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Key Factors which Impact Your Student Loan Interest Rates while Refinancing

March 14, 2018By Admin

Interest rates for education loans change regularly. By refinancing your loan for higher studies, you can ease the burden of debt on you, as it reduces the interest rate. Refinancing implies taking a new loan to pay off the current debt.

If you’re looking for refinancing your student loan, given below are a few key factors that you should know, which impact your secured/unsecured education loan that you have taken for higher studies.
  • Credit Rating
Usually, when the student first takes his/her loan for higher education, they are likely to have a no to low income and a short credit history. As a result of this, the interest rates are extremely high. However, once one has graduated and have been employed, they start earning, which puts them in a better position, financially. This also leads to a better credit score thus, making them eligible for a loan with a lower interest rate.
  • Position of the Economy
An economic catastrophe causes a low national prime interest rate. During recession, the Federal Reserve brings the interest rate at the national level, for encouraging lending. Students who have taken private education loan, exactly before a huge drop in the interest rates, are the most vulnerable to paying off loans at a higher interest rate. If you are one of those students who have taken private student loans during such a time, you should definitely consider refinancing.
  • Pre-payment Penalties
Any pre-payment penalty associated with the old loan is bound to increase the expenses incurred during refinancing. Here’s how it works. A lender assumes the loan contract, basis a certain income that he/she has anticipated to earn from that loan. If you are able to pay off the loan, earlier than promised, the lender will lose a chunk of his/her profit. To compensate for that loss, the lender will ask you for pre-payment penalties. Such penalties are only associated with private loans. The higher the loan amount, the higher the penalties.
  • Options for Loan
You may opt for a less flexible loan to bring down the interest rates. There are multiple ways, such as use of a collateral or inclusion of unfavourable terms, which make a loan, less flexible. To further elaborate, say you are using a home equity line for refinancing your education loan, which implies you are using your home as collateral for a lower interest rate. You might get that lower interest rate but you will lose your peace of mind. So, always keep that in mind.

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