Student loan refinancing is the process of replacing one or more existing student loans with a new one via a private lender. Depending on your child’s situation, it could provide a number of benefits as they work to pay down their debt.
As a parent, it’s natural to want to help your child, so here’s how refinancing could help your child and how you can help them make the right move.
How student loan refinancing can help your child realize their financial goals
Student loan refinancing isn’t for everyone, but if your child has specific goals with their student debt or their finances in general, the process can be a step in the right direction for them.
For example, if your child is trying to figure out how to lower student loan interest, refinancing is the only way to do it. Many private lenders offer low interest rates, and if your child can find one that charges less than what they’re paying right now, it could save them money and reduce their monthly payment.
A lower monthly payment can be especially helpful if your child has a goal to buy a house. Mortgage lenders will consider their debt-to-income ratio, which is the percentage of their gross monthly income that goes toward debt payments. The lower that ratio is, the more home they’ll be able to afford.
In addition to learning how to lower student loan interest, student loan refinancing can also give your child more flexibility with their monthly payments.
If your child wants to reduce their monthly payments even further, for instance, they can refinance with a longer repayment term. This will result in more total interest charges, but it can be helpful if your child’s budget is tight. Alternatively, if they want to pay off the debt faster than the standard repayment plan, they could get on a shorter repayment schedule. If your child is wondering how to lower student loan payments, refinancing is one of the best options available.
Finally, refinancing allows your child to pick which lender they work with. Many federal student loan servicers can be difficult to deal with. With student loan refinancing, your child will be able to review multiple lenders and pick the one they want based on their rate offer and other features.
When you should be a cosigner on your child’s student loan refinance
While refinancing student loans could be in your child’s best interest, it may be difficult for them to get approved on their own — or if they can get approved, qualify for the best student loan refinance rates.
As a cosigner, you would be able to essentially lend your credit history and income to help your child get approved for better terms. Cosigning a refinance loan can especially be helpful if your child recently graduated and hasn’t had the chance to build credit or increase their income.
That said, cosigning also comes with its own set of responsibilities. For starters, if your child can’t make payments on a cosigned loan, you’ll be responsible for paying the monthly bill.
Also, a cosigned loan will show up on your credit report as if it’s your debt, even if you never make a single payment. If you need credit in the future, lenders will consider that debt as they try to determine whether to approve your application.
In other words, cosigning can help your child achieve their goals, but it’s essential for you to understand the potential drawbacks to make an informed decision.
How your child can find the best student loan refinance rates and terms
Student loan refinancing is one of the only ways to lower student loan interest, so it’s important for your child to take the right steps to improve their odds of paying less.
If you’re wondering how to lower student loan rates as much as possible, the best thing you can do is shop around. Each lender has its own criteria for determining approvals and assigning interest rates, so comparing multiple lenders will give you the best chance to maximize savings.
Most student loan refinance lenders will allow you to get prequalified before you submit an official application. This process only requires a soft credit check, which won’t hurt your credit score, and will give you an idea of what your child might qualify for in terms of rates and repayment schedule.
However, going through the prequalification process with each individual lender can be time-consuming. With Purefy’s Compare Rates tool, you can go through this process with multiple lenders at one time.
The tool doesn’t allow you to add your name as a cosigner, but if your child submits their information, they’ll be able to see which lenders offer the best rates based on their credit profile, then you can add your name to the loan application when they’re ready to move forward on it.
Other ways to lower student loan interest that your child can consider include:
- Checking for loyalty discounts: Some lenders offer an interest rate discount to borrowers who already have an account with them. The discount is usually between 0.25% and 0.50%, which isn’t a lot, but the interest savings add up over the life of the loan.
- Set up automatic payments: Most private lenders will give you a discount of 0.25% off your interest rate if you set up autopay on the account. Again, it’s not huge, but it can make a difference over the long run. It’ll also help ensure that your child doesn’t miss a payment, which can hurt their credit score — as well as yours if you’re a cosigner.
Taking the time to compare student loan refinance rates and look for other ways to lower student loan interest rates isn’t convenient, but it can make a huge difference for your child.
The bottom line
If your child is considering how to lower student loan rates or meet other goals they have with their student loans, refinancing may be the best option for them. As a parent, you can’t make financial decisions for your child, but you can help them educate themselves and figure out the next best step.
Talk to your child about refinancing and how it can assist them in achieving their financial goals, and in the right circumstance, consider cosigning to make it easier for them to get approved.