The Key Facts About Student Loan Refinancing
A student loan refinance involves replacing one or more student loans with a new loan with better terms from a private lender. Both private and federal student loans can be refinanced. The purpose of refinancing is to get a lower interest rate and thereby reduce the monthly payments and lifetime costs. Many private lenders, including banks, online lenders, and credit unions offer student loan refinance loans. People with federal loans can also consolidate—rather than refinance—their debts. Debt consolidation involves combining multiple federal loans into a single loan with one simple monthly payment. The table below shows a sample of rates for student loan refinances compared to rates for first-time private and federal student loans. The Refinance column shows the lowest rates advertised by each lender. The First-Time Column shows fixed rates for federal government loans and lowest rates from private lenders.
|Refinanced Student Loans||First-Time Student Loans|
|2.58% Variable / 3.15% Fixed (LendKey)||4.45% (Federal Stafford Subsidized Loan)|
|2.57% Variable / 3.40% Fixed (Earnest)||4.45-6.00% (Federal Stafford Unsubsidized)|
|2.51% Variable / 3.999% Fixed (SoFi)||5% (Federal Perkins Loan)|
|3.50% Fixed (Splash Financial)||7% (Federal (PLUS Loan)|
|2.57% Variable / 3.20% Fixed (CommonBond)||3.62% Variable / 5.30% Fixed (CommonBond)|
Should I Refinance my Student Loan?
As the above table shows, it is often worth refinancing a student loan. If you’ve graduated from college and have built a good credit score, then you can achieve a much lower interest rate by refinancing—and potentially save thousands of dollars in the long run.
Things to take into consideration before refinancing:
- Interest rate. Some lenders offer lower rates than others. Before you refinance, make sure your chosen lender can actually save you money.
- Credit score. Holders of student debt can refinance at a significantly reduced rate, so long as they have a solid credit score along with steady income and employment. If your credit score is poor, you may find it more difficult to achieve a reduced rate.
- Term duration. If you refinance at a lower rate but with a longer loan, then your monthly payments decrease, but you may end up paying more overall due to accruing interest.
- Remaining debt. If you’re fresh out of college and tens of thousands of dollars in debt, then a refi could make sense. But if you’ve paid off most of your loan and only have a small amount of debt to pay off, it might not be worth refinancing. True, you could save a small amount. But on the other hand, applying for any type of loan or refi can affect your credit score—which could prove damaging if you’re also in the market for a mortgage or other loan.
The Pros and Cons of Student Loan Refinancing
|Potential for major savings over life of loan||With longer term, potential to pay more over life of loan|
|Reduced monthly payments||Applying for refinance can affect credit score|
|One single payment makes life easier||By refinancing federal loan, you waive rights to cancellation or forgiveness programs|
|More flexible repayment terms|
|Option of dropping previous co-signer from loan|
Student Loan Refinancing Requirements
Eligibility can vary slightly between lenders, but the following are standard requirements for most refinance loans:
- U.S. citizen or permanent resident
- Aged 18 years or older.
- Reside in a state where your chosen lender is authorized to lend.
- Have employment, sufficient income from other sources, or have an offer of employment starting within the next 3 months.
- Have graduated with an undergraduate degree or higher from a Title IV school that’s eligible to process federal student loans.
Lenders also look at the following:
- Credit. This involves a hard credit inquiry which temporarily affects your credit score. Your credit history is the most important factor in determining your interest rate.
- Income. Your lender will ask to see your pay slips or proof of other sources of income, in order to assess whether you have sufficient monthly cash flow to meet your monthly payments.
- Savings. In addition to income, your level of savings will also help the lender assess your ability to make monthly payments.
- Debt amount. The amount of remaining debt will help the lender determine the rate and term duration of your loan.
How to Refinance a Student Loan
A student loan refinance application is similar to other loan or refinance applications. It involves the following steps:
- Checking your credit. The major credit agencies (Equifax, Experian, and TransUnion) are legally obligated to share your credit history with you once every 12 months upon request, free of charge. As a general rule, credit of 700 or more is considered good, and 620-700 is average.
- Comparing lenders. You can use loan marketplaces to see loan options from multiple lenders or get a quote from a direct lender.
- Applying for your refinance. You’ll be asked to provide documentation, including: driver’s license or state ID, Social Security number, pay slips, and employment information.
Refinancing Student Loans with a Co-signer
|Greater chance of approval||Co-signer takes on liability for debts|
|Reduced interest rate if co-signer has good credit||Damage to co-signer’s credit score in event of missed payments|
|Flexibility to release co-signer at pre-determined date in future||Potential damage to relationship with co-signer over financial matters|
A co-signer can be a:
- Close friend
- Anyone else who is in a strong financial position and is willing to share the liability for your debts.
In many cases, recent graduates don’t have the credit history or income to be approved for a student loan refi unless they bring a co-signer. By bringing a co-signer with good credit and income, the lender is more likely to approve the refinance and to offer a low interest rate. Bringing on a co-signer involves more paperwork than applying alone. The lender will ask for documentation from both the primary borrower and their co-signer. A credit inquiry will be performed for both people.It might not be easy to find a co-signer. After all, not everyone would be open to sharing your financial liability. However, if a parent, relative, or close friend agrees to co-sign your refi, you may be able to sweeten the deal by agreeing to release them in the future. For example, student loans can last anywhere from 5 years to more than 20 years. If you’re taking out a 20-year loan but envision having stronger credit in 5 years, you could state in your loan agreement that the co-signer can be released after 5 years. When you reach the 5-year mark, you’ll need to show the lender that you have strong credit and sufficient income to maintain the loan on your own.
Alternatives to Refinancing
If you have private student loans or private and federal loans, refinancing could be the best way to save money. But if you only have federal loans, you may want to consider debt consolidation or any of the federal government’s loan forgiveness or cancellation programs.
If you’re unable to meet the minimum payments, these are just some of the programs for being forgiven all or a portion of your loan amount:
- Public Service Loan Forgiveness. For employees of federal, state, or local government organizations, and certain non-profits.
- Teacher Loan Forgiveness. For people who have taught full-time in a low-income school or education service agency for a minimum 5 consecutive years.
- Perkins Loan Cancellation. For teachers serving low-income schools or children with disabilities. Also available to teachers of math, science, foreign languages, or other fields classified as having a shortage of qualified teachers.
- Special Circumstances. Student debt may also be canceled in the event of disability, death, bankruptcy, school closure, withdrawal from school, or if the school falsely certified the student’s eligibility for the loan.
A student loan involves a great deal of risk and reward. For most students, the risk comes from taking out tens of thousands of dollars in loans when they are at their most vulnerable—young, not-yet employed, and with no credit history. On the flipside, the reward comes by graduating and finding a job in their chosen profession. In reality, many graduates find themselves unable to pay off all their student debt. Fortunately, there are ways to cancel or at least reduce your debt payments. Many students qualify for loan forgiveness or cancellation programs, but even those who don’t qualify for federal assistance can apply for a student loan refinance and save potentially thousands of dollars as a result.