Benefits of refinancing an education loan
What does refinancing a loan mean?
Refinancing an education loan lets a new lender take over the existing loan and pay out the old lender.
The new lender typically offers a lower interest rate on your loan, may offer a refinancing bonus, and provides better pay-back terms and service, making the shift attractive.
Why do students refinance education loans?
Most education loans have a tenure ranging from 5 years to 20 years. During this tenure, the loan rates may change in the market, and the current lender may not pass on the benefits of lower interest rates to the borrowers.
To ensure your education loan has the lowest interest rates, you can monitor the education loan market closely after taking the loan.
Even a slight lowering of interest rates can impact the repayment tenure or per month EMI. As your child starts their career and begins to repay the loan, every small amount saved will enable them or them to repay the loan faster.
There are usually three main reasons to refinance an education loan:
- To optimize the monthly pay-outs
- Lower the interest rate
- To change the loan tenure
Additional read: 5 ways to make getting an education loan easier for your child
What are the eligibility criteria to refinance an education loan?
To refinance an education loan in India, the student should have taken the loan to pursue graduation or post-graduation degrees from well-known institutes and colleges.
The repayment process of the education loan usually begins once the student has already started earning.
Accordingly, the student should have completed the course and either could have begun the repayment process or be in the process of starting repayment.
The borrower must have a good credit history and score, with financial resources in terms of a regular salary to pay back the EMI month after month. Most lenders will also check on the other debt that the borrower may have.
Dos and don’ts of refinancing an education loan
While refinancing an education loan, ensure you do the following:
- Do due diligence before rushing in to shift the loan to a new vendor. In India, refinancing a loan may invite charges from the old and the new lender. The Old Lender typically charges a foreclosure penalty, and the New Lender has processing charges upfront that will add to the overall payout. Before deciding to shift your lender, check on the additional costs that the refinancing will incur.
- Monitor the education loan market carefully. Changing rates can impact the total amount payable by you considerably. When you find the market rates dropping, you can speak to your existing lender to refinance your existing loan at the current rate or connect with a new lender for the same.
- Opt for a fixed interest rate, and explore the possibility of a student loan refinancing bonus. These amounts can considerably impact young students starting out in their careers.
- If your child’s refinancing application has been rejected initially due to low salary / insufficient funds, a promotion or salary increase can make them eligible later. Ensure your child uses these career developments smartly to refinance the education loan.
- Instruct your child not to default on the student loan as it impacts the individual’s credit score in the long run. Poor loan repayment habits will affect their chances of getting a refinance and even new loans in the future.
To see how a change in interest rates will affect the monthly pay-out and tenure of your education loan, check out our Loan Calculator. This will help you understand the benefits of having the education loan refinanced.
If your refinance application is rejected for any reason, you will do well to start saving money through our various investment options and build your own corpus to settle the education loan at the earliest.
Early loan repayment helps you minimize the interest you are paying and keeps your overall payout under control.
Is it good to refinance student loans?
Refinancing student loans can be a good financial decision if you can secure a lower interest rate than your current loans, potentially reducing monthly payments and saving money over the loan’s lifetime. However, it may not be suitable for everyone, so carefully evaluate your situation before deciding.
What happens if I refinance my student loans?
When you refinance your student loans, you basically take out a new loan with different terms to pay off your existing loans. This may result in a lower interest rate, a different repayment term, and a new lender. It can lead to lower monthly payments, cost savings, or both, depending on the terms of the new loan.
What is not a good reason to refinance a student loan?
Refinancing may not be a good idea if you’re relying on federal loan benefits such as income-driven repayment plans, loan forgiveness programs, or deferment/forbearance options. Refinancing federal loans into a private loan could make you ineligible for these valuable benefits. Additionally, if you have a low credit score or unstable income, refinancing may not yield favourable terms.
Is it beneficial to refinance a loan?
Refinancing a loan can be beneficial if you get lower interest rates, reduced monthly payments, or faster loan repayment. It can save you money and simplify your financial situation. However, the benefits depend on your specific circumstances, so it’s essential to carefully assess the terms and compare them with your current loan before refinancing.