- Refinancing replaces your existing loans with a new loan through a private vendor, and could potentially change your interest rate, monthly payments, and terms.
- Refinancing could save you thousands of dollars in the long run, especially if you can score a lower interest rate, or help you better manage high monthly payments.
- All refinancing is done through private lenders. Refinancing federal student loans means you’re giving up access to federal programs, such as loan forgiveness and income-repayment plans.
- When looking to change the terms of your loan, compare lenders and look at interest rates, loan terms, reviews, and more to find the best deal for you.
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Do you feel like you’re overpaying on your student loans due to high interest rates? Are you also juggling too many loans and having trouble tracking payment dates? It may be time to consider refinancing your student loans. There are several factors to consider to determine if this route is the best for your financial future. This guide to refinancing your student loans walks you through everything you need to know, from what refinancing is to the pros and cons to how you can start the process.
What Is Student Loan Refinancing?
Refinancing replaces your existing loan, or loans, with a new loan from a private lender, such as a bank, credit union, or other financial institution. The new loan usually has different terms, including interest rates, monthly minimum payment, monthly due date, and length of the loan. Individuals may refinance to:
- lower monthly payments
- secure a lower interest rate
- change the loan term
- or opt for a fixed interest rate over a variable rate
Both federal student loans and private student loans can be refinanced, but there are major differences between the two that need to be taken into account.
Federal Student Loans vs. Private Student Loans
All student loans, regardless of whether it’s from the government or a private financial institution, can only be refinanced through a private lender. The federal government does not offer a refinancing option. If you refinance a federal student loan, the loan will become private.
Many experts recommend not refinancing federal student loans unless you absolutely have to or it’s truly the best situation for your finances. Federal student loans come with several benefits and protections that are lost when the loan goes private. Borrowers will lose access to income-based repayment plans, deferment and forbearance programs, grace periods for repayments, longer default timelines, federal forgiveness programs, and more.
Private student loans could be refinanced through the current lender or a new one, depending on your goals and the terms offered.
What Are the Pros and Cons of Student Loan Refinancing?
Refinancing student loans has both advantages and disadvantages that could impact your decision. However, every borrower’s situation and goals are different and not all have the same pros and cons.
Pros of student loan refinancing could include:
- You could qualify for a lower interest rate. Lower interest rates are the main reason borrowers refinance.
- You want to lower monthly payments to reduce financial stress. If you’re struggling to make the minimum payment each month and are at risk of defaulting, you can lower the monthly repayments to better suit your current financial circumstances. If your situation improves later, you can always pay more towards the loan than the minimum required amount.
- Combine loans for a single monthly payment. If you’re juggling several loans, refinancing them results in one single payment each month, making it easier to track due dates. However, if this is the only benefit you’ll get out of refinancing, it could be better to consolidate your loans.
- You could potentially release your cosigner. If you have a private student loan with a cosigner, refinancing is the only way to release them from their loan responsibilities.
Here are a few downsides to keep in mind, too:
- You could be repaying the loan off longer. Lower monthly payments could mean extending the loan term. If the original loan was for 10 years and you refinanced to a 20-year loan, you’ll be paying back for longer. Due to interest, you could end up paying more in the long run, especially if your financial situation doesn’t improve and you can’t make larger-than-required payments each month later.
- You might have to get a cosigner. If your financial situation isn’t ideal for refinancing (low credit score, high income-to-debt ratio, low income), you might have to get a cosigner to lock in an advantageous interest rate or other beneficial loan terms.
- You’ll lose out on federal student loan protections and benefits. All refinanced federal student loans become private, meaning you’re giving up access to their default protection, forgiveness, and income-repayment programs.
Consolidation vs. Refinancing
Refinancing and consolidation are often used interchangeably, but they’re actually different.
Loan consolidation combines multiple loans into a single loan. Depending on the terms of the original loans, consolidated loans may also be refinanced, resulting in different monthly payments and interest rates. However, consolidated loans aren’t always refinanced.
The biggest benefit of consolidating loans is the fact that you only have one payment to keep track of every month. With fewer payment deadlines to remember, you can reduce the risk of missed payments, late payment fees, and defaulting.
Although you can’t refinance federal student loans through the government, you could consolidate them with a Direct Consolidation Loan, maintaining your access to federal programs. Even borrowers with low credit or income might be able to qualify for these consolidated loans, as they don’t require a credit check.
In a nutshell…
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 to 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
4 Reasons to Refinance Your Student Loans
Refinancing student loans could be truly beneficial for a borrowers’ finances, but it isn’t ideal for every situation. It really depends on the loan, the source of the loan, the terms, and your own financial circumstances.
But here are a few examples of where you should seriously consider refinancing:
1. You Can’t Afford Your Monthly Private Student Loan Repayments
If you simply can’t afford your monthly private student loan repayments, you should consider refinancing. Missed loan payments can result in late fees and additional interest until the payment is made. This can cause you to fall behind on your finances. If you can’t catch up, you run the risk of defaulting.
Many private lenders will work with you if you’re having trouble paying your bill. After all, they want their money. Reach out to them the second you realize you can’t make the payment to review your options.
However, keep in mind that refinancing for lower monthly payments will extend the term of your loan. You could end up paying more in the long run if your finances don’t improve.
If you can’t afford your monthly federal student loan repayment, contact your loan servicer to learn the next steps.
2. You Qualify for Better Terms
If your income and/or credit score have improved, you might qualify for better loan terms, including a lower interest rate. Better interest rates generally mean you’re going to pay less in the long run.
Refinancing could also help you switch from a variable interest rate to a fixed rate. Variable interest rates change with the market. Whether it’s beneficial for you depends on the economy. With a fixed rate, the rate will never change unless you refinance again later.
In addition, borrowers could opt to refinance if they want to shorten the length of their loan term. Going from a 10-year loan to a 5-year loan means you pay off the loan faster and spend less on interest. Generally, though, you don’t have to refinance to do this. You can simply pay more each month on the original loan. If you do this, be sure to check with your lender to confirm there are no penalties for paying off the loan early.
3. You Want To Release Your Cosigner
Cosigning a loan means you are sharing responsibility for that loan. If the borrower fails to make payments or defaults on the loan, the lender will contact the cosigner for payments.
Debt and missed payments could negatively affect the cosigners’ own credit score. In turn, this debt responsibility could mean the cosigner has trouble getting loans for their own needs, including car loans and mortgages.
The only way to release a cosigner is by refinancing. You could take on the responsibility solely yourself if you qualify, or you could choose another cosigner.
4. You Have Several Private Student Loans
If you’re juggling several private student loans through various lenders, refinancing could help you consolidate those loans while also qualifying for better terms. There’s a lot to remember with several payment deadlines, so combining them into one, single loan means you only have to keep track of a single due date. This could lower the chance of late payments, late fees, and defaulting.
How To Refinance Your Student Loans
Refinancing your student loans takes a bit of legwork, but it’s fairly straight forward. Before you apply, you should always research current student loan refinance rates. Like mortgage rates, these interest rates vary depending on the current market. If possible, you’ll want to time your application when rates are lower. However, if you need to refinance quickly, you might not be able to wait until this ideal time.
Once you’re ready to refinance, you’ll want to compare lenders, including their interest rates, loan terms, fees, and penalties. When you’re ready to apply, you’ll need some paperwork, including:
- proof of income
- bank statements
- list of assets
- contact and personal information
- and current loan details.
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?
Here are some things you’ll want to compare when looking for a lender:
- Interest rates. Even a small difference in rates can have a huge impact on your long-term finances. Always compare your personalized interest rate, as it could be different from the published rate ranges. You should also consider if you want a variable or fixed rate, and which the lender is offering you.
- Loan terms. Longer loan terms mean you’ll be paying the loan off longer with minimum payments, but it also means your payments will be less each month.
- Fees and discounts. Most lenders don’t charge for refinancing applications, but compare any fees or discounts you’re presented with, such as monthly fees or loyalty discounts.
- Reviews. Read past customers’ experiences to learn more about customer service and issues that arose before, during, and after the application processes. You might not want to go with a lender who has a severely low rating on trusted review sites.
- Credit checks. A soft credit check doesn’t impact your credit score, while a hard credit check could lower it, especially if you’re applying to and comparing several lenders. Make sure the lender uses a soft credit check before applying so your credit isn’t negatively impacted.
- Fine print. It’s good advice in general: always read over contracts and the fine print before signing. Companies, including lenders, can hide things in the legal documents that come back to haunt you in the future.
FAQ About Refinancing Student Loans
You likely have a few lingering questions about refinancing student loans. Here are some commonly asked ones:
Who Qualifies for Student Loan Refinancing?
Eligibility depends on several factors including income, employment status, debt-to-income ratio, credit score, and the original loan amount and terms. Private lenders tend to have specific numbers they’re looking for and may also require specific criteria. For example, some private lenders require proof of graduation while others will allow you to refinance even if you didn’t earn a degree.
What Should I Do If I’m Going to Miss a Student Loan Payment?
If you believe you’re going to miss a student loan payment or you already missed one, contact the lender immediately. Even private lenders tend to have options available in the event of hardship, such as waived late fees.
Don’t ignore the issue if you’re struggling to pay. Non-communication is more likely to result in a defaulted loan and high fees, exacerbating the problem. It’s also much easier to default on private loans than it is federal loans.
How Does Refinancing Affect My Credit Score?
Initially, refinancing could lower your credit score if the lender or lenders ran a hard credit check before granting you the loan details. Try to compare lenders within a 14 to 45-day period as this limits the impact on your credit.
You can expect your score to bounce back in just a few months, and over the long term, it could benefit you as long as you make timely payments. However, different refinancing terms and different financial situations could also change how refinancing affects your credit score.
Are There Any Fees Associated With Refinancing Student Loans?
Most lenders don’t charge for student loan refinancing applications. There may, however, be fees for late or returned payments or for opening a new account.
Will Refinancing Save Me Money?
It depends on your unique financial situation and the terms of your loan.
How Long Does it Take to Refinance?
The process can take between a few days and a few weeks, depending on the lender.
What Happens If I Default on a Loan?
Defaulting on your student loans could significantly damage your credit score for the long-term, affecting your ability to buy a house or car or open a new credit card. Wages could be garnished or payments could be taken out of your Social Security.
Does Refinancing Help Me Pay Back My Loans Faster?
It can, depending on the length of the new loan. However, if you’re changing your loan for lower monthly payments, you’ll likely be paying the loan off for longer.
Some types of loans come with prepayment fees if you try to pay off the amount faster. Student loans don’t come with these fees, so you could pay off your loan faster without refinancing if you pay more than the minimum required each month.
Can You Refinance More Than Once?
Yes, you can refinance student loans more than once as long as you qualify each time.
Refinancing your student loans can be an excellent solution if you’re looking to lower your interest rates, adjust your monthly minimum payment, or change the terms of your existing loan.
However, keep in mind that, if you refinance federal student loans, you give up all the benefits that come from the federal programs.
Comparing rates, loan terms, and lenders can help you make the best decision for your bank account. Want to learn more about lenders who handle student loan refinancing? Get started here.
