International students often contemplate refinancing their student or education loans in the United States with private lenders. However, the decision to refinance should not be taken lightly. It is crucial to consider the numerous factors that can significantly impact your financial situation and future.
Factors to consider before refinancing
The interest rate of the new, refinanced loan:
It is important to compare your options before deciding to refinance a loan. The interest rates are associated with the risk the lender is taking on by lending you money as the borrower. If there is less risk, it is most likely to lower the interest rate. As of September 19, 2023, interest rates for private education loans in the United States ranged from 4.40 -12.95%.
Eligibility criteria of the lender:
It is important to understand the eligibility requirements of each lender to refinance your student loan with them. For example, to be eligible to get a loan from some lenders, you need to have a citizen or a permanent resident to co-sign your application. On the other hand, some lenders do not require a minimum credit score nor a co-signer (Clark, 2022).
De-valuation or Re-valuation of the currency:
For example, if your existing loan in India has an interest rate of 11%, you are looking to refinance the loan for an 8% loan in the United States to have a similar or better rate. It is significant to know how the devaluing would affect you in this case. Over the past 20 years (from 2003 to 2023), the Indian rupee has devalued against the dollar by 2.93% a year (if we consider the dollar to be 46.58 INR in 2003 and 83.13 INR in 2023).
The term of the loan:
The term is how long you must make payments towards the loan to completely pay the loan off. The term of the loan offered may vary from one lender to another.
Decide whether you want to keep the same loan term or a different loan term. Some lenders offer a 5-year term whereas other lenders offer 10or more years to pay off the loan. The term of a loan is often expressed in terms of monthly payments made. A 10-year term would also be expressed as 120 monthly payments. Shorter terms often have higher monthly payments but lower overall interest costs.
The monthly payments and the repayment structure:
It is important to understand the monthly payment amount that you are supposed to be paying. As different lenders may offer different repayment structures (its mostly fixed monthly payments), consider which repayment structure aligns best with your current and future financial situation.
Grace period:
Not all loans will provide a grace period, which allows borrowers not to make payments for a certain amount of time before repayment begins. Some loans will require repayment to begin immediately after disbursement. Understanding when the repayment starts for the refinanced loan and if there is change in the grace period for the refinanced loan from the existing loan is key to formulate a repayment strategy. So, it is a characteristic of a loan that you might need to check when you decide to refinance an existing loan.
Credit scores:
To qualify for a loan with some lenders, one will need a credit score. For example, some lenders will lend to green-card holders with a credit score of 680 while some lenders do not require a credit score at all. Remember that missing a payment or defaulting on the loan might affect your credit scores and ability to obtain credit in the future.
Re-payment of the original loan and related charges:
It is important to inquire about the potential charges associated with the early pay-off of your existing loan. It can change based on the characteristics of the loan and the laws in the region your loan servicer resides.
For example, pre-closing a floating rate interest loan in India should not have any pre-closure charges by law. However, in the case of a fixed-interest loan, pre-closure can be subjected to penalties. This process of pre-closing the loan might involve some charges which often happens to be overlooked. In the United States, these charges would be referred to as 'pre-payment penalties'. One should always try to understand the terms of the loan before obtaining a loan.
Tax implications:
If you refinance the loan in the United States, you may be eligible to deduct up to $2,500 of interest paid on your student loans annually by using information from Form 1098-E. This tax benefit is available for loans that are for educational purposes even if it is not in the United States. If the loan meets the qualifying criteria, this deduction can be applied. To better understand this tax deduction, consult IRS Publication 970 or a tax professional.
To learn more about filling taxes and resources that exist to assist, visit SMMC page on Taxes.
Disclaimer: Tax laws vary among countries, states, counties, and municipalities. Tax implications can vary based on how you file taxes, your income, and your residency status among other factors. It is against university policy to provide financial advice. So, you should consult a tax professional for questions related to your individual tax situation.
Summary
While refinancing your educational loan can seem like an appealing option, it is crucial to compare plans and consider all the factors mentioned above. There is not a one-size-fits-all answer to whether you should refinance; it depends on your individual circumstances, preferences, and access to financial services. Ensure that you thoroughly assess these factors and research out to the lender or your existing servicer for any clarification before deciding on refinancing your loan. Making an informed choice will put you in a stronger financial position as you pursue your educational and career goals.
Learn More About Credit and Student Loan Management
You can learn more about loans and implications on your credit with:
And, to better understand and formulate a spending plan:
- Spooked by Spending Plans? (webinar) on October 11, 2023 @ 12 PM. Registration required.
- or complete the self-paced module in the Spend course
Enroll in the Borrow course by following the steps below:
- Visit the Borrow course.
- Click the NetID Login button.
- Log in with your NetID & password (requires 2FA).
- Under Self-enrollment (Student), click the "Enroll Me" button.
- Complete the modules that interest you related to borrowing and managing debt.
