Should I refinance student loans? This is the question many people ask when faced with mounting student debt or multiple student loan payments. While it’s true that refinancing student loans is often a practical idea that may even save you money, it’s also a big financial decision to make. A recent report from Credible suggests that eight million student loan holders in the United States could be eligible for a lower interest rate by refinancing student loans. That’s a third of all borrowers across the country! Even so, the decision to refinance your student loans absolutely must be an individual one. Like most financial matters, student loans are highly personal. Different people have different reasons for wanting to finance, not to mention the dozens of different types of student loans out there. It’s a complex issue, and there’s no one-size-fits-all answer. There are, however, certain questions you can ask yourself to determine whether it’s a good decision to refinance your student loans.
- What Does It Mean to Refinance Student Debt?
If you’re new to paying off your student loans or have never refinanced a loan before, then you might be wondering just exactly what it means to refinance student loan debt. It’s a valid question. When you refinance, you can transfer a single loan or multiple loans to a different bank. You can also secure a lower interest rate and/or reduce the amount of your monthly payment. (We’ll discuss these two advantages to refinancing your student loans in more detail later on.) When you refinance, you’ll still owe the same amount of money that you owed on your previous loan(s), but you’ll have different repayment terms (i.e. interest rates, repayment periods, etc.). If you’re one of the many borrowers who have more than one student loan, another benefit of refinancing is that you can combine these loans into one larger loan, meaning you’ll only have one bill to pay each month! Once you’re approved on a new loan and agree on the terms, your new lender will pay off your original loan(s) and essentially take over your student loan account. Thus, you will no longer have dealings with your original lender. It’s important to note that you will lose any benefits, discounts, or special programs and privileges you may have enjoyed with your previous lender, so you’ll want to make sure that your new lender offers comparable (or better yet, superior!) offerings.
- Are You Eligible to Refinance Your Student Loans?
Before spending too much time considering whether refinancing your student loans is a good financial decision, you should ask yourself if it’s even an option for you at the moment. Not everyone is eligible to refinance their student loan debt. At the very least, you will need to be able to demonstrate a steady income in order to qualify for a refinanced loan, and many lenders have income guidelines that you must meet as well. This is because lenders want to make sure you’ll be able to afford your student loan payment on top of your other expenses.
Your credit score is also important. If you have a history of late payments or defaulted accounts, then it’s going to be more challenging for you to find an accepting lender. Your credit score is a good predictor as to whether you will make your payments on time, so for lenders, it helps them evaluate their risk when approving you for a refinance. Generally speaking, if your credit score is above 600, you shouldn’t have a problem getting approved for refinancing. Anything below that could be an issue, though. Remember also that if your credit score is mediocre, you may qualify for a refinance, but the interest rate you’re approved for may not be any lower than your existing rate. You can check your credit score for free with agencies such as FreeCreditReport.com and CreditKarma.com, for instance. It is also important to note that if any of your student loans are currently in default, you won’t qualify for refinancing until all student loan payments are brought up to date.
Be prepared to see a dip in your credit score if you do attempt to get approved for a refinance. Anytime a lender checks your score, your numbers decrease. This damage is both slight and temporary, so it shouldn’t be a major concern. If you are worried that your credit may be negatively affected, you can curtail any potential harm by researching lenders and applying for a refinance loan with just one or two banks.
- Why Refinance Student Loans?
There are many reasons people consider refinancing their student loans. These reasons can vary significantly depending on their individual circumstances, so you should take the time to consider your specific, individual reasons for wanting to refinance student debt. What exactly are you trying to accomplish? Do you want to reduce your monthly payments or slash the total amount of your student loan payoff? Perhaps you’re looking to extend your repayment period, or you might want to pay off your student loans sooner than you previously planned. Maybe you think you’re paying too much in interest and want to lock in a lower rate. There’s no right or wrong reason to refinance your student loans, but it is important that you know what your precise goals are in order to determine if you should refinance and how exactly to do so. When making any sort of financial decision, it’s best to be as informed as possible before making your move.
- What Student Loans Do You Owe?
It seems like a no-brainer that you need to know what student loans you owe before seriously considering refinancing. Unfortunately, many people tend to forget what types of loans they have and how many student loans they owe. This may or may not apply to you, but it’s more likely to be relevant if you’ve had your loans for a long time, or if you have multiple student loans.
One of the most common types of student loans is the Stafford loan, sometimes referred to as the Direct loan. Stafford loans come from the federal government and are offered through the Federal Direct Student Loan Program, or FDSLP. Stafford loans come in two different varieties: the subsidized Stafford loan and the unsubsidized Stafford loan. Both types of loans carry low-interest rates, but with subsidized loans, the federal government pays the interest accrued on the loan while the borrower is still in school (at least half time) and during a six-month grace period after the borrower graduates. Borrowers with unsubsidized loans are required to pay all of the interest themselves. Clearly, the subsidized loan is the better option, but students have to demonstrate financial need in order to qualify for this type of loan. Unsubsidized loans, on the other hand, are available to all students, regardless of their financial status.
Another common type of student loan is the Federal Perkins loan. The Federal Perkins Loan Program was established to provide financial assistance for students who wish to go to college but have exceptional financial need or hardship. Undergraduates who qualify for a Perkins loan can borrow up to $5,500 a year, but because the funds come directly from the school, the amount each individual borrower will receive depends on the school’s available funds. Graduate students who are Perkins loan eligible may borrow up to $8,000 a year, but again, the specific amount will depend on the school’s funding.
However, when it comes to refinancing, you will primarily be working with private student loans. Private loans are loans offered by a lender that is not part of the federal or state government. If you received your student loan from a bank or from a financial institution such as SoFi or Sallie Mae, you have private loans. Unlike federal loans, the amount you can borrow, the interest rates, and other benefits and requirements vary greatly depending on the person borrowing and the lender.
- Can I Refinance Federal Student Loans?
If you’re wondering how to refinance student loans taken out from the federal government, the short answer is that you can’t. The federal government does not currently have a refinance option, which is unfortunate since federal student loan rates are significantly lower now than they were ten years ago. Good news, though—there is a consolidation option, which may be a good alternative for refinancing your student loans, depending on what your financial goals are.
When consolidating your federal loans, you’re basically combining multiple loans into one. The interest rate on your new loan won’t be significantly less, however, since it will be based on the average interest rate of your original loans. Student loan consolidation does have other benefits, though. For many people, having a single monthly payment rather than two, three, or even more can make them feel less overwhelmed, even if they are still paying around the same amount each month. In addition, it’s easier to stay organized and make payments on time when paying just one bill as opposed to several. Consolidating federal student loans may also give you access to certain repayment plans that you may not have been eligible for with your original loans.
However, if you’re dead set on refinancing your federal student loan debt, there is one way to accomplish this: consolidation. Some lenders will combine your private loans and federal loans into one consolidated private loan. This can technically accomplish the same thing as a refinance, as well as allow you to refinance this new consolidated loan now that it is private. However, this does come with risks (see #8: Should I Refinance My Loans if They’re Federal Loans) and should not be done without completely thinking through the repercussions.
- Should I Consolidate My Private Loans?
Consolidation is a part of refinancing. Typically, when you refinance multiple loans at once, they are automatically consolidated into one loan. However, that doesn’t necessarily mean that you have to consolidate all of your student loans if you don’t want to. We’ve already discussed the benefits of consolidating your federal loans (see #5: Can I Refinance Federal Student Loans), but there are also pros and cons to consolidating your private loans that you should consider.
Many people refinance or consolidate their loans because it makes it easier to keep up with their finances. If this convenience is one of your priorities, then it’s probably worth doing. Consolidating can also get you a lower rate or monthly payment, which are other big reasons people choose to refinance their loans.
In the context of refinancing, there are two main reasons that you would not want to include all of your private loans in a refinance and as a result, consolidate them. One is that your preferred lender is not willing to refinance all of your debt, but will consider refinancing some of it. Another is that one of your loans has perks or discounts that you will lose you money in the long run to give up. In these cases, you may want to consider leaving one or two loans out when you refinance.
- How Much Do You Owe?
Facing the amount of student loan debt you owe can be a daunting prospect, but it’s absolutely necessary if you’re considering whether and how to refinance student loan debt. Also keep in mind that the amount of your current student loan balance is different than the total payoff of your loans. This is because interest accrues over time. Depending on your interest rate and your repayment period, your total payoff may be significantly higher than what you owe right now. Once you know how much you currently owe versus what your total payoff will be, you can use this information to determine how to move forward. This, of course will depend on what you hope to accomplish when you refinance your student loans (see question #1). If your goal is to reduce the total payoff of your student loans, you may want to shop around for lower interest rates. There are some things to consider when doing so, however:
- Federal student loan rates are fixed.
If you have federal student loans, refinancing for the purpose of finding a lower interest rate may not be feasible. The rates on these loans are almost always fixed and they also tend to be quite low, so you may be unable to find a better rate. If you have private student loans, however, then shopping around for lower interest rates may indeed be a good idea.
- Interest rates are dependent on your credit score.
If you’re looking to refinance student debt for the purpose of lowering your interest rates, you need to understand that your credit score will impact the interest rate that you qualify for. That is, if you have a very high credit score, you’ll qualify for a very low interest rate. On the other hand, if you have a very low credit score, you will only qualify for higher interest loans. There is another option for you if your credit score isn’t up to par. If you can find a cosigner with good credit score—someone who is willing to pay your debt if you can’t—then you may qualify for a better interest rate.
Keep in mind that some lenders have a minimum amount of student debt that they will refinance. Typically, if you owe less than $10,000, it may be difficult to find a lender willing to work with you. You still have other options though, depending on what your goals are regarding your student loans. If you wish to pay off your loans sooner rather than later, considering making a bigger payment each month or even increasing the number of payments per month.
- Should I Refinance My Student Loans If They’re Federal Loans?
Deciding whether to refinance student loans can be complex no matter what your situation, but if you’re thinking about refinancing federal student loans, you have a separate list of considerations to make. First and foremost, you need to consider whether you are or may become eligible for the Public Service Loan Forgiveness Program. Under this program, borrowers who work full-time for the government or a non-profit organization may be eligible to have their student loan balance forgiven after making 120 payments. Teachers, police officers, and nurses are often eligible for loan forgiveness under this program, but it is not limited to these professions. Before considering refinancing, you’ll want to make sure you’re not eligible to have your student loan debt wiped clean. If you do refinance a federal student loan, you’ll automatically become ineligible for the Public Service Loan Forgiveness Program.
There are other benefits you may lose when you refinance student loans from the federal government. For example, most federal student loans are eligible for at least one of the income-driven payment plans available. An income-driven repayment plan will consider your income and calculate a monthly payment that you can afford. Considering your situation, your payment could be as low as $0. There are currently four different income-driven repayment plans available for federal student loan holders:
- Revised Pay As You Earn Repayment Plan (REPAYE Plan)
Under a REPAYE plan, borrowers typically pay no more than 10% of their income towards their student loan debt each month.
- Pay As You Earn Repayment Plan (PAYE Plan)
Borrowers who qualify for PAYE will be responsible for allocating around 10% of their discretionary income each month towards paying off their student loans, but this particular plan guarantees that this amount will never exceed what a borrower would pay under a standard, 10-year repayment plan.
- Income-Based Repayment Plan (IBR Plan)
The IBR plan stipulates that borrowers will pay 10-15% of their discretionary income towards paying off the balance of their student loans, depending upon when they graduated.
- Income-Contingent Repayment Plan (ICR Plan)
The ICR repayment plan is based on income, family size, and overall amount borrowed.
Some private lenders offer repayment plans of their own, so you may want to compare these to determine which plan is right for you.
Another benefit of federal student loans that you may lose if you refinance with a private lender is the ability to apply for a deferment or forbearance if you find yourself unable to pay your monthly student loan payment. A deferment is a period of time during which student loan payments are put on hold and the interest on the loan is paid as well. A forbearance is similar to a deferment in that payments are put on hold, giving the lender some breathing room, but with a forbearance, interest does continue to accrue. Both deferments and forbearances may be granted during times of unemployment, illness, or economic hardship. With a private loan, however, there may not be many options available to you if you’re having a difficult time making payments. This is why many experts warn against refinancing, even if you are able to find a lower interest rate.
- Should I Refinance Direct PLUS Loans?
The federal government also offers Direct PLUS loans. These loans are only given to graduate and professional students or parents of undergraduate students. Unlike other types of federal loans, Direct PLUS loans do usually require a decent credit score to determine eligibility. There are exceptions to this rule, however. Borrowers with low credit scores can seek a cosigner to vouch for the payments in the event that they become unable to pay back the loan. Alternatively, they may provide documentation to the U.S. Department of Education that their spotty credit history is the result of extenuating circumstances. In both cases, the borrower will also be required to complete credit counseling.
The interest rates on Direct PLUS loans are higher than other types of federal loans, which make them good candidates for a student loan refinance. If your parents took out the loan on your behalf, however, most lenders won’t allow you to refinance this loan in your own name. There are a growing number of private lenders who will, though, including Darian Rowayton Bank and CordiaGrad, for instance. Many times, parents will continue to be the primary account holder long after the student graduates and becomes financially stable enough to pay back the loan. In these cases, the individual may simply log in to the parent’s account or pay the parent back for monthly loan payments made on their behalf. If this is the case for you, you can benefit by proxy if your parents decide to go forward with refinancing student loans from the Direct PLUS program.
Of course, when you (or you parents) refinance Direct PLUS loans, you’ll lose some of the benefits that you had through the federal student loan program. Some such benefits include various repayment plans, forbearance and deferment options, and the possibility to have the loan forgiven or discharged.
- Is It Worth Losing Benefits Offered by My Current Lender?
As we’ve already mentioned, your current lender may be giving you special discounts or programs that will not carry over if you choose to refinance. The most obvious example of this is the benefits associated with federal student loans, but that doesn’t mean private loans don’t have benefits or discounts that you should keep in mind. At first glance, you might think that you don’t need that discount or perk, but make sure you do the math before committing to a refinance. You don’t want to end up paying more in the long-term because you don’t have a thorough understanding of what your current lender offers. It’s also reasonable to hold off on refinancing if you don’t think the better rate or monthly payment is different enough from your current situation to make it worth your while.
- Should I Refinance Student Loans with a Fixed or Variable Interest Rate?
If you do decide to refinance student debt, you need to decide whether you want a refinanced loan with a variable or fixed interest rate. There are advantages and disadvantages of both. According to Credible’s recent report, well over half of borrowers who refinance their student loans do so with a fixed interest rate. With a fixed rate loan, you may have a higher interest rate at first, but you will also enjoy the security of knowing that this rate will never change. With a variable rate loan, your interest rate will likely be low initially but may rise according to changes in the economy. Fixed rate loans are typically better if you have a longer repayment period. If you plan to pay off your loan in short order, however, a variable rate loan may be the preferable option.
- What Lender Should I Choose?
There are numerous factors to consider when choosing a lender to use when you refinance your student loans. Those factors that will take priority for you depends on what you’re looking to accomplish through the refinance process (See #3: Why Refinance Student Loans). If you’re looking to lower your overall payout without shortening your repayment period, for instance, then you’ll want to place priority on the interest rate of your newly refinanced loan. This is important because the interest rates for private student loans can vary from as low as 2% to over 10%, depending on your lender and what rates you qualify for based on your credit score.
- Should I Refinance My Student Loans with a Home Equity Loan?
Some borrowers looking to refinance student loan debt consider doing so in a nontraditional way—by paying off their student loans with a home equity loan. This means that they entertain the idea of using the equity that they’ve built up in their home to pay off their student loan lenders. This can be advantageous since interest rates on homes are typically lower than interest rates on student loans. This option is not without substantial risk, though. It’s important to understand that the reason a mortgage company is willing to offer such low interest rates is that if a borrower defaults on the loan, they can reclaim the house. Essentially, by using a home equity loan to pay off debt, you would be putting your house on the line. Defaulting on a student loan doesn’t have nearly as harsh a consequence.
- What If My Refinance Is Denied?
If your chosen lender denies your refinance, you may be discouraged. Don’t worry! You still have a few different options moving forward. One is to try a different lender. This may not be ideal, since you probably chose this lender because it best fit your refinancing priorities. However, other lenders may still fit your goals, albeit to a lesser extent. If you still think the change in interest rate or monthly payment is worth it, it could be a good idea to try one or two more lenders. Just keep in mind that every time you apply and a lender checks your credit score, your credit score will drop slightly, so you might not want to try this option too many times in quick succession.
Another option is to wait until your credit score and income are higher and then try again. Many borrowers find that even though they have a steady income and decent credit score, it just isn’t enough for their preferred lenders. This usually happens because of a bad debt-to-income ratio. If your debt is double your income, it doesn’t really matter how stable that income is. In this case, wait for your income to increase and debt to decrease before refinancing.
Alternatively, if the reason your refinance was denied is your debt-to-income ratio and not your credit score and you have multiple student loans, you can refinance only some of your loans rather than all of them. Most people in this situation choose to refinance the loans with the highest rates. While this is not necessarily guaranteed to work, many lenders are more willing to refinance a smaller amount of debt when the borrower has a lower income.
15. Where Can I Get more Information?
Refinancing student loans is a big step that has long-lasting consequences, so you’ll want to get as much information as possible. In addition to reading our comprehensive guides to paying off student debt, you’ll want to do some independent research on your specific loans as well as your options for refinancing. If you have federal loans, a good place to start is the Federal Student Aid website. If you have private loans, you’ll want to consult with your lender.
A student loan refinance is ideal for many borrowers, but it may not be for everyone. Be sure to spend some time evaluating your individual situation and your options before committing to a new loan.