Many times, even the smartest students fall into a debt trap. Once you find your debt amount increasing, it can become extremely difficult to get your financial need back up again. If you are a student that is currently facing financial hardship where the monthly loan payments that need to be made are becoming more of a burden, there are a few ways you can reduce your debt as well as ensure that you clear the loan amount due much faster.
The 2 main choices that can help people who are in the midst of a financial crunch, these programs are student loan refinancing and student loan forgiveness. Both these programs are explained in detail below.
In layman’s terms, student loan refinancing is when a loan provider pays off the amount due on your existing loan and then replaces it with a new one. The benefit of this is, the loan will come with a new repayment plan as well as better interest rates.
By providing students with a more favorable interest rate, the new loan amount will be much easier to pay on a monthly basis. When it comes to refinancing student loans, both loan types can be refinanced (federal loans and private loans).
If you have an existing federal loan, be careful before you choose to refinance it as you will lose the benefits that come with federal loans. It is not advisable to opt for student loan refinancing if you are someone who heavily relies on these benefits.
The main difference between Federal loans and private loans are listed as follows.
Remember that if you have availed a federal loan and plan to apply for the process of student loan refinancing, you will lose certain benefits and programs. Some of these are listed below.
Deferment refers to the federal protection provided with federal loans that allows the borrower to lower the loan amount due or to choose the option of not making any loan repayments up to a period of 3 years. During this period, the rate of interest on your student loan will not increase as the government will pay the internet amount due. However, you will lose the ability to opt for deferment if you go ahead with the student loan refinancing process.
Federal loans also come with the Income Driven Repayment (IDR) plan. This allows borrowers to streamline their loan repayments as the government will consider different factors such as the monthly income the borrower receives and based on that, it will devise a loan repayment structure.
The income-driven repayment plan can be extremely useful for borrowers looking for another solution as they are having difficulty when making continuous loan repayments. THe drawback to this is that you may be liable to a higher rate of interest.
When it comes to refinancing student loans, each loan provider has their own eligibility criteria. Ensure that you check and compare a list of the loan providers that offer student loan refinancing. Generally, private lending organisations have a higher standard of eligibility when compared to Federal loan providers.
One of the main deciding factors will be the applicant’s credit score. An above average or excellent credit score can result in lending organizations favoring you over applicants who have a below average credit score. You will also need to provide additional documents in order to prove that you are a graduate, have a stable source of income and good saving habits.
There are certain sites online such as Credit Karma that allows you to check your credit score and your chance of approval. They also have many features that can assist you in finding the right loan provider best suited to you. The Credit Karma Tax is one such feature they offer that lets you check your credit report and credit history.
In case you fail to meet the eligibility criteria to avail the option of refinancing your student loan (due to a poor credit score or insufficient level of income). You can try again with a co-signer. However, you must ensure that the co-gner has an excellent credit score and credit history.
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