What Is Student Loan Refinancing?

Student loan refinancing lets you combine multiple loans into one, thereby simplifying repayment. You’ll work with a private lender that pays off your old student loans and issues a new one in their place. There’s typically no fee to refinance student loans, but you’ll need to meet the lender’s requirements for credit and income.

If you have strong credit (or can apply with a creditworthy co-signer), you could potentially qualify for a lower interest rate than you have now. Reducing your interest rate can lower your monthly payment and save you money over the life of your loan.

When you refinance, you can also choose new repayment terms, often between five and 20 years. A shorter term can help you get out of debt faster and save on interest, while a longer term could give you more affordable monthly benefits but comes with more interest charges over time.

Keep in mind, though, that refinancing federal loans turns them private, meaning those loans will no longer be eligible for federal repayment plans, forgiveness programs or other benefits.

How Does Refinancing Student Loans Work?

When you refinance student loans, you take out a new loan with a different lender to pay off your existing student debt. Your new loan will have a new interest rate and repayment term, which means you could pay less in interest or lower your monthly payments. Refinancing is also a useful way to combine multiple student loans into one debt, which can make it easier to manage repayment.

Refinancing is only done through a private lender. That means that if you refinance your federal student loans, they will become private debt and you will lose access to federal benefits like income-driven repayment, loan forgiveness programs and more flexible deferment and forbearance options.

If you want to keep your federal student loan benefits, refinancing isn’t a good option. Instead, you can consolidate your federal loans into one payment with a direct consolidation loan. This averages all your student loan interest rates and rounds up to the nearest one-eighth percent. Your new repayment period can be as long as 30 years but you retain all your federal benefits.

If you don’t mind losing your federal benefits or only have private student loans, refinancing might work better for you. You can use a student loan refinance calculator to determine how refinancing can help you save money or lower payments.

Pro Tip

Before refinancing federal student loans, it’s important to read through all of the federal loan benefits and understand those benefits will no longer be available once you refinance with a private lender. Private lenders may offer some of their own perks, like deferment or forbearance in certain situations; however, you would no longer be eligible for federal income-driven repayment plans or loan forgiveness after refinancing.

Student Loan Refinance Requirements

Eligibility requirements for student loan refinancing vary by lender, but borrowers generally must meet the following criteria:

  • Good to excellent credit. Lenders typically require borrowers to have good to excellent credit, meaning a credit score of 670 or higher.
  • Steady income. You’ll need to meet the lender’s income and employment requirements. For example, the lender may require you to be employed full-time and have a salary of at least $35,000 per year.
  • Minimum loan balance. Most lenders require a minimum outstanding loan balance to qualify for refinancing. The minimum varies by lender, but it’s usually between $5,000 and $10,000.

If you don’t meet those requirements, you could still qualify for a private student loan if you add a creditworthy co-signer to your loan application.

Pros and Cons of Refinancing Student Loans

Student loan refinancing can be an excellent way to manage your debt, but it’s important to weigh your options and research the pros and cons carefully.

Pros of Refinancing Student Loans

  • You could save money. If you refinance your loans and qualify for a lower interest rate, you could save hundreds or even thousands over your loan term.
  • Simplify payments. Most borrowers take out several loans to pay for their college education, and keeping track of the different loans and payments can be stressful. When you refinance your loans, you can combine them into one loan and have just one account to manage and an easy-to-remember payment due date.
  • Pay off your loans faster. With a lower interest rate, more of your payments will go toward the loan’s principal rather than interest. If you make additional payments, you could pay off your loans much faster.

Cons of Refinancing Student Loans

  • Lose federal loan benefits. If you refinance federal student loans, you will transfer them to a private lender. They’ll no longer qualify for federal benefits like income-driven repayment, Public Service Loan Forgiveness or federal forbearance programs.
  • Not everyone qualifies for a lower rate. Refinancing companies have strict eligibility requirements and depending on your existing loans, you may be not eligible for a lower rate than you have now.
  • You may need a co-signer. Because the eligibility requirements are stringent, you may need a co-signer to qualify for a loan. Co-signing a refinancing loan is a major commitment since student loans can be in repayment for 10 to 20 years.

Should I Refinance My Student Loans?

The three items to consider when deciding whether to refinance are financial history, interest rates and repayment needs.

First, identify whether you qualify. Most student refinance lenders require a minimum credit score of 650. You’ll also generally need to show stable income, a low debt-to-income (DTI) ratio and a history of on-time debt payments.

Eligible to refinance? Now look at your current loans’ interest rates. If they’re significantly higher than the rate you’ll likely get when you refinance—which you can check using lenders’ prequalification tools on their websites—refinancing might make sense for you.

But remember, if you refinance federal student loans, you’ll lose access to federal programs such as flexible forbearance, income-based repayment, and Public Service Loan Forgiveness (PSLF). If you rely on these programs (or think you might in the future), think twice before refinancing.

You should consider student loan refinancing if you have a good or excellent credit score and stable income (or a co-signer who does) and your current loans have high enough interest rates that you’ll benefit from a lower rate. In some cases, you can even refinance federal parent PLUS loans from your parents and put them in your name, relieving them of payment responsibility.

How to Refinance Student Loans

If refinancing makes sense for your situation, you can start the process immediately. Here’s how to refinance your loans:

1. Shop around before you apply. Most refinancing lenders allow you to prequalify for a loan. To do so, you’ll enter a few personal details and the lender will complete a soft credit check—which has no impact on your credit score—before showing your estimated fixed and variable interest rates for your desired loan. Do this with several lenders to see who might offer the best deals.

2. Submit an application. Once you’ve decided which lender you want to work with, submit a formal application. This is a more in-depth form, and you may need to include extra documentation about your income and other details. The lender will then do a hard credit check to confirm your information. If you’re approved, you’ll receive an overview of the final loan terms. Review the documents, and if all looks good, you can sign the paperwork to receive your loan.

3. Confirm your old loan is closed, then start making payments. Your new lender will likely pay off your old loan directly. However, keep making payments on your old debt until you receive confirmation that it’s been paid off and your account has been closed. Once that happens, you’ll start making regular payments to your new lender on your refinanced loan.

How To Refinance Student Loans With Bad Credit

Applying with a co-signer is likely the best way to qualify for student loan refinancing when you have bad credit. A co-signer guarantees repayment of your loan if you default, which reduces risk for the lender and can help you qualify for a loan with a better interest rate.

The ideal co-signer is someone you trust with a good payment history and a FICO Score of 670 or higher. When using a co-signer, paying on time is crucial since late payments can affect both of your credit scores. If you default on the loan, the lender can sue you and your co-signer for the unpaid debt.

Talking with potential co-signers about your employment prospects and repayment plans after school could help them feel more confident about doing you a favor.

Is Refinancing Student Loans Worth It?

Refinancing student loans is worthwhile if you have a stable job and strong enough credit to qualify for a low interest rate, which can save you money in the long run. Most lenders don’t charge application or origination fees, so there are no upfront costs.

However, choosing the right loan term is important. Extending your student loan repayment term can result in lower monthly payments but higher long-term interest costs. Ideally, the payment reduction from refinancing should come from a lower interest rate and not a longer term.

If your credit is fair or poor (below 670 on the FICO Score scale) and you can’t qualify for an interest rate lower than your current rate, refinancing might not save you much money. And if your job is unstable or there’s any chance you might need to use payment relief options like deferment, loan forgiveness or income-driven repayments, it’s probably best to keep federal student loans.

Check Also

Private Student Loan Rates: January 23, 2024—Loan Rates Jump Up

The average interest rate on 10-year fixed-rate private student loans rose last week. For borrowers …

Leave a Reply

Your email address will not be published. Required fields are marked *