How to Help Your Children Refinance Student Loans
June 6, 2019
As a parent, you of course want only the best for your child. That means you want them to have a terrific education and a successful career.
However, those goals can be hurt by student loan debt. High interest rates and pricey monthly payments can make it hard for your child to make ends meet, and watching them struggle financially can be really hard.
If your child is having trouble managing their debt, or simply wants to get out of debt as quickly as possible, student loan refinancing can be a great idea. As a parent, you can help your child learn about refinancing and how to snag a great interest rate.
What is student loan refinancing?
Student loan refinancing is a strategy you can use to tackle your debt. With this approach, your child works with a private refinancing company to take out a loan for the amount of their current debt. The new loan is completely different than their old student loans; it will have a new interest rate, monthly payment, and repayment term.
Benefits of student loan refinancing
Refinancing can be a smart way for your kids to manage their loans. It offers several significant benefits.
1. Your child could save money
When your child refinances, they could qualify for a loan with a lower interest rate. With a lower rate, they’ll pay less in interest charges over the length of their loan. Depending on their loan balance and new interest rate, they could save thousands of dollars.
2. Your child’s monthly payment could decrease
If your child struggles with their monthly payments, refinancing can help. With refinancing, your child could qualify for a lower interest rate and can opt for a longer repayment term, reducing their monthly payment.
If they extend their repayment term, they’ll pay more in interest over time. However, that tradeoff may be worth it to get more breathing room in their budget.
3. Your child can get out of debt faster
With a lower interest rate, more of your child’s payment will go toward the loan principal rather than interest. If they keep making the same payments as they had before refinancing, they can cut months or even years from their repayment term, becoming debt-free faster.
4. Your child will have one easy payment
It’s common for students to have multiple loans from several different lenders, all with their own minimum monthly payments and due dates. Juggling all those payments can be stressful and confusing.
Refinancing streamlines the process. When you refinance, you combine all of your loans into one large loan. Going forward, you have just one loan and one easy monthly payment.
5. You can transfer the student loans into your child’s name
If you took out loans in your name, such as Parent PLUS loans or private student loans, but your child wants to take over the responsibility for the debt, refinancing is a good option. By refinancing the debt, you can transfer the loans into your kid’s name, removing the loan from your credit report.
By doing so, your child will now be obligated for the debt. As they make payments on the loan, their payment history is reported to the three major credit bureaus — Experian, Equifax, and TransUnion — which could help boost their credit scores.
Drawbacks to refinancing student loans
While refinancing can be beneficial, it’s not for everyone. Here are some disadvantages to keep in mind.
1. Your child will lose out on federal benefits
If your child has federal student loans, they’re entitled to certain benefits, such as access to loan forbearance, deferment, and Public Service Loan Forgiveness. But, when they refinance, they’ll lose out on those perks.
2. It may be hard for your child to qualify on their own
Many fresh graduates will be unable to qualify for a refinancing loan on their own, due to insufficient income or too low of a credit score. If that’s the case, the only way for them to get a loan is to have a co-signer.
3. You’re locked into a payment plan
With federal student loans, your child has the option of applying for an income-driven repayment (IDR) plan. With IDR plans, their monthly payments are capped at a percentage of their discretionary income, reducing their monthly payment. IDR plans can make student loans more affordable while your child builds their career.
However, you’ll lose out on this option when you refinance. With refinancing loans, you choose a set repayment plan and cannot change it later on.
How to help your child qualify for student loan refinancing
If you think student loan refinancing makes sense for your child, you can help them navigate through the process. If you’re interested in refinancing through Purefy, your child needs to meet the following criteria:
- They need to have good credit
- They should have steady income, or a written job offer (the required income amount varies from lender to lender)
The rate your child receives is dependent on their creditworthiness, the amount they refinance, and the selected repayment term.
One of the best ways to help your child is to agree to be a co-signer. A co-signer is someone with a stable income and good credit who signs the loan application along with the primary borrower. If your child can’t keep up with the payments, the co-signer is responsible for them, instead. Having a co-signer lessens the risk to the borrower, so your child may have a better chance of getting approved for a loan and scoring a lower interest rate.
Managing student loan debt
If your child wants to aggressively target their debt, student loan refinancing can help them meet their goals. But before you submit a loan application, it’s important to do your homework. It’s a good idea to compare offers from multiple lenders to get the best rates for your child. By using Purefy’s Find My Rate tool, you can get quotes from several different lenders at once and choose the one that makes the most sense for your child.