Wishing your student loan payments were lower? Or that less of your monthly payment was going towards interest?
Student loan refinancing may lessen that nagging headache associated with your student loans.
Student loan debt is a national crisis and you aren’t the only one feeling the strain. But with interest rates still low, you may be able to reduce your interest rate or make changes to your loans to pay them off faster by refinancing.
But while some can save money, others will end up paying more or wishing they kept some of the protections provided by Federal loans. If you are considering refinancing your student loans, approach this financial decision with the knowledge you need so you can make the best choice for your situation.
This guide will give you everything you need to determine whether refinancing will help or hinder your financial health. Let’s dive in!
What Is Student Loan Refinancing?
When refinancing, you will combine one, some, or all of your student loans into a single new loan. Student loan refinancing is an option for both federal student loans and private student loans.
The new loan is a private loan and will include a new interest rate and loan repayment term. If you combined student loans, you will have one singular student loan payment each month with one private lender.
When Should You Refinance?
We would all love to fork over less cash to our student loans. So, how do you know when refinancing is for you?
You Have Loans With High Interest Rates
High interest rates are generally anything above 6%. If you can refinance to reduce your interest rate significantly, this a good reason to do so. You may also choose to refinance because you have a loan with a variable interest rate that keeps going up. Being able to lock in a fixed interest rate that is lower will solidify a consistent monthly payment.
You Have Stable Income
If you have been working for some time and have a consistent paycheck, then go for it. However, the moment you score a new job would be a terrible time to refinance. You want to make sure you will be at that position long term and you have passed your 90-day review or subsequently, you have signed a contract to ensure you will be working at that location.
If you are considering a career change, your family will be moving, etc. Then hold off on refinancing your student loans.
You Have a Good Credit Score
Good to excellent credit will help to ensure a lower rate and save you money. Generally, if you have a credit score of 700 or above you will qualify for refinancing.
You can check your credit score for free at Credit Karma.
You Have Multiple, Expensive Loans
Refinancing needs to be worth your time and effort as well as the lender. If you owe less than $10,000 it will end up costing you to refinance and you should continue to stay the course with payment.
For most borrowers, including myself, $10,000 is a mere fraction of what is owed in student loan debt. Refinancing could benefit you when you owe a large sum because the lender can offer a longer-term loan, allowing a more manageable monthly payment.
You Want to Release a Cosigner From Your Loan
If you had a parent, relative or friend agree to be a cosigner for your student loans in college, refinancing can be a good option to get them off the hook and free up their credit.
Understand that taking a cosigner off a loan can be challenging, but it is possible. To help you be successful, make sure you have made all payments yourself and complete the paperwork for refinancing yourself.
When Shouldn't You Refinance?
Refinancing to a lower interest rate seems like an attractive option, but it’s not for everyone. When you have Federal student loans that you’re refinancing to private, you can lose some repayment protections. And if your financial house isn’t in order, you might not be able to save as much as you think.
You Plan On Using Federal Repayment Plans
Refinancing federal student loans into one private student loan removes all borrower protections including the federal student loan income-driven repayment plans. These are of help to many individuals who are just coming out of school and whose income may be lower.
Additionally, if you are a teacher, lawyer, doctor, or work in public service and plan to do so for some time, you are eligible for student loan forgiveness and do not want to refinance.
You Have Bad Credit
A bad credit score means you will not get a good offer from private lenders or you may not qualify. Refinancing your student loans with bad credit can mean a worse deal for you and your loans or may even require a cosigner, which isn’t recommended.
How Much Can You Save By Refinancing?
Lenders will offer a lower monthly payment or a lower interest rate. They want your business and both sound enticing. However, it is important to know where the savings actually comes in and where you may just be getting blinded by the “lower” monthly payments.
When refinancing your student loans you need to look at these three factors:
- Length of the Loan
- Interest Rate
- Monthly Payment
The Shorter the Term the More Money You'll Save
Typical repayment plans offer a 10-year span. When refinancing, you have the opportunity to shorten or lengthen the term of your loan. Shortening the term of your loan will save you money because you will be paying less in interest by paying off the loan sooner.
However, if you have a shorter payment term it could mean a higher monthly payment.
A Lower Interest Rate is Ideal
Interest rate is what you are charged monthly on your principal balance for borrowing money. This fee is a percentage of your total loan. A lower interest rate is a good thing and means you are paying a lower fee. However, if the interest rate is only lowered by 1%, you will not see a huge amount of savings. Look to lower your interest rate from 7% to 3.5% in order to see noticeable savings.
Also, keep in mind that a lower interest rate over a longer loan term can end of costing you the same as if you paid it off over 10 years instead of 20.
Your Monthly Payment May be Higher
Lastly, your monthly payment is determined by your loan term length, the amount you owe, and the interest rate.
Refinancing to save the most money, likely means you will be paying a higher monthly payment. The only reason it may be lower is if you can refinance, keep your same repayment term, and lower the interest.
If lowering your monthly payment is a goal due to financial challenges, then look into repayment plans with your current lender or the repayment plans offered for federal student loans before considering refinancing.
Bottom Line: Try to Save Money But Stay Balanced
Bottom line for saving money: Your bulk savings most often comes from a shorter loan repayment term, not the lower interest rate.
This is a good thing, as you and I both want to get rid of that student debt as soon as possible.
I also know that sometimes we need to consider life and balance, making sure the monthly payment is affordable. Sticking with a fixed interest rate ensures you can budget and plan long term and stay on top of your loan.
See How Much You Could Save
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What to Watch Out For When Refinancing Your Student Loans
You don’t just want to jump at the lowest available monthly payment when refinancing your student loans. Understand what you’re signing up for – and how it will impact your long term financial health.
Refinancing All of Your Loans
When refinancing your student loans you don’t need to do all of the loans. While it may seem like the more convenient option to have all of your loans in one place, it may not be the most money-savvy choice.
Choose loans that have high interest rates or variable interest rates that keep going up, and keep your loans with the lower interest rates with the current lender.
Fixed vs. Variable Interest Rates
Lenders will have two options for a fixed versus variable interest rate. A fixed interest rate stays the same for the life of the loan. A variable interest rate typically starts out lower but could increase over time with the market.
While interest rates might be low right now, it is always possible for them to climb, and I don’t like to risk too much when it comes to loans.
If you choose a variable interest rate, you are choosing to weather the market’s ups and downs. Alternatively, choosing a fixed interest rate will ensure your monthly payment stays consistent making it easier to budget.
Loan Term Length
Paying off your student loans faster means you will pay less in interest and free up your money for your other financial goals. A shorter loan term length should be the goal as long as you can handle the payments each month.
Refinancing Smaller Loans
If you have student loans of $10,000 or less the benefits you would see from refinancing would be minimal to non-existent by the time the loan was paid off. Instead, try focusing on ways to save or earn more to throw towards your loans.
Preparing to Refinance Your Student Loans
Ready to refinance? You will need to make sure you have your paperwork in order and understand your student loans entirely before contacting a lender.
Check Your Credit
Excellent credit means you will have better offers for refinancing. Check your credit score for free online and make sure everything is in order. When you apply your lender will pull your credit history and look at this score to help determine what you qualify for.
Keep Your Debt-to-Income Ratio Low
Your debt-to-income ratio is taken into account when taking out any kind of loan, even refinancing. Lenders want to be sure you can afford the minimum monthly payment on your current income.
Debt-to-Income ratio is determined by the total of your minimum monthly debt payments divided by your gross monthly income and results in a percentage. You want to keep this percentage as low as possible in order to get the best offers from lenders.
You can help this percentage by paying off an Auto Loan or Credit Card prior to refinancing.
Compare Rates at Multiple Lenders
You need to shop around before you refinance your student loans. Most lender websites will allow you to get rates and estimates. A soft credit pull will not hurt your overall credit score, so as long as you do not officially apply, you will be ok.
When you are looking around be sure to use the same loan term length you have now (or a shorter one) in order to ensure you have comparable numbers for what you pay now.
The Documents You’ll Need For Refinancing
- Proof of Citizenship – SSN
- Valid ID – drivers license or passport number
- Proof of Income – Pay stubs
- Official Statements from your private and federal loan lenders
Some Lenders Will Also Require
- Bank Account Information – via a routing number or bank statement
- Recent Tax documents- W-2 or 1099
When you are looking around be sure to use the same loan term length you have now (or a shorter one) in order to ensure you have comparable numbers for what you pay now.
Where to Refinance Your Student Loans
When refinancing your student loans, you can get quotes from multiple providers without worrying about multiple hits to your credit score. Receiving quotes only takes a soft pull of your credit (doesn’t impact your score) and lenders only record a hard credit pull if you choose to move forward with their quote.
While interest rate and terms – such as whether or not the lender has unemployment or other protections – are the most important, when rates are close consider lenders other benefits. SoFi, for instance, offers career coaching to customers, while CommonBond covers the cost of education for a child in the developing world for each refinanced loan.
These top-rated providers have excellent refinancing rates, great customer service, and easy application processes.
Credit unions often offer the most consumer friendly banking and loan terms. But, until now, it was hard to access a number of credit unions at once – especially ones outside your local area.
LendKey is partnered with hundreds of non-profit credit unions and banks to bring you student loan refinancing offers online. The application process only takes a few minutes and you can compare a number of options from different institutions.
Debt associated with associates, undergraduate, graduate, and doctoral degrees are eligible for refinancing with LendKey. Loan terms are between 5 and 20 years, there are no origination fees, and fixed or variable rate loans are available.
SoFi is one of the highest regarded student loan refinancing companies and markets to career-driven individuals. While they don’t have a set credit minimum, they only accept refinancing from people with very strong credit scores.
At SoFi, Associates, Undergraduate, or Graduate degrees qualify. Terms also allow for 12 months of unemployment protection, but you need to work with their career counselors. SoFi also offers community benefits suck as Career Coaching, community events, and an Entrepreneurship program.
SoFi refinances Federal and private student loans, offering competitive fixed or variable rates.
CommonBond is highly rated for customer service and offers low and competitive rates for refinancing federal and student loans. They don’t charge origination fees and there are no prepayment penalties, along with 24 months of unemployment protection.
To refinance at CommonBond, you need a minimum credit score of 660 and only Undergraduate or Graduate degrees qualify.
CommonBond also believes in social impact and funds a child’s education in a third world country for every student loan they issue.
Want to check multiple refinancing rates quickly and easily? Credible will show you rates from up to 8 lenders after filling out one simple form.
There is no fee for Credible’s service, you can refinance Federal, private, and Parent PLUS loans, and there are never prepayment penalties.
In just 2 minutes you can get actual rates (not a range) and without a hard pull on your credit report. If you see a rate you like, you can move forward directly from the Credible platform.
Deciding Whether or Not to Refinance
If you are in a stable financial place, have a good credit score, and have a handle on your other forms of debt, then refinancing might be a good option for you.
Do your research and approach this like any other financial decision — with research and care.
There is no ripping off the band-aid when it comes to student loans or student loan refinancing. Paying off the debt is a slow and steady march with smart financial choices along the way. Good luck!
Have you refinanced your student loans? Why or why not? Share in the comments!
