If your student loan debt burden is big enough, you’ve probably considered the prospect of doing a student loan refinance.
After all, people refinance their homes and business loans all the time; why should student loans be any different?
The truth is, student loan refinancing is different for a myriad of reasons. Still, this doesn’t mean you shouldn’t consider refinancing your loans anyway.
The key to figuring it out is considering everything you’ll gain – along with everything you’ll lose.
Below I explain all of the pros and cons of refinancing your student loans. Once you see the big picture, you’ll be in a better position to decide.
Then, you can make an informed decision on your student loans to figure out what will work best for your financial situation.
Let’s dive in!
Is Student Refinancing for Me?
Student Loan Refinancing Benefits You Might Enjoy
If you don’t plan to take advantage of any federally-supported student loan programs, student loan refinancing is one option to consider.
Benefits of student loan refinancing can include, but are not limited to:
A lower interest rate – Some, but not all, federal student loans can be refinanced or consolidated into a private loan with a lower interest rate.
While this will generally extend your timeline for full repayment, the savings you accrue by paying a lower interest rate can seriously add up over time.
Depending on what interest rate you have now, you could save upwards of 50% of your interest payments by refinancing.
One easy payment – If you’ve got several student loan bills to contend with, refinancing can help you achieve one low monthly payment.
Going from several payments down to one won’t save you money by itself, but it will save you time and hassle.
A lower monthly payment – If you secure a lower interest rate – or extend the repayment timeline on your loan, you’ll end up with a monthly payment that is much easier to manage.
Scoring a lower monthly payment can give your budget a little bit of breathing room while also making it easier to throw extra money straight towards the principal of your loan.
Lock in a fixed rate or choose a variable rate – Some private loans come with variable rates that cause payments to fluctuate over time. In many cases, you can refinance these loans into a product with a fixed rate and a predictable monthly payment.
If you refinance into a loan with a variable rate, however, it’s important to understand that your payment will rise as interest rates rise. Always consider the consequences of the type of loan you choose before pulling the trigger.
And if you want to lock in a monthly payment that will never change, go with a loan that offers a fixed rate.
Better rates with a co-signer – If you have private personal loans with a high-interest rate, securing a co-signer with good credit might help you get a loan with better terms.
These better terms could include a lower interest rate or a better repayment horizon – both perks that could help you save money and pay your student loans off faster. Refinancing student loans without a cosigner and no credit is probably not going to happen.
In fact, 90% of all private loans require a cosigner according to statistics from the Consumer Finance Protection Bureau.
Six Signs it Might Make Sense to Refinance Your Student Loans
Confused yet? You’re not alone. The many rules, benefits, and drawbacks that arise when considering this option make this decision a difficult one. Still, student loan refinancing really is the best option for borrowers in certain situations.
Here are six scenarios where you might just fall into that category:
- You’ll earn too much to qualify for income-driven repayment plans anyway, and you have no desire to work in public service. Many people who enter high-paying fields earn too much to qualify for income-driven repayment plans, and some have no desire to work in the public sector at all. If the shoe fits, estimating how much you would save by refinancing your federal student loans is a smart idea. If you have a large amount of debt but make great money, student loan refinancing could literally save you thousands of dollars.
- Your loans are fixed at a high-interest rate, and you think you could do better. If your student loans are a fixed at a high-interest rate, it might be worth exploring your refinancing options. Depending on your loan details and financial situation, you may qualify for a loan with a lower interest rate that will help you save money. This especially makes sense for private loans and Graduate PLUS Loans (which are the highest interest rate Federal loans)
- You are making multiple loan payments at various interest rates every month. If you’re sending in multiple payments every month, refinancing into a solid loan with excellent terms is one way to simplify your life and save money in one fell swoop. Find out how much you could save with this calculator.
- You want to pay down your loans as quickly as possible. If you’re like many young people, the idea of enduring income-driven repayment for the next 20-25 years of your life is troubling. In certain situations, refinancing is the best way to kill your loans off for good. Plus, it can save you some money while you’re doing it.
- You want independence from your co-signer. If your old loans involve a third party and you want to break off on your own, refinancing is one way to make it happen. And if your credit score is good enough, you’ll hopefully qualify for a new loan with a low-interest rate and terms you can live with.
- You want to transfer a Parent PLUS Loan to your child. Parent PLUS Loans are some of the worst student loans – because the parent holds the loan and the student gets the money. This also means that the parent is on the hook financially for repayment. However, there are companies that will allow parents to refinance the PLUS loan into their child’s name (and even if it requires a cosigner, there is cosigner release to eventually get free). This can be a good deal to get out of Parent PLUS Loans.
What To Look For
Now that we’ve talked about what the benefits and what the drawbacks to student loan refinancing are, what should you personally look for when refinancing your student loans? When does it make the most sense for you?
There are a lot of options when it comes to refinancing your loans, but you should always keep this general mindset in mind as you shop for your student loans:
I should be refinancing into a student loan that saves me money over the course of repayment AND I can afford it going forward.
What does that mean?
Well, the whole point of student loan refinancing is to save you money. So, don’t get involved in a refinancing plan that doesn’t save you money.
Second, you need to be comfortable affording your new student loans today and going forward. Consider your job stability and what monthly payment you can afford to determine if a certain student loan makes sense.
When shopping for student loans, you’re going to see:
Variable Rate and Fixed Rate Loans: There will be a combination of variable rate and fixed rate loan opportunities available. In almost every circumstance, the fixed rate loans will have a higher interest rate than the variable rate loans.
The reason is that the fixed rate loans never change over the life of the loan – you get to know your payment and know what to expect.
On the other hand, variable rate loans will vary over time-based on market interest rates.
Most loans have caps on how much they can rise and how fast, but a common variation is no more than 0.25% change per month, with a total cap of 8%. As interest rates rise (or fall), your loan interest rate will also change.
This will change your monthly payments – meaning they could rise or even exceed what the fixed rate loan option would charge you.
However, you are starting at a lower interest rate up front. If you plan to pay off the student loan in a relatively short period of time (say, less than 2 years), a variable rate loan can make a lot of sense because you can save in interest.
If you plan on taking the full length of the loan to pay it off, a fixed rate loan might make more sense for you – especially since interest rates will likely rise in the future.
The choice, and risk, is yours. The bank rewards you for taking the risk by giving you a lower interest rate, but that rate could rise.
Different Lengths Of Time: When shopping for a student loan, you’ll see a variety of different lengths for the term of the loan.
Typically you’ll see as short as 3 years and as long as 25 years. However, some credit unions offer loans as short as 1 year and as long as 30 years.
To get the best interest rates on a loan, you typically have to get a short term on the loan as well. The longer the term, the higher the interest rate will be.
The combination of the term of the loan (length) and the interest rate is what will make your payment amount.
The longer the loan, the more expensive and more interest you’ll pay, so always be looking to shorten the loan term.
Benefits And Perks: Many lenders these days offer a variety of benefits and perks to differentiate themselves. Some of these benefits matter, some don’t.
For example, some of the benefits that could be important include having no prepayment penalty. If you plan on paying back your loan early, you don’t want to be penalized for doing so.
Also, if you are going to need a cosigner for your loans, you’ll probably want to get what’s known as cosigner release. This means that after a certain amount of on-time payments, the cosigner can be dropped from the loan.
The best cosigner release plans are usually 24 months.
Another bonus that you should take advantage of is interest rate reduction opportunities. Many banks offer a reduction in interest rate by signing up for automatic debit payments.
This simple trick can reduce your interest by 0.25% at most lenders. Some banks even offer another 0.25% reduction for having a checking or savings account at the bank.
Those savings can add up significantly over time!
Some perks that don’t really matter for most people include job coaching, connected bank accounts, and free swag. Always keep in mind what’s important to you financially and go back to what we said above:
I should be refinancing into a student loan that saves me money over the course of repayment AND I can afford it going forward.
What to Watch Out For
Refinancing into a student loan with better terms might sound like a dream come true, but if you have federal loans, you might also have to give something up.
Namely, federal student loans come with certain protections that can help you if you’re in default, reduce your monthly payments indefinitely, or defer repayment until a later date.
Don’t Confuse Student Loan Refinancing With Student Loan Consolidation
A lot of people confuse student loan refinancing with student loan consolidation – but they are very different things. Student loan consolidation should be used to combine multiple Federal student loans.
The reason to consider doing this is simply to make it easier to repay your student loan debt. When you graduated college, you might have 5-6 different student loans – one from each year of school (or maybe even a couple different loans from each year of school).
It can be hard to manage all those different payments.
Student loan consolidation makes it easy by combining all your Federal loans into one loan. And this is a FREE service offered by the Department of Education – you just go online to StudentLoans.gov, select Consolidate My Loans, and you’re moving down the path to consolidate.
On the flip side, student loan refinancing means getting a new private loan to replace your existing loan (or loans). You can refinance one or all your loans – both Federal and private loans.
So, in a way, you’re consolidating by creating one new private loan, but really this is called student loan refinancing.
Just remember – student loan refinancing means getting a private student loan.
These loans act much more like car loans – you don’t get fancy repayment plans, you don’t get student loan forgiveness, and if you don’t pay, you’ll face big consequences.
Realize That You May Lose Benefits
Students with federal loans may qualify for public service loan forgiveness as well as income-driven repayment plans like Pay As You Earn (PAYE) and Income-Based Repayment (IBR).
These plans let you pay a certain percentage of your discretionary income towards your loans for 20-25 years before doling out 100 percent forgiveness of any remaining balances.
Other federal programs that help the student with federal loans include medical and economic deferments that can give you a break from repayment for up to 24 months, military benefits that will repay your federal student loans if you or a spouse serves active duty, and federal help rehabilitating federal loans that were formerly in default.
Once you refinance federal loans with a private lender, you lose access to federally-supported student loan forgiveness, deferment, or forbearance programs. And that includes any student loan programs for federal loans that may be offered in the future.
If you potentially qualify for programs like Public Service Loan Forgiveness (PSLF), you should probably avoid refinancing your Federal student loans.
Further, refinancing and consolidating your student loans can extend the time it takes to pay them off. If you’re already years into paying your student loans down, this is certainly something to consider.
Important Reminders When You Refi
Before you pull the trigger, here are the last few reminders to think about.
First, you can refinance one, some, or all your loans. You don’t need to refinance all or none. Maybe you only want to refinance your private student loans and keep your Federal ones – that’s possible.
Maybe you only want to refinance a couple high-interest loans and not the rest – that’s fine too. Basically, you can pick and choose what loans you want to do.
Just remember that most lenders have minimum loan amounts – anywhere from $1,000 to $3,000. If your loan isn’t big enough, they won’t refinance it. But, if it’s that small – just pay it off!
Also, if you have large loans, you might have to get two different student loans. This will typically only apply to doctors, but most lenders have caps on how much they will refinance – usually $250,000 or so.
If you have more student loans than that, some lenders may reject you altogether while others will simply require you to get two loans.
Second, you can refinance multiple times. Let’s say that you refinance today at 5%, but interest rates go down to 4% in 6 months. Well, you can refinance again at that time. There’s nothing stopping you from doing it.
Now, some lenders might frown on it, and not let you refinance at the same company. But other lenders might allow you to quickly and easily refinance with them because they don’t want to lose your business.
Just like the first time refinancing your student loans, it pays to shop around!
Compare Options and Rates
There are a lot of places to refinance your student loans! From online lenders, to banks and credit unions, the options are many.
But that can make it really hard to shop around for different loans. This list of places to refinance is a great starting point, but don’t forget to check you local bank and credit union as well.
Credit unions can be good places to consider, especially if you have a unique situation that requires special underwriting.
Also, many places offer bonuses to refinance with them.
Never choose a cash bonus over a lower interest rate, but if you have two or three firms with the same rate, see if any of them will throw in a cash bonus to win your business.
You would be surprised how competitive some firms will be to get your student loan refinancing business.
The great thing about shopping around for a student loan is that you can do it in minutes.
And the choices you make could save you thousands. So, take a few hours and compare a bunch of different places – the time spent is well worth it.
The Bottom Line
In the perfect world, we would blink and our student loans would disappear.
But in the real world, it’s on us to pay them back – even it takes a decade or longer. Sadly, it usually takes over 20 years for the average consumer to pay off their student loans.
Fortunately, plenty of businesses have stepped in to offer new products that can make paying off your loans easier.
But before you take the plunge, you should perform due diligence to make sure refinancing actually makes sense.
There are a lot of options to consider, but refinancing can save you money if done right. Make sure that student loan refinancing makes sense before you dive in.