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Student loans have always played at least some role in helping American college students pay for their education, but in recent years the amount of student loan debt held by American graduate students has exploded. Case in point: In 2017, total college loan debt is estimated to be about $1.45 Trillion split among 44 million borrowers, and the average Class of 2017 graduate has more than $37,000 in student loan debt. Scary, right?
Are you one of those millions of Americans who relied on student loans to go to college? If so, then you know how much student loans suck, and you’ve done some research to figure out how you can make them suck a little less. Refinancing your student loans is one way that you might be able to make paying them off a little bit easier.
If you’ve heard of student loan refinancing, you probably have a lot of questions. What is student loan refinancing? Why do people refinance their student loans? Is refinancing the same thing as consolidation? Can I refinance a federal student loan? How do I refinance my student loans? Should I refinance my student loans?
In this guide, we’re going to answer all of these questions and more so that by the time you’re done reading, you’ll understand what student loan refinancing is, how you can do it, and how you can figure out if it’s the right thing for you.
What does it mean to refinance your student loans?
Want a super-simple definition? Student loan refinancing is the process of getting a new student loan to replace an old one. The new student loan will usually have a new interest rate, payoff schedule, monthly payment amount, or a combination of all three. You could refinance your student loan with your existing lender, or with a new lender.
If you’re brand-new to the world of student loans, you should take a look at our introductory guide that will help you understand all of the student loan basics.
In effect, when you refinance your student loans (or any kind of loan, really), you’re shuffling your debt around. If you’re refinancing your student loan with the same lender that holds your existing loan, then your lender closes out your current loan account and issues you a new student loan at your new loan terms. If you’re refinancing your student loan with a new lender, then the new lender effectively pays off your old loan for you. Your old lender closes out your account, and your new lender issues you a new student loan at your new loan terms.
It’s a lot less complicated than it sounds, I promise.
But that still leaves the question of why. Why would someone choose to refinance their student loans to begin with?
Why do people refinance their student loans?
There are four big reasons that borrowers decide to refinance their student loans:
- They want lower interest rates
- They want lower monthly payments
- They want to pay off their loans faster
- They want some combination of all three
These things—interest rate, monthly payment amount, payoff schedule—are called the “terms” of your loan. They are the terms that you and the bank must agree upon before refinancing begins.
Refinancing to a lower interest rate will save you money, because less of what you pay will be going towards interest and more of it will be going towards your student loan principal. Refinancing to a lower monthly payment will free up money in your budget that you can use for other expenses like rent or utilities, or that you can use to start saving and investing for the future or to pay down your student loan principal. In the same way, refinancing to a shorter payoff schedule will allow you to save money by paying off your student loans faster, limiting the amount that you pay towards interest. And of course, if you’re able to get some combination of all three, then you’ll reap even more reward.
Depending on when they were disbursed, federal student loans can have an interest rate as high as 8%, and private loans can average as high as 12%, so it’s very likely that you’ll qualify for lower rates.
One important thing to note about payoff schedule: If your goal is to refinance to a shorter payoff schedule, but your interest rate stays the same, then your monthly payment by necessity will go up. If you have room in your budget to accommodate this and already have adequate emergency savings, that’s great: You’ll pay off your loan faster, save money on interest, and have the peace of mind of knowing that you’re debt free.
But if increasing your monthly payments will put a strain on your budget or hamper your ability to save for emergencies, then you’d probably want to prioritize a lower interest rate and lower monthly payment, even if it comes with a longer payoff schedule. Once you’ve built up your savings and gotten some wiggle room in your budget, you can then use your interest savings to pay more of your principal down each month to pay off your loan quicker.
Can I refinance federal student loans?
Yes and no.
There is no federal student loan refinancing program, which means that you can’t refinance an existing federal student loan into a new federal student loan with different terms. But you can refinance a federal student loan into a private student loan with a private student loan lender.
Doing so might be able to save you a lot of money on interest, depending on the terms of your original loan, but comes at a cost. By refinancing from a federal to a private student loan, you’ll be giving up certain benefits, including:
- Deferment and Forbearance Options: Federal student loan borrowers have a lot of option available to them in terms of deferment and forbearance. If you have federal student loans and can’t afford to make your monthly payments, you may be eligible to place them in deferment or forbearance if you meet certain eligibility requirements. Most private student loan lenders, on the other hand, do not offer deferment or forbearance if you cannot make your monthly payments. That being said, some student loan lenders may offer unemployment protection in the event that a borrower loses their job.
- Income-based Repayment Plans: Federal student loan borrowers have the option to tie their monthly payments to their income through something called an income-based repayment plan. Doing so typically keeps your monthly payments manageable: If your income drops, then your monthly payment drops; if your income rises, then your monthly income rises. (Your payoff schedule fluctuates accordingly—a lower monthly payment will correspond to a longer payoff schedule, and vice versa.) These options are not available to private student loan borrowers: If you have a private student loan, and your income drops, you will still be responsible for your regular monthly payment.
- Student Loan Forgiveness: Federal student loans may be discharged or forgiven for a number of reasons. Private student loans, on the other hand, are typically never forgiven.
Therein lies the rub. Refinancing your federal student loan might get you a lower interest rate or a lower monthly payment, but it also removes a lot of valuable borrower protections. Whether it’s the right decision for you depends on your own financial situation. If, for example, you work in a volatile industry or company where layoffs are common and finding a new job difficult, you should really think long and hard before giving up your federal protections by refinancing to a private student loan.
Is refinancing the same thing as consolidation?
Nope, they’re completely different things.
Student loan refinancing is the process of getting a new loan, with new loan terms (interest rate, monthly payments, etc.) to replace an old loan. The new loan may be drastically different from the old loan.
Student loan consolidation, on the other hand, is the process of combining multiple student loans into a new, single loan. At the end of the day, this new loan will not be different from your old loan. Though the interest rate might appear to be different, it is actually the weighted average of all of the loans that were merged together, meaning that your new interest rate is effectively the exact same as it was before you consolidated your loans.
The main benefit of student loan consolidation is that it simplifies repayment by allowing you to make a single, larger payment each month instead of multiple smaller payments. The main benefit of refinancing, on the other hand, is that it typically offers new loan terms like a lower interest rate or smaller monthly payments. If you’re considering refinancing your student loans, make sure you understand all of the pros and cons of consolidation before moving forward either way.
That being said, it is possible to refinance multiple student loans into a single new loan, effectively consolidating them. The difference though, again, lies in the facts that other terms of the loan have also likely changed.
Only federal student loans are eligible for consolidation. If a borrower wants to consolidate their private student loans into a single new loan, they would need to go through the process of refinancing.
What factors do student loan refinancers take into consideration before approving a new loan?
This is a great question, and an important one.
Lenders want to make sure that they’re going to get their money back. If you can prove to them that you’ll be able to pay back the loan, then you have a greater chance of being approved, and you’ll get better loan terms (lower interest rate, etc.). In this way, lending money is all about risk management.
But how do lenders determine risk? How do they know who is likely to pay back their debts and who isn’t? They make these judgement calls based on a number of factors:
- Credit Score: Applicants with higher credit scores have shown that they are financially responsible. They’ve made their payments on time, they have a credit history, and they’ve managed their debt. Typically, student loan refinancers want you to have a credit score of at least 650, though 700 or higher gives you a better chance of being approved by a student loan refinancer, and the higher your score, the lower the interest rate that you will qualify for.
- Steady Income: Think about it, would you lend someone money if you knew that they didn’t have a job? Of course you wouldn’t. And neither will a bank. A part of the application process will include proving that you have a steady income. The higher your income is compared to the loan you are requesting, the better the odds that you’ll be ultimately approved for student loan refinancing. (It’s also worth noting that lenders take into account all debt, not just student loan debt, when making their decisions.)
- Type of Career: This is an extension of the steady income factor above. Lenders often prioritize borrowers who work in certain industries that offer high stability and income, such as medicine and law. If you work in such an industry, you may qualify for better terms despite high debt levels, because it’s expected that your income will enable you to pay off your loans.
- Cosigner: Requiring a cosigner is another way that a lender helps guarantee that they’ll get their money back, even in the event that you, personally, can’t pay. If your debt-to-income ratio is too high, or you have a lower than ideal credit score, your lender might require a cosigner. Even if they don’t require one, you might earn a better interest rate by offering a cosigner.
Want to ensure that you’ll be approved when applying to refinance your student loan, or that you are able to get favorable loan terms? Then do everything in your power to make yourself less risky. Improve your credit score, pay off some of your debt so that your debt-to-income ratio is lower, and think about bringing on a cosigner to put your lender at ease.
How do I refinance my student loans?
1. Make sure you are tracking your student loans.
If you’re thinking about refinancing your student loans then you need to make sure you’re on top of your current loans. Make sure you’re up to date on all of your payments and that you aren’t forgetting about any loans (this is especially important for new graduates). Then, gather all of your student loan information together and track it in a spreadsheet.
Free Student Loan Spreadsheet
Yeah, I know. Spreadsheets are boring. But they’re also really helpful, especially when you’re talking about organizing your finances. By plugging all of your student loan information into a spreadsheet, you’ll have all the critical information handy—your current interest rate, lenders, monthly payments, balances, etc.—as you begin to research the refinancing options available to you.
After all, you’re not going to wind up in a better place if you don’t know where you are already!
2. Know why you want to refinance.
Why do you want to refinance your student loans? Do you want lower interest rates so that you can save some money as you pay off your college debt? Do you want to lower your monthly payments so that you have more wiggle room in your budget for saving, investing, and just plain living? Do you want a condensed repayment schedule so that you can pay off your student loans faster? Or do you want some combination of those—say, a lower interest rate, and lower monthly payments?
If you’re going to be successful in refinancing your student loans, then you need to know what you want to get out of the process. Not just some vague idea, and not just some talking point you heard from a friend or parent—you need to know exactly what you want. What do you need to get out of refinancing your student loans for it to count as a win by your standards? If you can’t put that desire into words, then I would suggest you pause until you’re able to do so.
3. Know your credit score.
Before you begin searching for rates, you should check your credit score with the big 3 credit bureaus so that you know if you’re likely to be approved or not.
Typically, student loan refinancers want borrowers to have a credit score of at least 650. Having a score of 700 will make it more likely that you’ll be approved, and the higher your score, the better the rates you’ll qualify for.
If your score is not at least 650, then take some time now to increase your score by paying down your debt, making sure you don’t miss any payments, and disputing any errors that might be on your credit report.
You can find your score for free by signing up for a service like Credit Karma or something similar.
4. Shop around to find the best rate.
If you’re going to get the lowest interest rate and loan terms when refinancing your student loans, then you need to shop around. After all, you wouldn’t so much as buy a television without making sure you were getting the best deal; you should put at least as much energy into finding a refinancer as you do into any other purchase that you make.
The good news is, there are a lot of lenders out there that would like to refinance your student loans. Everyone from large national banks to local credit unions to lenders who specifically focus on student loan refinancing might be willing to do business with you. All of those options means that competition is high, and when competition is high, you win. The bad news, though, is that having so many options is also overwhelming, and it makes it difficult to even know where to start. This phenomenon is called “decision fatigue,” and it’s very, very real.
Your goal is to find the BEST loan terms possible before agreeing to anything. Decision fatigue works against you by wearing you down until you no longer care about finding the best option—you just want to be done, so you settle for something that’s only okay. But the difference between an okay interest rate and the best interest rate could be the difference of thousands of dollars over the life of your loan. Don’t settle for “okay!”
To keep yourself from falling victim to decision fatigue, I recommend that you start with a rate comparison tool that will give you a broad look into the student loan refinancing market. The way these tools work, is they take some information about your loans (total balance, current interest rate, etc.) and they show you some loan terms that you might qualify for with different lenders. These tools are in no way exhaustive—they’ll typically show you rates from only a handful of lenders—but they’re helpful nonetheless. First of all, they put you directly in touch with some lenders who might be willing to refinance your student loans, which helps you get the ball rolling.
But even if you don’t ultimately work with one of those lenders, you now have information that’ll make your search easier. By knowing what these lenders are offering, you have a clearer sense of what a “fair” rate looks like, and you can use this information as you dig deeper for the best rate and loan terms.
There are a number of rate comparison tools out there, but my personal favorite is from LendEdu. In exchange for your contact information and some info about your student loans, LendEdu will show you the going rates from the big lenders in the student loan refinancing market, including SoFi, Citizen’s Banks, LendKey, CommonBond, Earnest, and more.
On top of showing you rates that you might qualify for, the tool will estimate what your monthly payments might look like, and will show you what your total savings could be. And if you do decide to work with a lender that they suggest, they give you all of the contact information you need to get the ball rolling. If you’re interested, I wrote a review of LendEdu that walks you through the process of searching for rates, so you know exactly what information they’ll need to do your search.
Once you’ve armed yourself with this preliminary search and you know what a fair rate looks like, you need to continue your search until you find the best. Often, this will come from smaller local banks or local credit unions, which typically offer lower rates to members, but there’s no hard and fast rule. You should check with the large lenders, small local lenders, and student loan refinancing specialists.
5. Choose your lender and loan terms.
As you complete your search, take note of the lenders that offer the best loan terms. Whittle down your list to the top 5 that you’d like to work with, with your top choice on, well, the top. You’ll want to make sure you’re these offers match up with the goals that you had when you started looking to refinance: Lower interest rates, lower monthly payments, shorter repayment schedule, etc.
One thing to also keep in mind is whether or not an interest rate is “variable” or “fixed.”
Variable interest rates often start out lower than fixed rates, which makes them appealing to borrowers. But, because variable rates are tied to the prime rate set by the Fed, they can (and very likely will) change. The prime rate has been at historic lows for a number of years, but is expected to start rising soon, which means that a low variable interest rate now will very likely wind up being more expensive in a few years.
Fixed interest rates, on the other hand, do not fluctuate. For this reason, they are often a bit higher than variable rates. The added cost comes with a benefit, though: Even if the prime rate rises, your debt will never get more expensive so long as you have a fixed rate.
If your goal is to aggressively pay off your student loans in a year or two, then refinancing to a variable interest rate might make sense for you: You can pay off your debt before rates rise, and that extra-low rate up front will help your money go further. But if you are planning on paying back your loan over the course of 5, 10, or 15 years, then your low variable rate today will likely rise—maybe even higher than whatever rate you had before refinancing. That’s why it’s very important for you to have a repayment plan in mind before settling on any refinancing option.
6. Prepare your documents and apply.
Ultimately, the information and paperwork that you’ll be expected to provide with your application will vary from lender to lender, but often include:
- Proof of citizenship (government ID number of Social Security number)
- A Valid ID Number (from passport, driver’s license, or state ID)
- Proof of steady income (typically pay stubs or an offer letter)
- Student loans statements from your current lenders (for both federal and private loans). These need to be official statements that show your original balance, the disbursement date, and a record of your repayment history.
- Housing costs (rent or mortgage payments)
You should gather all of these forms together before you begin the application process, just so you’re prepared. And know that if you are applying with a cosigner, you’ll likely need all of these same forms with their information, too.
Once you’ve got everything together, you’ll complete your application, usually online. The lender will tell you at this point what supporting documents they’ll need, and you’ll either upload them through the online portal or you’ll send hard copies through the mail.
You’ll also typically agree to a hard credit check/inquiry at this point in the process.
It’s really important that you follow through at this point on anything that the lender asks you for. If they ask you for additional forms or information, get it to them as soon as possible; if you forget or are late in getting them information, you’ll likely be denied. Treat this process like a job interview!
7. Continue making your regular payments while waiting to hear back.
It can take weeks or even a full month before you hear back with a decision about your student loan refinancing decision. For that reason, it’s incredibly important that you make sure you continue making your regularly scheduled payments.
Missing a payment while your application is in review isn’t just bad for your credit: It also reflects poorly on your ability to be responsible with your debt, and your potential lender will definitely hold it against you.
8. If approved…
If your application is approved, breath a sigh of relief and celebrate: You’re on your way to better loan terms that make repaying your college loans easier and cheaper.
You’ll typically receive a notice telling you that you were approved, along with an official offer that spells out the loan terms you are being offered. Make sure that you review all paperwork, contracts, and loan terms before signing anything. If anything seems off, of you have any questions, contact the lender for an explanation. You could also review the paperwork with a Certified Financial Planner (CFP) to make sure you are getting a good deal.
When you sign and return the offer, your new lender will issue a final payment to your current lender, effectively closing out the account, and your new loan will officially begin.
To keep yourself from getting confused by new payment due dates, etc., I’d recommend that you sign up for autopay if your lender offers it. Doing so will make sure you don’t miss any payments, and might even come with a small interest rate reduction. A lot of lenders offer a .25% interest rate reduction if you sign up for autopay.
Also don’t forget to update you student loan spreadsheet with your new loan information so that everything is up to date and current.
9. If not approved…
You have some options.
First, I’d suggest asking the lender why you were denied. They may or may not give you a reason, depending on their policy. If you applied without a cosigner, consider asking if their decision would have been different if you’d apply with a cosigner. If they say yes, then you may be able to reapply with a cosigner and be approved.
Second, you can choose to move on to the next lender on your list. Just because the first lender does not approve does not mean that the second lender won’t—all lenders have their own requirements for approval.
On the other hand, you might take a step back from applications and work to make yourself a more attractive borrower. If your credit score is low or mediocre, work to raise it; if your debt-to-income ratio is high, try paying off some of your debt; if possible, ask for a raise or get a better paying job to show that you’ll be able to repay your debt. Then you can try applying again, and you might get a more positive answer.
Should I refinance my student loans?
Nobody can answer that question except for you. The decision to refinance your student loans is a big one to make, and it depends entirely on your own personal financial situation and goals. Before beginning to apply for student loan refinancing—or, at least, before signing any agreement, make sure you are able to answer the following questions:
- What do you hope to gain by refinancing your student loans—lower interest rates, lower monthly payments, a shorter payoff schedule, a combination of those three, or something else?
- What interest rates are you eligible for, and are they lower than your current interest rates?
- How much can you afford to pay each month? This will impact the payoff schedule of your new loan.
- Would refinancing lower your monthly payments and make it easier to enjoy life? Would it allow you to pay off your loans faster, or more cheaply?
- If refinancing from federal student loans to a private student loan, would the new loan terms outweigh any benefits that you’re giving up, such as deferment/forbearance options, income-based repayment plans, or forgiveness eligibility?
- Does the lender offer any benefits like unemployment protection that would be helpful in the event you lost your job?
- Are there fees associated with refinancing? If so, are the savings you’ll see from a reduced interest rate worth the fees?
- Are you planning on paying off your loan ahead of schedule? If so, make sure that there are no prepayment penalties for doing so.
Ready to get started?
I’m not going to tell you that refinancing your student loan debt is the right decision, because that’s impossible for me to know. Only you know your personal financial situation and goals well enough to make an informed decision.
That being said, student loan refinancing can be a valuable tool in your fight against student loan debt. But refinancing to a lower interest rate, you can save a lot of money over the life of your loan; by refinancing to a lower monthly payment, you can free up space in your budget to make life easier. But as with any decision, there are both pros and cons that you must consider before moving forward.
If you’re thinking about refinancing, I’d recommend that you check rates you might be eligible for on LendEdu to see how much money you could save, so that you’ll have a better sense of whether or not it makes sense to move forward. You might be surprised at just how much money you could save.