More than $4 billion in student loans were refinanced in 2020, according to one report.1 Why do so many borrowers want to refinance? In short, to save money. If you have a loan with a relatively high interest rate, then refinancing at a lower rate can save you money over the life of your loan.
There are pros and cons to refinancing student loans. While saving money is a big plus, not everyone is eligible, and you could lose important benefits. Let’s look at what it means to refinance private and federal student loans, what to look for, what to consider, and how to actually start the refinancing process.
Refinancing vs Consolidating Student Loans
There can be confusion understanding consolidating vs refinancing your student loans:
- Consolidation means combining multiple loans into a single one. This often gives you an interest rate that’s an average of the rates of the existing loans (or a rounded-up interest rate). Usually any unpaid interest will capitalize (become part of your principal balance) so you’ll be paying interest on the new, higher balance.
- Refinancing means getting a new loan from a private lender that will pay off your existing loans. When you refinance, you’ll have a new interest rate, new terms (including how long you’ll have to pay back the loan), and possibly a new lender. Plus, you’ll make a single payment on the refinanced loans.
Who Can Refinance Their Student Loans?
You may be able to refinance your federal and private student loans, even if you’ve refinanced them before. Most borrowers who refinance have been out of school for a bit, so there’s been enough time for interest rates to change. Being out of school for a few years can also give you time to build up your credit, which is considered when a lender looks at your refinancing request.
When you refinance a student loan, it means that a lender will pay off your current loan balances. In return, you get a new loan—which may or may not have a lower interest rate. If your current lender is doing the refinancing, you’ll still have a new loan with them.
- If you extend the term of your loan (how long you’ll be paying it), you may end up paying more over the life of your loan.
- Your monthly payment isn’t guaranteed to be lower; the rate you’re offered will depend on your creditworthiness and the interest rate environment.
What Happens When You Refinance a Student Loan?
When you refinance your student loans, you’re basically applying for a new loan. A lender will look for many of the same factors they looked for when you first applied for a (private) student loan, like these:
- How’s your credit? According to some websites, you may need a credit score that’s in the high 600s or even the 700s.2 If not, you may need a cosigner.
- How responsible have you been? What’s your record of on-time payments?
- What’s your income and your debt-to-income ratio? This is a measure of your ability to take on new debt—the total of your monthly debt divided by your gross monthly income. If you have a high one, it may indicate to a lender that you’re at a higher rate of defaulting on the loan.
- Are you a U.S. citizen? With some lenders, if you’re a non-citizen or permanent resident, you may have to add a cosigner.
- How much do you have left? If you don’t have a large enough amount of debt, then it might not be worth refinancing; you could save a small amount but applying for a new loan could impact your credit report.
Refinancing private student loans
Private student loans can be refinanced, either with your original lender (if they offer it) or a new private lender. There are pros and cons to refinancing:
- Pro: The most common reason to refinance a private student loan is to save money over the life of your loan, usually through a better interest rate and a different term (length of time you have to pay it back).
- Con: A possible downside is whether the money you’ll save will offset any valuable benefits (including discounts) your original lender offered. Also, a longer repayment term may result in your paying more overall.
You’ll want to consider both the interest rate and the repayment term when you’re deciding whether refinancing is right for you.
Refinancing federal student loans
It may be an easier decision to refinance private loans than federal student loans. Federal loans offer a number of flexibility and benefits. So, while you may save money, you need to balance those savings against the impact of losing features and benefits:
- Popular forbearance programs, like returning to school, illness, and disability, may be different or not exist with a new lender.
- You’ll lose the flexibility to switch to a new repayment plan (like income-driven repayment).
- If the government offers a new loan forgiveness program, a refinanced loan (which becomes a private loan) will not be eligible.
While the government does not offer loan refinancing, consolidation is available, and it may help you retain some of your benefits. Check studentaid.gov to find out what’s available for your federal student loans.
Should I Refinance My Student Loans?
The biggest reason to refinance is to get a better deal financially. If rates have dipped since you got your loan (or if it looks like they’ll go up and you have a variable interest rate that would go up too) then refinancing might be worth looking into.
To see if you could get a better deal financially from refinancing your student loans, check out an online student loan refinance calculator from Nitro.
Things to Consider Before Refinancing Student Loans
- Are you really saving money? If you’re just paying over a longer term, you may end up paying more over the life of your loans
- Will you lose any current student loan benefits, such as repayment options or Public Service Loan Forgiveness?
- Will your new loan be considered a student loan or a personal loan? If it’s not a student loan, will you lose out on an interest tax benefit?
- Will you have to pay any service fees to refinance your student loans?
- Will you lose any discounts that you’ve had with your loan originator?
How to Refinance Student Loans
You’ve decided you want to refinance your loans…here are a few steps you should take:
- Research the lenders who are highly rated for refinancing. These could include banks, credit unions, and online lenders.
- Compare their interest rates to see who offers the best rates and terms.
- Be careful to read the fine print: Are there fees? What are your options if you can’t make a payment? Will the rate increase at any time?
- Complete your chosen lender’s application, upload documents they require, and, when you’re approved, sign the final documents.
- Make your payments to the new lender. Note: Make sure the last payment to your original lender has been made and you don’t owe them any more.