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If you want to start a business, one thought may go through your mind (particularly if you’re funding your business out of pocket): “If I didn’t have to repay my student loans, I’d have more money to put toward my business.”
No doubt about it, student debt can be steep. The current average federal student loan debt per borrower is $39,547, while the total average balance, including private loans, may be as high as $43,333. This leaves many student loan borrowers who feel stymied by their debt wondering how to get their business ideas off the ground.
If student loans gobble up a chunk of your cash every month, refinancing might free up funds to put your fledgling business on the right track. Read on to learn how refinancing student loans can benefit the launch of your new business.
Key Points
• Refinancing one or all of your student loans at a lower interest rate can help you save money through lower monthly payments.
• You can adjust your loan term or choose between fixed and variable rates to better meet your financial goals.
• Simplifying multiple loans into one payment may make repayment easier to manage.
• Securing a lower interest rate could improve your overall financial outlook, helping you qualify for a business loan.
• Refinancing your student loans means giving up federal protections, so it’s important to weigh the trade-offs.
What Is Student Loan Refinancing?
Before diving into the definition of student loan refinancing, let’s discuss the components that make up a student loan: principal, interest rate, and loan term.
• Principal: The principal is the original amount that you borrowed, which you will repay with interest over time.
• Interest rate: The interest rate is a percentage of the loan principal that you pay monthly on top of a portion of the principal. This is charged by the lender and is how they earn money while lending you cash.
• Loan term: The loan term is the amount of time over which you will repay your loan.
Student loan refinancing means replacing your existing student loan with a new one. You can refinance either federal or private loans with funds from a private lender. However, there are two important points to keep in mind if you are considering refinancing. The following factors can help you determine if refinancing is a good fit for you:
• When you refinance federal loans with a private loan, you forfeit federal protections and benefits, such as deferment and forbearance options.
• If you refinance for an extended term, you may end up paying more in interest over the life of the loan, even if your monthly payment is lower.
đź’ˇ Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.
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Benefits of Student Loan Refinancing
Some of the key reasons to refinance your student loans include the following:
• Potentially lowering your interest rate: Reducing your interest rate on your student loans can save you a lot of money over time because you won’t pay as much in interest per monthly payment. Check with various lenders to ensure you’re getting the lowest interest rate possible. You can usually get the best rates by having a strong credit score and a steady source of income. Your credit score is the three-digit number that reflects how well you’ve paid back debts in the past.
• Reducing your monthly payment: When you work with a lender to extend your loan term, you may reduce your student loan payments per month. For example, you may extend your loan term from 10 years to 15 years, although the options available to you will depend on your lender. However, as mentioned above, note that extending your term often means you’re likely paying more interest over the life of your loan.
• Obtaining a single monthly payment: Instead of making multiple monthly payments, you can refinance and make one monthly payment. Sticking to one monthly payment can help you stay organized and make your payments on time. You also don’t have to refinance all of your student loans. For example, if you have five student loans, with a low interest rate on one and a high interest rate on the rest, you could refinance just the high-interest ones. Use a student loan refinance calculator to determine how different refinance scenarios might work to your advantage.
• Choosing between variable- and fixed-rate loans: Refinancing may allow you to choose between a variable- or fixed-rate loan. A fixed rate means your interest rate stays the same throughout the life of the loan, while a variable rate changes, meaning your interest rate could increase or fall over time.
Note that you can also consolidate student loans, which involves combining several federal student loans into one loan through the Direct Loan Program.
đź’ˇ Quick Tip: Refinancing could be a great choice for working graduates who have higher-interest Grad PLUS loans, Direct Unsubsidized Loans, and/or private loans.
How Refinancing Student Loans Can Benefit a New Business
So how exactly does refinancing student loans benefit a new business? Here’s a closer look.
1. Lower Your Loan Payments
As mentioned earlier, refinancing can help lower your loan payments by possibly offering a lower interest rate and/or by stretching out your loan term. Lowering your monthly payments can allow you to devote more financial resources toward your new business. You can also use the extra money to pay for household expenses or financial goals, such as the down payment on a house or your retirement nest egg.
2. More Money to Get a Business Loan
First, let’s clarify that using student loans to start a business is a no-go. Student loan money should go toward education costs, living expenses, and housing. When you refinance, you can lower your monthly repayment amount, which can improve your overall financial outlook. Then, if you apply for a business loan, you may have a more creditworthy profile.
A bank or credit union will review your financial information to evaluate your qualifications for a business loan. If you refinance your student loans and lower your monthly payment, that could help improve your debt-to-income ratio (DTI), which is an important indicator when you apply for a loan. Your DTI is your monthly debt payments divided by your gross monthly income. If you lower a component of your monthly debt (say, your student loan), you can lower your overall DTI, which is a positive.
3. Use Business Income to Pay Student Loans
Are you wondering, “Can my business pay my student loans?” The answer to that is “no,” if you want to pay directly through your enterprise. However, if you launch a business and earn income, you can then use your pay to eliminate your debt, whether that’s from a student loan or another source.
Keep in mind that, as a business owner, you could get tax breaks that other taxpayers can’t claim, but you can’t deduct the principal payments you make on student loans.
Recommended: How to Get Out of Student Loan Debt
The Takeaway
Refinancing your student loans can benefit a new business by potentially lowering your monthly payments, freeing up capital to invest in your venture, and improving your debt-to-income ratio to make you a more attractive candidate for a business loan. The process involves replacing your current loan with a new one, allowing you to potentially secure a lower interest rate, adjust the loan term, or consolidate multiple loans into a single payment.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQ
Can you start a business if you have student loans?
Yes, you can start a business if you have student loans, but it may be harder to access business credit and save cash to put toward your business. No matter what, you must keep up with your student loan payments. Not making your payments can hurt your credit score later, which in turn can hurt your application for a small business loan.
How do I start a student loan?
You can apply for federal student loans by filing a Free Application for Federal Student Aid (known as the FAFSA), which helps determine the amount of federal student aid you can receive. You can also apply for private student loans on lender websites.
Can I get an SBA loan with defaulted student loans?
Through the Small Business Administration (SBA), SBA loans require potential borrowers to keep up to date on student loan payments. Unfortunately, you could become ineligible with defaulted student loans.
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SoFi Student Loan Refinance SoFi Loan Products
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
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