The Situation: You have private student loans with Discover and want to refinance at lower interest rates or monthly payments. (If you are considering refinancing with Discover, this is what you should do Read the Discover Refinance Review.)
Despite the growing popularity of student loan refinancing, there are many misconceptions.
One of the biggest misconceptions is that your current student loan company can affect or limit your refinancing options. The truth is that your current student loan company has minimal impact on the refinancing process.
Today we are going to discuss the steps to refinance borrowers using Discover Student Loans.
Can You Refinance a Discover Student Loan?
All borrowers are eligible to refinance their Discover student loans provided they can pass a credit check.
When refinancing, a refi lender pays off a borrower’s existing student loans. After the old loans are eliminated, the borrower pays back a new loan to the lender. Essentially, you are borrowing money to repay your old loans. You pay back the refi lender according to the terms of the refinancing transaction. Ideally, borrowers can get a lower interest rate or lower monthly payments.
Discover does not impose any prepayment penalties on its private student loans. Thus, borrowers can refinance themselves without transaction costs.
Why should I want to refinance my student loan?
As a student, you likely didn’t have a job or a degree. Most students also have limited or nonexistent credit histories. Loans to individuals who fit this description are risky for lenders. When lending is risky, lenders charge a higher rate of interest.
As a graduate with a job, degree and a positive credit rating, you have a lower risk. Individuals who match this description will qualify for better loan terms.
Most borrowers refinance to achieve one or both of the following goals:
Lower interest rates – When you get a new loan with a lower interest rate, the total cost of repayment is lower. The downside of loans with extremely low interest rates is that borrowers have to repay the loan within five years. This approach is the fastest and most efficient way to eliminate student loans, but the short repayment period can be challenging for some borrowers.
Lower monthly payments – Some borrowers extend the repayment period to 20 or even 25 years. The interest rates on these loans tend to be slightly higher, but the payments are lower because they are spread out over a long period of time. Borrowers often choose this approach when trying to improve their debt-to-income ratio to buy a home or because they want to free up extra cash each month.
Occasionally, borrowers try to strike a middle ground by taking out a 10 or 15 year loan. Choosing a loan with the same repayment duration but lower interest rate means lower loan costs AND lower monthly payments in the long run.
Do I have to refinance with Discover?
Student loans with Discover do not require the borrower to refinance with Discover.
In fact, the best option might be to relocate your business to find the lowest possible interest rate.
Discover may offer a better refinance rate because they want to keep your business, but an outside lender may offer a better interest rate because they want a new customer.
Most financial services companies tend to be more aggressive in attracting new customers than they are in retaining their current customers. There might be exceptions, but I would bet that most borrowers will find better refinance rates shopping around than visiting Discover.
Is there a downside to refinancing? Are you discovering student loans?
There are considerable risks involved in refinancing federal student loans. By refinancing, borrowers lose important federal benefits such as student loan awards and income-based repayment plans.
However, Discover only deals with private student loans. This significantly reduces the risks.
For most borrowers, the process is a huge benefit. However, changes in the debt to income ratio could be a disadvantage for borrowers who choose a shorter repayment period.
How quickly can I refinance?
Since there are no prepayment penalties on Discover student loans, borrowers are free to refinance anytime they want.
The borrower’s credit profile is the main factor in deciding when to refinance.
It is likely too early to refinance for those borrowers who are still in school or haven’t found work.
Receive the lowest monthly payment
The interest rates that most lenders advertise are usually the 5 year refinance loan.
I find that longer loans can be a better option in many circumstances.
With a shorter loan, the borrowers are required make larger payments; With a longer loan, borrowers have the possibility make larger payments. The lower monthly payment gives them the flexibility to choose. A lower monthly payment can make it easier to buy a home and free up money to save for retirement.
The disadvantage of longer loans is that the interest rates tend to start a little higher. Right now, the following lenders offer the best rates on 20 year fixed rate loans:
Borrowers looking for other options or a more comprehensive list of lenders should check out our refinance lender rankings and reviews.