How To Refinance Your Student Loans
Have student loans and have started working? Like saving money (of course)? Then it might be time to think about refinancing. Here’s what you should know.
Why you should consider refinancing
The point of refinancing is to save money by replacing your existing student loans with a new, lower interest loan.
So if you’ve started working and your financial prospects are looking better than when you first took out your loans – you’re earning a steady income, you’re building your credit – then lenders may be willing to offer a lower interest rate. And that lower rate can add up to serious money.
Let’s say you currently have $30,000 of debt and are paying 7.5% interest for 10 years. Your monthly payment would be $356 and you’d pay total interest of $12,733 over the life of the loan. But suppose you could now negotiate a refi at 5% instead. Your monthly payments would then drop to $318 (saving $38/month) and the total interest you’d pay over the life of the loan would drop to $8,184 (saving almost $4,550). Not too bad.
Also, if you have multiple student loans, refinancing offers the additional benefit of getting all of your loans in one place. This can help make it easier to keep track of your balance and monthly payments. However, this is really more of a perk and it’s not necessarily a great reason to refinance if you don’t also get a lower rate.
When you shouldn’t refinance
While refinancing can be a good idea sometimes, it isn’t always. Particularly if you aren’t able to negotiate a lower interest rate on your loans, say if your profile as a borrower hasn’t improved or if interest rates in general have gone up since you took out your loans.
You should also think twice about refinancing federal loans. When you refinance, you replace your existing loans with a private loan. So you’ll lose all the protections offered by your federal loans, like forbearance, deferment, income-driven repayment, and loan forgiveness. Unfortunately you can’t refinance into a new federal loan.
You’ll need to weigh the benefit of these protections with the money you’ll save by refinancing. Sometimes it’s worth it, sometimes it’s not. And some lenders won’t even refinance federal loans, so you’ll need to check first.
What it takes to qualify
To qualify for refinancing, you’ll either need stable income and good credit or you’ll need to find a co-signer.
If you’re going to refinance on your own, lenders will need to see you have a job earning steady income and that you have good credit. For the most part, this will mean a credit score of about 700 or above. Some lenders are willing to go below that though if you have limited credit history and can demonstrate you’re creditworthy based on other factors, like having a low debt-to-income ratio (how much you earn in a month relative to your monthly debt payments).
Alternatively, you can consider getting a co-signer, like a parent or a spouse. But keep in mind, if you miss your payments, your co-signer will be on the hook to pay. And your loans can add up to a lot of money, so any co-signer should be well aware of the responsibility he or she is taking on. Over time, as you continue to make regular payments, your lender may remove your co-signer from the loan.
As long as you qualify, a number of financial institutions will eagerly compete for your business, so take advantage.
Online-only lenders like SoFi and Earnest have grown in popularity in recent years, offering attractive rates and easy to use software and tools. Or if you prefer a traditional brick-and-mortar bank, like Citizens Bank, you can go that route too.
You can also go to a third party site like Credible which will help you compare real time offers without requiring a hard credit check. So it won’t affect your credit score.
As you compare offers, look at the annual percentage rate, or APR, and the other terms of the loan. Keep in mind, it’s possible for a lender to offer you lower monthly payments by extending your loan, but you could be stuck with a higher interest rate. So even though your payments are lower, you’ll end up paying more. Of course you do need to make sure you’ll be able to make your monthly payments no matter what loan you choose.
You should also pay attention to fixed vs variable rates. While variable rate loans usually start out charging lower interest rates than fixed rates loans, those rates can rise over time, potentially costing you more in the long run.
In terms of other fees, most of the major lenders allow you to refinance for free. Student loans can’t charge a prepayment penalty by law and usually there are no origination fees for the new loan. But you’ll want to ask before signing up.
Compare actual refinancing offers for free with Credible.
How to apply
You’ll want to shop around and compare competing offers from lenders. But you need to do so thoughtfully because of the potential impact of credit inquiries.
For the most part, lenders’ websites will show approximate rates, but you probably won’t know your exact rate until you actually apply for a loan. And applying for a loan requires a “hard check” on your credit. This can temporarily hurt your credit score (too many hard inquiries can make it seem like you’re desperate for a loan). It probably won’t be a big hit to your score, according to FICO, but it’s something to be aware of.
Additionally, lenders have come to realize that multiple inquiries could be a sign that you’re shopping for a rate (a good thing). So for loans where rate shopping is common, like student loans and mortgages, credit models will likely count multiple inquiries as a single inquiry if they’re all done within a few weeks of each other (some models use 14 days as the cutoff and some use 45). So if you do apply to multiple loans, try to keep them to within a couple weeks of each other.
When you submit an application, it will include information about your financial situation – employment status, loan balances, etc. The lender will use this information, along with your credit score, to determine the exact rate and terms they can offer. At that point you can decide if you want to take the loan or not.
Consider other ways to reduce your interest
Refinancing may not be your only option for lowering your interest payments. Some lenders will charge a lower interest rate if you sign up for automatic payments. So check with your lender to see what they offer.
You can also think about paying down your balance ahead of schedule. Doing so won’t actually reduce your interest rate per se. But it will reduce how much total interest you’ll end up paying over the life of the loan.
Refinancing can be a smart way to save money on your student loans if your financial situation has improved or if interest rates have gone down, but you’ll want to do your research first and make sure it’s the right move for you.