The Ultimate Guide to Refinancing Your Student Loans

  • Refinancing student loans could be a smart solution to managing student loan debt.
  • When you refinance your student loans, you may be able to reduce your monthly loan repayments to suit your financial circumstances.
  • Done right, refinancing student loans may also save you money, particularly if you can score a lower interest rate.
  • It’s important to note if you decide to refinance federal student loans, you lose the benefits that come with them (like loan forgiveness).

Here's our ultimate guide to refinancing your student loans.

Source: Flickr user Tax Credits.

Refinancing could be a relatively simple and smart way to manage your student loan debt. Refinancing student loans involves exchanging your existing student loans for a new loan with new terms. This can only be done through a private lender.

When you refinance your student loans, the lender pays off your current loans and gives you a new loan with a new interest, new terms and conditions. The interest rate on your new loan depends on your financial credentials at the time of refinancing. The stronger your financials, generally you’ll be offered better the terms.

If you’ve never refinanced student loans before, the entire process can seem mysterious and a bit scary. How do you know if refinancing student loans is the best option for you? What does the process entail? Which lending company should you use? Should you choose a shorter term or longer term? These are common questions that students ask when considering refinancing their student loan debt.

In this guide to refinancing student loans, we’ll answer these questions so you can make informed decisions and avoid making mistakes that could negate the benefits of refinancing.

How Student Loan Refinancing Helps You Manage Your Debt Better

Refinancing student loans may offer multiple benefits. It could allow you to better manage your student loan debt by lowering the monthly repayments to suit your financial circumstances. If you’ve improved your credit since you first took the loan, you may also qualify for a lower interest rate on the refinanced loan. This drop in the interest rate could save you a substantial sum over the life of the loan.

Refinancing can generally help you in one of a few ways:

  1. Saving on monthly payments by lowering your monthly payment amounts. This could make payments more affordable and lower your risk of defaulting on the loan. You should note that lowering your monthly student loan bill may extend the term of your loan meaning it will take you longer to pay off your student loan debt. You’ll also pay more in accrued interest because of the longer term.
  2. Combining loans into a single monthly payment. This option can help make it easier to keep track of your payments.
  3. Paying off loans faster. If your income allows you to pay more each month, this can help shorten the term of your loan and reduce the total accrued interest.

What You Should Know About Refinancing Federal Student Loans

The federal government does not offer a refinancing option. You can only refinance student loans – both federal and private – through private lenders.

However, when you refinance your federal student loans with a private lender, those loans will become private. As private loans, they lose all benefits and protections associated with the original federal loan. That means, you’ll lose access to income-based repayment plans, default, forbearance, and federal forgiveness programs.

You’ll want to be certain you do not want these protections before you choose to refinance federal student loans.

Is Refinancing Student Loans The Best Option For You?  

While refinancing is a good option in general, it may not necessarily be the best choice for you. You may want to consider student loan refinance under these circumstances:

  1. You can’t afford your monthly student loan repayments: Missed loan payments can attract late payment fees as well as interest on the missed payment till it gets paid. This only makes future payments even more unaffordable. Refinancing to lower monthly payments makes them more affordable and minimizes the risk of default and its consequences.
  2. You hope to pay off your loan faster than your original loan term: This is a great option if you’re earning a higher income and have money leftover every month. Refinancing to a new term can help you pay off loans faster! Another benefit of this strategy is that less interest accrues over the shorter term so you’ll save money too.
  3. Your financials have improved and you qualify for a lower interest rate: Regardless of the above two scenarios, it’s a good idea to consider refinancing if your financials have improved. When you refinance, lenders offer you a personalized interest rate based on your credit score and income. A strong credit score and high income could qualify you for a lower rate of interest.
Lendkey company logo.

Reduce monthly payments by up to $191

Fixed rates from 5.49% - 9.45% APR with auto-debit

Learn More

Student Loan Refinance Vs. Consolidation: Which Is Better?

Refinancing and consolidation are two ways that student loan borrowers can use to manage their monthly repayments if they have multiple loans. Although the terms refinancing and consolidation are often used interchangeably, they are in fact completely different. The only similarity between refinancing and consolidation is that both allow you to combine multiple loans into one. Other than that, each one works differently, and each has its own set of pros and cons.

Student Loan Consolidation

Student loan consolidation only applies to federal student loans. It allows you to combined multiple federal student loans into one loan. The interest on the consolidated loan is calculated as the weighted average of your combined loans.

The biggest benefit of student loan consolidation is that you’ll only have one payment to keep track of every month. The fewer payment due dates you have to remember, the lesser the chances of you missing a payment.

Another benefit is that you will still have access to federal protections, unlike refinancing where you lose all federal benefits. Plus, there’s no credit check required for consolidation so you can qualify even with poor credit.

The disadvantages of consolidation are that only federal loans are eligible, and secondly, it does not lower your interest rate.

Consolidation may be the right option for you if:

  • You want to combine multiple federal student loans into one single loan
  • You’re looking to make your loans more manageable and want to retain your federal protections
  • You don’t qualify for lower interest rates through refinancing

Refinancing may be the better option for you if:

  • You’re looking for a way to manage your private student loans
  • Your financials are strong and you qualify for lower interest rates
  • You’re looking combine multiple federal and private loans into a single loan
  • You’re at risk of defaulting on your payments and need to lower the monthly payments on your private student loans

Student Loan Refinancing Options (Choosing a Strategy)

If you’ve decided to go ahead with refinancing student loans, start by identifying your short- and long-term refinancing goals. There are a couple of different approaches you can use when refinancing student loans. Identifying your goals will help you choose an approach that will work best for you.

Here’s a look at the two main refinancing options and tips on which one to choose:

Goal 1: You want to lower your monthly student loan payments:

  1. Refinance private student loans and choose a lower monthly loan payment amount so it is affordable. Remember, this may extend your loan term and could cost more in the long term but it will ease your current financial burden.
  2. Refinance all student loans (federal and private) into one loan, which will likely qualify for longer financing terms and lower payments. If you qualify for a lower interest rate, you can lower your monthly repayments and save money too. However, remember that by refinancing federal student loans into a private student loan means forfeiting the benefits and protections associated with the original federal loans.

Goal 2: You want to repay your loans faster (SAVING MONEY AND TIME):

When you combine loans into a single monthly payment, you can save time by making one payment instead of several. And, when you pick a shorter repayment term you reduce the lifetime of the loan and in turn reduce the interest that accrues. So you’ll repay your debt earlier and save money too.

Steps to Take to Refinance Your Student Loans

Here are the steps to take to start refinancing your student loans

Source: Flickr user pensiero.

Most of the hard work for student loan refinance is doing the up front research to assess your current loan situation and decide what approach is going to work for you.

Once you’ve identified the approach that works best for you, the steps are pretty straightforward:

  1. Choose a strategy based on your financial circumstances and your short and long term financial goals.
  2. Research refinance lenders and compare interest rates, loan terms, fees, and penalties.
  3. Gather together all the necessary paperwork.
  4. Submit your application and documents for refinancing student loans.

Tips For Choosing The Best Student Loan Refinancing Company

One of the hardest parts about refinancing your student loans can be figuring out which company or lender to use. How do you know if you’re getting a good deal? How do you know if the lender is reputable? Will shopping around hurt your credit?

There are a few quick things to look for when comparing student loan refinance companies:

  • Compare interest rates: The rate of interest that you pay will have a major impact on the total interest that accrues over the loan term. Even a small difference in rates can make a significant difference. It’ important that you compare your personalized interest rate, as it could be different from the published rate.
  • Compare loan terms and options: Lenders offer loans with fixed interest rates but not all offer the variable rate option. If you have decided that variable rate works better for you, make sure the lender you choose offers this option.
  • Compare fees and discounts offered: Every lender sets its own fees and discounts when refinancing student loans. Fees can add to the cost of refinancing while discounts can lower the cost. It’s advisable to check with prospective lenders before making your final choice. Make sure to check for loyalty discounts the lender might offer.
  • Read customer service reviews: Reading about other customers’ experience can tell you a lot about how helpful a lending company is or isn’t.
  • Make sure the lender only does a “soft” credit check to prequalify you: Lenders will want to check your credit score to determine eligibility and to determine your interest rate. However, multiple “hard” credit checks can damage your score temporarily. Lenders should ideally be conducting soft credit inquiries to prequalify you. This will not impact your credit score. Be sure to ask about how your credit history will be examined prior to requesting information or even rates from lenders.
  • Read the terms and fine print: How long will you be paying? Is your interest rate variable or fixed? It’s important to understand the details of your loan before signing the contract. If you have questions, ask them up front. If you can’t get answers, then reconsider whether you should be working with that lender.

What to Do After You’ve Refinanced Your Student Loans

So, you refinanced your student loans and set up autopay to ensure that all loan payments go out on time every month. What’s next? Well, there are a couple of things you can do.

If you’re happy with the outcome, you could maintain your refinance arrangement until your loan is paid off. But, also consider that interest rates change over time, and your credit score may also improve, qualifying you for an even lower interest rate in the future. It’s worth investigating your refinance options again every few years to see if you might be able to continue to save money or improve the terms of your loan.

Are you looking for student loans? Use College Raptor’s new Student Loan Finder to discover personalized loans. Compare lenders and interest rates to find the ideal student loan for you!