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How to refinance your student loan

According to the most recent census data, one in eight Americans has some student loan debt. That’s 42.9 million Americans. Whether those students started at a two-year community college or finished medical school, that's a lot of people starting their careers with debt. 

 

Unlike most every other kind of loan available, most student loans are obtained years before the payments begin, so there's a decent chance life has changed since first taking out a student loan. If you have college loans and you've heard any news about student loan debt in America, you know you will likely be paying on those loans for many years if you aren't on the track for student loan forgiveness programs. 

 

Much of the news about loans focuses on the stress and extent of student loans, but not all of that one-in-eight are in deferment. Many graduates are making their regular monthly payments on their student loans. Considering these may be the very first loan for many people, it might also be their first chance to establish and build a credit history, which will come in handy when it's time to buy a car or even own a home. 

 

That doesn't mean, though, that you have to be stuck with the loan term that you had when you started college. Also, if your loan has a variable rate, you shouldn't have to watch your principal change as more or less of your payment actually pays down the debt. 

 

Whether you are recently graduated or just getting ready to resume payments, it might be time to learn how to refinance student loans — because, after all, we never stop learning.  

How to refinance your student loans  

If you decide that refinancing either your federal loan or your private loan is worth exploring, the next step is to find a suitable lender. As you get into the details of refinancing, you may find you may also narrow down your decision to refinance. 

Eligibility for student loan refinancing  

 

While you may be searching for which bank or credit union will offer you the best rate or the ideal loan term, your lender will look at several factors to determine your eligibility for student loan refinancing:  

 

  • Your current and projected income  

  • Your credit score  

  • Your savings and assets  

  • Your debt-to-income ratio  

  • A college degree from an accredited school  

  • A minimum balance determined by the lender (the refinancing has to be worth their time, too) 

The tricky part may be your credit history - or lack of, to be precise - as many recent graduates have little or no credit history. Don't be surprised if a cosigner (someone else with an established credit history) is needed to approve your new loan. 

 

There's no limit to how many times you can refinance a student loan. The only real limitation is whether you meet that specific lender's refinancing requirements. If you do, you can choose a loan and move forward.  

The options of a new lender 

 

Carefully calculate payments as they would be under your new loan and compare them to your original payment structure. 

 

  • Is the difference great enough to be worthwhile?  

  • Will the new interest rate free up your income for more productive pursuits?  

  • Will your credit score allow you to take out a new loan?   

Keep in mind, the interest rate that others pay may not be the one that you pay. If you have a positive cash flow and can make extra payments, or at least more than the minimum monthly payment, you likely have more flexibility and can wait for rates to be low enough so you can refinance before rates start increasing. Now you're back in the "maybe" column. 

 

Lenders may encourage you to set up autopay or open a checking account to arrange for automatic payments to be withdrawn. If this makes your life easier, consider that there may be additional processes or requirements from lender to lender. Be sure the checking account does not come with monthly fees — nobody needs that.  

The specifics of your loans and your credit  

 

Your possible refinance rate and loan terms will depend on several factors, including:  

 

  • How much money you owe in total  

  • Whether you have federal student loans or private student loans  

  • The willingness of lenders to take on your specific types of student loans 

In addition to the loan specifics, the new rates you may be offered will vary depending on your credit report. If you have a high credit rating, you can likely save significantly by refinancing your student loan. That'll lower your interest rate over time and allow you to reduce your monthly payments. 

 

However, a low credit rating could have the opposite effect if you try to refinance your student loan, which would defeat the purpose of a refinance loan option. Again, consider a cosigner if one of your goals in refinancing is to improve your credit score. 

 

Be sure to also review your credit report. Lenders will make a hard check on your credit report to assess your current financial situation, which will lower your credit score slightly. Although your credit score should go back to where it was after a few months, bear this in mind before you go around asking multiple lenders about refinancing.  

All the implications of student loans 

 

The kind of student loan you have matters, too. Some student loans (and even personal loans for other college expenses) have a prepayment penalty. Some federal loans offer certain types of repayment flexibility, while others don't. 

 

If you're a good candidate for refinancing, it's important to know what your student loan offers and see whether it contains any special terms and protections you need to account for before refinancing. Do your homework - and you thought you were done with that! 

What about parental student loans? 

 

If you got a little help from your parents to get your college years off to a healthy start, you might decide you want to take on that debt yourself now that you have money coming in. Why not? It's a great way to establish a strong credit history for yourself. 

 

If your financial aid package includes a PLUS loan (Parent Loan for Undergraduate Students), for example, some lenders might be unwilling to offer you refinancing. You can refinance with a private lender who agrees to either the same or similar terms as the original repayment structure. This is commonly referred to as a private consolidation loan. 

 

You'll have to shop around to find a private loan provider that will work with your PLUS loan, but you may be able to find one.  

Remember those protections when refinancing student loans 

 

It's important to know that if you refinance most any federal student loan with a private lender, it's almost inevitable that you'll lose some of the original borrower protections. This is something you'll have to keep in mind. again, do your homework for your specific loan type. 

 

Many student loan borrowers have protections that the federal government offers for student loans that just aren't repeatable in the private sector. If these are important to you, that would be a reason to hold off on refinancing. These federal protections include things like:  

 

  • Income-driven repayment plans  

  • Options for having your loan discharged in the event of hardship  

  • Loan forgiveness programs if you plan to enter into public service  

The decision to refinance depends on your situation - not just getting rid of your variable interest rate or arranging a more favorable repayment option. There are some legitimate reasons for holding on to your federally issued student loan, even if you could get a better interest rate in the private sector. However, if those circumstances don't apply to you, the situation changes considerably. 

 

Knowing what you can expect from refinancing will, of course, depend upon what type of student loans you have. Everything from subsidized loans to variable rate loans and from private student loans to federal loans all have different guidelines. In that sense, the opportunities, benefits, and downsides we have discussed might be out of your hands. The best way to navigate those restrictions is to ask questions of your current lender and potential lender to understand your protections and your student loan repayment options.  

Benefits of refinancing your student loans 

 

What's your goal in refinancing your loans? If you are trying to lower your interest rate or monthly payments, prioritize this when searching out lenders and arranging new financing. Extending the length of the loan by refinancing will reduce your monthly payments if that's your goal, but it will mean more interest over the lifetime of your student loan. 

 

Maybe your goal is to eliminate your debt sooner. Perhaps your goal is to simplify a variety of loans, student loan consolidation may be preferable to refinancing. Consider, too, your short-term plans and your long-term goals. Improving your credit score, buying a home, and making future life changes that could impact your repayment ability all factor into your decision. 

 

Whether refinancing your student loans makes sense or not is a personal decision. If you're thinking about starting a business or making a life change that would make lower monthly payments helpful, extending the life of your loan could make much sense. On the other hand, there are benefits to getting out of student loan debt — or any debt — as soon as you can. 

 

Which is something else to keep in mind: refinancing will be another loan. You may expect your credit score might take a hit when you first refinance, but getting better payment terms or a better interest rate will improve your ability to make payments and improve your credit score in the long term. You want to think about what's best now, as well as down the road. 

 

You also want to look at the market and your finances as a whole to see whether refinancing is the right decision. 

 

  • Is your industry on an upswing?  

  • Are you considering making an employment change?  

  • Will I need to buy a car sooner rather than later?  

  • What changes am I expecting in my family?  

It's not unrealistic to want to consider a local bank or credit union refinance options, especially if you've gotten married and want to combine debts with your partner into a single debt consolidation loan. 

 

Don't feel a little sheepish about refinancing your student loan more than once. There's no financial penalty for doing so. If you're only borrowing what you need to repay, it's actually good business sense if you can reduce loan debt by refinancing. Why pay more than you have to?  

Is it time to refinance your student loan?

 

Yes: When to refinance your student loans 

Remember that moment when you moved the tassel from right to left or the one where you tossed your mortarboard into the air? Yeah, those are probably not the times when you should refinance student loans, but truthfully, after that, anything is fair game. 

 

But that also does not mean it's the right time for YOU, so it's worth considering if you should check into refinancing or student loan consolidation. They sound similar, but they have some definite differences. Student loan consolidation lumps your multiple loans (you may have taken out a new one every year) into a single loan with one monthly payment. When you refinance student loans, you likewise consolidate them, but you also create a new loan with a new loan term. This means you might be able to get a lower interest rate or a lower monthly payment — who doesn't want that? 

 

Like most loans, you will likely be paying more interest up front and more principal as you continue making payments. If you have the opportunity to lower your interest rate, there is definitely an argument to be made that it's good to make the switch if it helps you either now or in the long run. 

 

What are key reasons why refinancing student loans makes sense? 

 

  • You're unhappy with your current interest rate, repayment term, or your randomly assigned lender.  

  • You want to free up money from your payment schedule to use elsewhere  

  • You want to switch from loans with variable rates to a single fixed-rate loan  

  • The economy is good and interest rates have dropped  

  • You think refinancing your student loan can help you pay the entire sum faster  

  • You calculate that you can save money on interest by refinancing student loans  

  • You have both a federal student loan and a private student loan each with a different repayment term, lender, and interest rate  

Whether a private loan or one you obtained through federal student aid programs, refinancing your student loans isn't something to rush into. Be ready to provide the necessary financial information to help a lender assess your situation. Start by being clear about a few important pieces of information:  

 

  • How much you owe in total — it's pretty easy to find out when you log on to your student loan website or portal  

  • Your interest rate — keep in mind it may be different depending on each loan  

  • How much you owe each month — like any loan, there's a minimum due, but you can pay more towards the principal  

As you begin to check out the interest rate of a possible refinanced loan, it will be helpful to have all this information ready to determine if you really are going to save yourself money. (If your student loan interest rates vary between 3% and 6% and you find a loan for 5%, it will be important to know how much of your loans are at 6% and how much are at 3% to see if it is really a savings.) 

 

If you are feeling savvy, you can do the math to determine a possible monthly payment of a combined loan and determine at what interest rate you will need to refinance to make the process worthwhile. You can also speak with a loan officer at a local bank or credit union to help determine if a refinance will help you month-to-month and over the life of the loan. 

 

Maybe: When you should wait to refinance student loans   

Like any loan, the best time to refinance is when interest rates drop significantly. Now may not be the right time. However, even a modest interest reduction can be worth it under the right circumstances. The goal is to obtain a new student loan before your old student loan becomes too burdensome for you. You can't have your federal student loan refinanced by the federal government, but you can get assistance based on your current earnings. If you are eligible for an income-based repayment plan you'd miss out on those benefits. 

 

How many times can you refinance your student loans? Generally speaking, you can refinance your student loan as many times as you want and with as many different lenders as are willing to work with you. It's simply a matter of finding a lender willing to take on your loan. Of course, every new loan, or refinanced loan, you open is considered new credit, and is weighted differently in your overall credit score. If you are trying to improve your credit score, multiple new or refinanced loans may not be ideal. 

 

So don't think there is one perfect time to refinance. As your income, credit score, and the economy change, there may be various times to proceed and times to wait. 

 

You can refinance your student loan as soon as you find a rate that you can qualify for and that makes doing so worthwhile. Qualification depends on your income and credit, so, in theory, you can apply for refinancing as soon as you feel you meet those criteria. Like any new loan, your potential lenders will then review your application and make the final decision on whether or not to refinance. There are definitely times when you should hold off on refinancing, too.  

 

No: When you should stick with the student loans you have 

Again, everyone's finances are different, and there are reasons to delay or avoid refinancing your student loan altogether. 

 

If your debt load is relatively small, there may not be any compelling reason to refinance it. For example, the average student loan debt after a four-year degree is just under $30,000. You may find that it's easier to simply keep making student loan payments, or even paying extra each month, under the existing schedule without refinancing. 

 

Depending on specifics of your federal student aid package, your student loan could come with certain borrower protections that you would lose if you refinanced it. You might not be able to find a private lender willing to facilitate the same income-driven repayment plan you have arranged for your federal student loan. The same could be true if you think you might take advantage of a federal loan forgiveness program at some point in the future. Once you've refinanced with a private lender, that won't be an option anymore. 

 

Your financial situation might also prevent you from refinancing even if you want to. For one thing, you need good credit to qualify for refinancing at a rate that makes it worthwhile. If the interest on your loan payments would be higher under the new plan, what's the point? Remember that refinancing a student loan isn't necessarily the best way to reconcile debt. If that's your motivation for refinancing, you might be better off developing a targeted plan to pay off your loan faster and consolidate the debt rather than changing your student loan terms. 

Finding the right student loan lender 

 

These are excellent matters to discuss with your loan adviser if you have one. Be selective when choosing private lenders. Reputable lenders won't charge you any money upfront. Still, you do want to pay careful attention to the details of your new interest rates, watch for an origination fee, and be aware of the monthly payment schedules to make sure that refinancing is worth your time (and, of course, your money). 

 

While there should be no hidden fees for refinancing your student loan, lenders make money in other ways. For instance, late payment fees are often rather stiff, and lenders do charge high collection fees for defaulted loans. You also may be discouraged from repaying your student loan early by a rather hefty prepayment penalty. All these and more are reasons why you should carefully assess the potential terms of your loan before refinancing. 

 

One additional concern to watch out for when thinking about refinancing: the student loan scam. If you come across an offer that seems too good to be true, chances are it isn't good at all. Make sure any student loan refinancing company you work with has an excellent reputation. Only work with reputable lenders.  

 

We recommend finding a community bank or credit union since they do prioritize you and your financial success as much as their own. Some ways you ensure your security and avoid surprises include: 

 

  • Ask up front whether they assist with federal student loans  

  • Ask whether they charge any fees upfront  

  • Find out how many clients that lender has served in the past year  

  • Compare their rates to those of other lenders 

Lastly, don't be surprised if the process takes some time. Because many student loans are not secured loans, the lender will want to be certain of your ability to repay the debt, plus they will want to know exactly what type of student loan you have. Be prepared to provide as much information as possible to make the process easier.  

The bottom line on your student loans  

 

Refinancing your student loan can make much sense, especially if you're in a strong financial situation. While it's not something to jump into without thinking, and there are legitimate reasons why you might rather stay with your current loan, it's an excellent option and well worth your consideration. 

Tags: Student finances, Borrowing

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