Should I Refinance My Student Loans?
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Refinancing a student loan can help you in a handful of surprising ways. While refinancing isn’t necessarily a quick process—especially if you follow the recommended steps to find a good loan—it can still be worth the effort for some borrowers, especially those with private student debt. By refinancing your student loans, you can potentially save money, time and stress when it comes to managing your debt.
Five reasons to consider student loan refinancing
Refinancing student debt involves taking out a new loan in order to pay off one or more of your existing student loans. While the U.S. Department of Education (ED) does not offer refinancing for student debt (see more about their consolidation option below), some private lenders do. Here are some reasons you might consider looking into your options:
1. Reduce your interest rates
One of the best reasons to refinance a student loan is to lower your annual percentage rate (APR). While APR might not seem very important, reducing it by as little as 0.5% can potentially save you a significant amount of money on interest charges and shorten your student loan repayment timeline.
You’re most likely to qualify for a loan with lower APR if your credit scores have improved since you took on your current debt. However, it’s worth noting that market rates will play a big role in determining the APR you qualify for, so some times are better to apply for a new loan than others. For example, the APR on Stafford loans for undergraduates have fluctuated between 2.75% and 6.8% since 2006, so applying for a Stafford Loan near the peak rate could have been very pricey.
2. Reduce your monthly payment
Refinancing can potentially lower your monthly payment on your student loans. This is most likely the case if you borrow less that you originally did, and/or if you qualify for a loan with a longer payoff timeline. Just note that extending your payment timeline means accruing more interest charges overall.
3. Consolidate (or combine) loans
When you refinance, you can potentially use your new loan to pay off multiple student loans. This is also known as consolidation. By consolidating your student loans, you reduce the number of separate payments you have to make each month and the number of accounts you have to manage.
While the Department of Education does not offer student loan refinancing, it does have a Direct Consolidation Loan. This can be a great option for people who want to consolidate their federal student loans, since it can mean maintaining access to the flexible repayment programs offered by the federal government.
4. Release a co-signer
If you want to remove a co-signer from your student loan, refinancing may be the only way to accomplish your goal. For a borrower who can qualify for a new loan on their own, they can use the new loan to pay off the old loan, which relieves your co-signer of their responsibility for the debt.
5. Get a fixed interest rate
If your student loan has a variable interest rate—meaning a rate that changes from time-to-time—you may want to refinance as soon as you’re able to qualify for a new loan. By refinancing into a loan with a fixed rate—a rate that won’t change at any point during your loan repayment—you can ensure your loan payment stays at the same amount each month.
How to refinance your student loans
Finding a good refinance loan takes some effort. Instead of speeding through the the process, and potentially getting into a more expensive or risky loan, give yourself some time to complete these steps and find the best loan available:
- Check your loan terms: Check the terms on your current loan to see if there’s a prepayment penalty. You’ll also want to find out how much you still owe and determine your APR.
- Review your credit: Pull all three of your credit reports (Equifax, Experian and TransUnion) from a platform like AnnualCreditReport.com to see what improvements you can make before applying for loans. Note that any changes you make will take at least 30 days to show up on your credit reports and could take even longer to improve your credit scores.
- Shop around: Compare at least three loans, ideally by getting prequalification offers, before choosing where to apply. Your bank or credit union can be a great place to start.
- Apply: Complete and submit a loan application. For this step, you typically need to provide information about your current loan, income and other debt.
- Pay off your old student loan(s): Once you receive the loan funds, pay off your existing student loan debt. You may have to do this manually or the lender will send the funds on your behalf. Just be sure to make all payments that come due on your old debt while you’re waiting to complete this step.
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What to look for in a loan provider
Each lender has something different to offer, and some don’t allow you to use their loans to pay off student debt at all. If you don’t research the lender’s policies, you might end up having your application declined, or even taking out a worse loan than your current one.
So when you compare different lenders and loans, be sure to consider all of the following:
- Lender fees, including application or origination fees and prepayment penalties
- APR range
- Credit score requirements
- Restrictions on how the loan funds can be used
- Payment timeframes
- Timeline to get your application approved/declined and timeline to receive the loan funds
- Customer reviews of the lender
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Is refinancing student loans right for you?
Depending on your goals, refinancing your student loans could be a good move. People with private student loans are most likely to benefit from refinancing, especially if they can get a lower APR on a new loan.
But federal student loan borrowers should proceed with caution. The Department of Education does not offer loan refinancing, which means you’ll have to use a private loan to refinance, and doing so can mean forfeiting helpful features like income-driven repayment and loan forgiveness programs. A better alternative could be to consider a Direct Consolidation Loan from the Department of Education.
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