Student Loan Refinancing

What is Student Loan Refinancing?

Student loan refinancing is when you exchange your current student loan or loans into a single new loan, often with a lower interest rate. This is done through private lenders such as banks, credit unions, or other financial institutions.

Refinancing your student loans can be a smart move that could give you one loan to pay off rather than multiple, potentially lower the interest rate on your loan, and ultimately save you money over the long term.

How Does Student Loan Refinancing Work?

In a nutshell, student loan refinancing begins once a student has graduated college and has begun paying off their loans. Once you have a job, a good credit score, and an overall decent financial situation, you can begin looking into refinancing your loans.

The process all begins with comparing lenders and seeing what rates and terms you can receive. This can be done directly with the lenders, or by using a loan comparison website.

Each lender has its own requirements for refinancing, so you’ll notice the rates you will be offered are likely to vary widely.

Once you have selected a lender, your previous loans will actually be paid off and you will be given a single new loan with the agreed-upon terms. From here, you will have one monthly payment to be made to your new lender.

When Should I Consider Refinancing a Student Loan?

While refinancing a student loan is often a personal decision, the majority of the time it comes down to whether you can receive better terms (interest rates, payment periods, etc.) than you currently have with your student loans.

Let’s say you have a current student loan that has a 10% interest rate. If you can refinance your loan with a new lender that is offering a 5% interest rate, it’s likely to be a smart decision. That 5% interest saved over the lifetime of the loan will end up saving you a significant amount of money.

When you are debating whether or not to refinance, remember that you need strong finances to get rates better than what you’re currently paying. This means having a good credit score and decent income. Without these, you may be required to have a cosigner to refinance your loan.

Types of Student Loans That Can be Refinanced

To put it simply, any student loan can be refinanced. You have the option to refinance both federal and private student loans, but there are important distinctions between the two.

Federal Student Loans

Federal loans can be refinanced through a private lender, but they may also be consolidated through the federal government. The ultimate result is the same - changing multiple loans into one new loan. However, there are major differences between the two.

Federal loan consolidation is done through the US government. When you consolidate your federal loans, all of your loans will be combined into what is known as a direct consolidation loan.

The interest rate on your new loan will be the average of all your current interest rates. This means that while you have a new loan, you will be paying the same rate. The advantage lies with the simplification of paying just one bill and retaining all of your federal loan benefits.

You can also refinance a federal loan through private lenders. Doing so will relinquish all of your benefits such as potential loan forgiveness, but you will likely receive a lower interest rate which will save you money in the long term.

Private Student Loans

Private loans can easily be refinanced, and the majority of the time you will be able to receive a lower interest rate on your loans.

When you refinance a private loan, it can only be done through a private lender. While federal loans can be consolidated with the government, this isn’t an option for private loans.

With private loans, you will be required to provide financial information to the lender. This includes current income, a credit check, and more. This is done to qualify you for a new loan with potentially better rates. Federal loans being consolidated through the government do not require any financial information.

With private loans, you usually don’t have any of the benefits afforded to federal loans, to begin with, so by refinancing you are not losing out on any of those.

Pros and Cons of Refinancing Student Loans

There is a lot to think about when it comes to refinancing your student loans, so let’s go over the pros and cons.

Pros

• Lower Interest Rate - Quite often the main goal of refinancing your loans is to lower your interest rate. With a decent income and good credit score, this will often be the result.
• Simplify Your Loans - Having multiple student loans can be hard to juggle. Consolidating all of your loans into one single loan will make balancing your finances much easier.
• Pay Your Loans Quicker - If you have a lower interest rate, you can put more money towards the principal of your loan, paying them off quicker.

Cons

• Loss of Federal Benefits - If you decide to refinance your federal loans through a private lender, you will lose the federal benefits attached to your loan.
• Potential to pay more money - If your refinance involves changing from a 10-year repayment to a 30 year, there is a chance you will end up paying more money due to interest.
• Sometimes High Financial Requirements - If you don’t have the income or credit score required by the lender, you may not be able to refinance.

Tips to Refinancing Student Loans

Compare Multiple Lenders

Each lender has its own requirements and interest rates. Comparing multiple lenders can often result in a wide range of rates and terms, guaranteeing you get the best possible loan.

Have a Decent Income

Before applying, make sure that your credit score and income are somewhat high. Lenders want to make sure you are in a good place financially before they extend a loan - especially one with low rates.

Pay what you can afford

Refinancing your loans can often lower your interest rate and save you money. But make sure you don’t end up paying more than your budget allows as that can put you into an even deeper hole.

Is Refinancing a Student Loan a Good Idea?

Refinancing is a good idea if you are able to secure a better rate. As stated previously, if you don’t have a good income or credit score - you will be unlikely to receive a better interest rate than you have currently.

If this is the case, there is almost no reason to refinance. Yes, you can consolidate multiple loans into one which makes repayment easier, but at the end of the day, you will be paying the same amount of money.

Check with multiple lenders to see what benefits are available and whether refinancing will be worth it for you.

What is The Cost of Refinancing a Student Loan?

Most lenders don’t charge any money to refinance a student loan. They will be making all of their money from the interest attached to your loan, so making it cheap and easy to refinance is in their best interest.

Student Loan Refinance Rates

The rate that you receive when refinancing your student loans varies widely and is entirely dependent on how much you are refinancing, the lender you choose, and your financial picture.

Interest rates are currently low in the United States, so it’s a good time to refinance.

If you decide to consolidate your federal loans with the US government, you will pay the exact same interest rate. Your interest rate will be the average of all the loans you consolidate, resulting in the same amount of interest paid.

How Much Can You Save by Refinancing Student Loans?

How much you can save on your student loans depends entirely on what interest rate and payment terms you receive.

Note that refinancing your student loans does not mean you will reduce the principal amount that you owe. You will still owe the same overall amount, but the interest rate will be changed.

With today’s interest rate environment, you could see your rate lower to 2.5%.

Does Refinancing Student Loans Hurt Your Credit Score?

Without getting too deep into how credit scores work, the answer is slightly, but only temporarily.

Anytime you receive a new line of credit and a credit check is run, your score will be dented temporarily. But because you are replacing old debt and not taking on additional debt, your score won’t drop much.

The small dip in your credit score from the new loan will usually be resolved in a few months as long as you keep up to date with your payments.

Can I Refinance a Student Loan With Bad Credit?

You can, but it probably isn't a great idea.

When refinancing, the goal is to reduce your interest rate. If you have bad credit, a low income, or both - it’s likely you won't get a much better rate which negates the benefits you will receive.

If you are in a poor financial situation, you can use a cosigner for refinancing. This person’s finances will decide the terms of the loan, but they will ultimately be responsible for the loan if you default.

How Does Refinancing Student Loans Affect Taxes?

Refinancing student loans is not likely to affect your taxes. If it does at all, it will actually reduce the amount you can deduct.

Each person can deduct up to $2,500 for student loan interest per year. If by refinancing, you end up paying less interest, you may not be able to maximize your deduction.

With that said, in that scenario, you will likely be paying less on your loan so it is likely you would still come out ahead.

Compare Student Refinance Rates Online

Here are the current rates for refinancing student loans.