Student debt is a given these days, and is at its highest levels ever, with American students carrying enough collective debt to run a small country!
If you are one of the millions of college grads that is carrying this kind of debt, the enormity of the pay-off process may be overwhelming. And, it may have occurred to you to consolidate and refinance the debt to make it more manageable.
Student loan refinancing is often a solid move, but there are considerations.
Are your loans private or federal? How much can you afford to pay each month? How will refinancing affect your credit score?
Your credit score affects everything in your financial future, from interest rates on future loans to your ability to rent an apartment to your ability to buy a home.
Knowing how your financial decisions impact that scores is a vital part of any financial decision.
How Does Refinancing Work, Anyway?
Because of how student loans are structured (in a borrow-as-you-need model), you may have multiple loans from multiple lenders floating around in your debt portfolio.
Consolidation and refinancing can combine your loans down to only one creditor and one payment (or two, if you have a mix of federal and private loans). This often results in lower payments, but longer loan terms.
So, How Does it Affect My Credit Score?
A few ways.
Initially, the lender you refinance through is going to do a credit check, which will ding your score just a little.
However, you can often make up for that small ding by continuing to make your loan payments on time. This is made easier by consolidation and refinancing, because it offers much lower payments in most cases.
Students loan debt is also seen as “good” debt by most lenders, so you may find that it doesn’t impact your score as much as you might think.
Refinancing also gives you a few options.
During the Obama administration, certain debt relief programs were signed into law, including the “Obama Student Loan Forgiveness“. It’s actually called PAYE, or “Pay as your Earn”, and offers good repayment and loan forgiveness if you have federal loans.
The other consideration is this: if you are planning on any other large financial moves in the next year or so, you may want to hold off on a refinance.
When you buy a house or a car, your lender will do a hard pull, which dings your credit, and too many of those hard pulls in a short period can make you look unfavorable to lenders.
What’s the Takeaway?
Initially, yes, the hard pull on your credit score is going to knock your overall score down a few points.
But, the opportunity to pay responsibly each month can be an opportunity to build your score while carrying “good” credit, as opposed to “bad” credit like credit cards.
So, as long as you aren’t planning on any other major financial actions in the next year or so, go ahead. Refinance those loans and save yourself some cash.