Refinancing – A Comprehensive Guide

Refinancing – A Comprehensive Guide

Studying abroad is an expensive affair. Students who wish to study overseas often turn to education loans to finance their tuition. Like all kinds of loans, education loans also come with an interest rate and a processing fee. The interest rate on these loans can be as low as 6.5% or as high as 16%. It is often higher than low. But, the conditions of a loan, like interest rate and term are more or less revisable. This can be done by loan modification or refinancing. Let’s find out more about refinancing and how it’s helpful for international students. 

What is Refinancing?

By definition, refinancing refers to paying off your existing loan with another loan with revised terms. International students turn to it under financial distress. It helps them lower the interest rate, reduce the monthly interest payments and change the term or duration. Students have a lot of questions and challenges while exploring their options when it comes to refinancing. Being a foreign national also adds to the challenge. However challenging, it is not impossible to get what best fits your needs. It is observed that the interest rates can go as low as 4% after refinancing. This is significantly lower than the average interest rate of 8 to 9%. It is designed to pay off loans in a more manageable way by reducing interest rates and keeping you from debt. 

Refinancing Student Loans

Now that you already have a vague idea of when you would need refinancing as an international student, let’s take a closer look. 

Reasons to Consider Refinancing

  1. You are unable to afford monthly interest payments (solves it by revising the interest rate or increasing the term duration, both of which result in a lower monthly payment).
  2. The interest rate on your current loan is too high. 
  3. A cosigner on your current loan has to be released.
  4. You want your overall interest amount lowered 
  5. You want to pay off your loan faster 

What Do You Need to Refinance a Student Loan?

Make sure that you have the following in order to successfully refinance your student loan – 

  1. A good credit score (690 or over).
  2. A credit history of at least 2 years.
  3. A cosigner with a good credit score, mandatorily a citizen of the same country you are getting your loan refinanced in.
  4. A 43% or lesser debt to income ratio.
  5. A permanent job in a stable company. 
  6. A valid visa with the possibility of renewal. 

As mentioned before, refinancing can be quite a challenge for overseas students. However not necessary, having all of the above requirements significantly increase your chances of getting a loan refinanced. 

*Note – Debt to income ratio is monthly debt payments divided by monthly gross income. 

*Also Read – How to Save Money in the USA as a Student?

Things You Can Do for Easy Refinancing of a Loan

Once you have all the prerequisites in place, you would want to know how to actually go about refinancing your student loan. There are several ways in which this can be done. Here are some – 

1. Take a personal loan to repay your student loan. 

You can apply for a personal loan and use it wisely so that you are able to repay your student loan. This works when the interest rate on your personal loan is less than that of your student loan. It may be convenient but this option is not entirely foolproof. The interest that you pay on a student loan is tax-deductible in countries like the US. The interest you pay for a personal loan is taxable. Avant Loans, Nomad Loans, etc. are some lenders that refinance student loans into personal loans for international students. 

2. Refinance with the help of a private student lender. 

There are several companies that are dedicated to refinancing student loans for visa holders. Some of which are SoFi, MPOWER Financing, CommonBond, Laurel Road, Prodigy Finance, etc. 

3. Get a loan from a friend or a family member. 

Pitch the idea of refinancing your international student loan to a family member or friend with the necessary funds. In a setting like this, people usually involve an attorney to set the terms of the loan clear. It is advised that the interest rate here be set reasonably. A very low interest rate may deem this transaction a gift instead of a loan in the eyes of authorities. 

Does Refinancing Hurt Your Credit Score?

The simple answer to this question is, yes. However, the difference is minimal. It is so because a new loan is a new debt that can reflect a dip in your credit score. You might also want to keep in mind that ideally, the interest rate of your refinanced loan is lower than that of your original loan. Read more here

How to Maintain a Good Credit Score?

According to the HDFC bank’s website, you can maintain a healthy credit score in 5 simple ways. 

  1. Opt for deferred payments
  2. Pay credit card bills on time 
  3. Check your credit score
  4. Pay instalments on time 
  5. Understand credit score risk factors like amount owed, new credit, types of credit in use, length of credit history and payment history. 

Refinancing FAQs

Ques – I need to refinance my student loan in the USA. I do not have a US cosigner. What can I do?

Ans – In a case like this, you might want to prove that you have a good credit history. It can be challenging as an international student but it is not impossible. 

Ques – Will refinancing save me money?

Ans – Refinancing a loan helps you make easy monthly interest payments by reducing the interest rate. 

Ques – Are refinancing costs tax-deductible?

Ans – If you use the new loan only to repay your student loan, it can be tax-deductible. If you use the refinanced loan money for something else it might not be the case. 

Ques – Can international students use SoFi?

Ans – The SoFi support quotes “We are able to offer loans to international and non-permanent residents, but ONLY with a US Citizen cosigner. Permanent residents are eligible, with or without a US Citizen co-signer”. 

Ques – What are some student loan refinancing lender companies?

Ans – Some good student loan refinancing companies are Brazos, CommonBond, ELFI, SoFi, PenFed, Advantage Education Loans, etc. Compare rates here.