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How to shop for student loan refinancing
Refinancing student loans can help you lower your payments by consolidating your private or federal student debt into a new loan with a lower rate and better terms. Learn how to compare student loan refinancing options.
Student loans are a terrible burden for many Americans. There’s not much you can do to get out of paying your student loans — they even survive bankruptcies! But there is something you can do to lower your monthly payments: refinance your loans.
Refinancing can help you make consistent, on-time payments without getting deeper into debt or going broke. Sounds ideal, doesn’t it? Here’s everything you need to know about refinancing your student loans.
What does it mean to refinance?
Let’s start with a simple definition before diving into the details. When you refinance a student loan, a private lender pays off your current loan then issues you a new loan with a new interest rate.
A lower interest rate means lower monthly payments. It can also mean paying less overall because you won’t be paying as much in interest. Interest, of course, increases the total amount of your loan. So the lower your interest rate, the less you end up having to pay overall. And a lower rate makes it easier to keep up with your monthly payments and avoid defaulting on your loan.
What are the eligibility requirements?
Wondering if you will be able to qualify for student loan refinancing? Below are some of the standard requirements:
- Must be a U.S. citizen or permanent resident.
- A minimum amount of student loan debt ($5,000–$10,000).
- Responsible financial history.
- Cosigner (in some cases).
- A degree from a qualifying college (Title IV accredited university or graduate program).
- Proof of employment or a job offer that begins in 90 days.
- Strong monthly cash flow.
Eligibility requirements vary from one lender to the next, so you will have to check with those you are interested in. If you can’t qualify alone, many lenders allow for joint applications with cosigners.
We’ll return to the question of eligibility and what lenders are looking for in more detail later. Before that, let’s see how you can find just the right loan refinancing option for your situation.
How do you compare student loan refinancing offers?
With so many lenders willing to refinance student loans, it can be a challenge to know which one to select. These are the factors you should consider when making a decision.
What are the student loan refinancing rates?
Student loan refinancing rates vary widely by lender. If your priority is to save money, you will want to choose the lender with the lowest rates. However, you will only qualify for the lowest rates if you have a high income and a great credit score.
What loan rate types do they offer?
Most lenders offer loans with both fixed and variable rates. Initial rates are usually lower for loans with variable rates. But these rates can change with time depending on the market rate. Fixed rates are typically higher, but they don’t change for the duration of the loan. This makes it easier to budget.
Consider how much you can afford in monthly payments and how much risk you can tolerate regarding future rates. Figuring out in advance whether you prefer fixed or variable rates can speed up your search for the right loan.
So, how do you decide what interest rate type you prefer when it comes to refinancing your student loan? Should you go with a variable or fixed interest rate? To help you decide which rate type you prefer, here are lists of the pros and cons of each type.
Here is a list of the benefits and the drawbacks of refinancing at a fixed rate.
- If rates rise, you continue benefiting from your fixed low rate.
- More predictable expenses, making budgeting easier.
- Initial rate is typically higher than for a variable rate loan.
- If rates are higher than you’d like right now, they may go down in the future. You won’t be able to benefit from this unless you refinance.
Variable rate loans may have lower starting rates than fixed rate alternatives. If rates remain stable, this could mean lower total student loan costs. If they don’t remain stable, your variable rate loan could cost you more or less than a loan with a fixed rate. Should rates rise a great deal, variable rates will cost you much more. Should rates fall, variable rates will save you money.
Here is a list of the benefits and the drawbacks of refinancing at a variable rate.
- If rates stay low and get lower, you’ll save money over the life of the loan.
- If rates are higher than you’d like right now, they may go down in the future. With variable rates, your loan expense will go down as the rates do.
- The variation in your budget could come in handy when rates are low.
- If interest rates shoot up, you’ll end up owing more that month.
- If interest rates get higher and stay up, you’ll end up paying more over the life of the loan.
- The variations in your budget will mean a dangerous lack of stability when rates rise. If they rise enough, you may even find you can’t make ends meet any longer.
As you consider refinancing your loan, remember these lists. They will help you decide if the fixed and variable rates available to you are a good value given where interest rates are likely headed in the future. Given how low Federal Reserve rates are as of 2021, few if any analysts expect them to go down. If you have good credit and can qualify for the lowest fixed rates, a fixed rate loan is probably a safe bet.
Do they offer low APRs?
APR stands for annual percentage rate. It is the figure used to communicate how much a student loan costs per year. The APR includes the interest rate along with other costs of borrowing, such as fees and taxes.
The Truth in Lending Act (TILA) requires U.S. loan and credit card issuers to communicate the cost of borrowing as an APR. This standardization makes it easy for borrowers like you to compare the cost of various lenders.
You’ll notice that lenders often advertise their lowest possible APRs. This can be misleading because these rates are only available to the ideal borrower in a specific scenario. To find out the actual rate a lender will offer you requires getting prequalified. The good news is that SuperMoney allows you to prequalify online without affecting your credit score.
You can shop around from the comfort of your home and find out what several lenders will offer you. If you can get an APR lower than your current one, you can cut down on your borrowing costs.
What terms do they offer?
Typically, lenders offer loan terms ranging from 5 to 20 years. Some lenders will not go higher than 15 years. A longer term means lower monthly payments. But the longer the term, the more interest you’ll have to pay before you get the loan paid off.
Does the lender accept borrowers with your degree and college?
Some lenders will only refinance student loans for students who have attended certain colleges. SuperMoney’s student loan offer engine allows you to filter lenders based on the college you attended.
Do they offer unemployment protection?
If you recently graduated, it’s likely you will switch jobs a few times before you settle down. Regardless of how long it has been since you left college, losing your source of income is always a possibility. Some lenders offer unemployment protection that pauses student loan payments while you look for work. Note, however, that the criteria to qualify for deferment can vary by lender. Ask about this before you accept a loan offer.
Do they provide options for forbearance or forgiveness?
What happens if you face a financial or personal difficulty and can’t pay your monthly payments? Will you have protection if you become unemployed? Are you still held liable if you pass away or become permanently disabled?
It’s good to know how a lender handles these situations before you face them. Some lenders will be more flexible and accommodating than others, so be sure to check their policies. Also be sure to review what other borrowers have to say about their customer service during such crisis situations.
Do they offer cosigner release?
Adding a cosigner when applying for a student refinancing loan can help you qualify for lower rates and better terms. But do you want to have someone guaranteeing your loan for the next 20 years? Even if that’s not a problem for you, even close family members may not be eager to guarantee a loan for that long.
Unfortunately, some lenders will not allow you to remove a cosigner until you completely repay the loan. If you hope to remove a cosigner from your loan at some point, be sure you find a lender and loan that allows this.
Does the lender have a good track record?
Lastly, take note of a lender’s reputation. Most will publish statistics on how much they save customers on average, both monthly and overall. Plus, read reviews from past customers to find out how satisfied they were with all aspects of the experience.
Keep all of these factors in mind when vetting lenders to ensure you are happy with your new loan.
Answering the above questions when comparing lenders will help you find the best deal available. SuperMoney’s student refinancing offer engine makes it easy to filter lenders, rates, terms, and fees.
Is refinancing the same as consolidating?
Student loan consolidation typically refers to federal student loans only. It’s the process of combining two or more federal loans into one loan, resulting in a single monthly payment. This is done using a Direct Consolidation Loan offered by the Department of Education.
Federal consolidation cannot be used with private student loans. It is not considered refinancing because the new (fixed) interest rate is simply the weighted average of the interest rates on the loans being consolidated. It won’t help you save money on interest. You may even end up paying more interest.
Student loan refinancing, on the other hand, is done through a private lender and can include both federal and private student loans. Unlike federal consolidation, private refinancing results in a completely new loan with new terms and a new interest rate. Therefore, you can get a lower interest rate and monthly payment when you refinance through a private lender. To learn more, read our complete guide on private vs. federal student loan consolidation.
Here is a list of the benefits and the drawbacks to consider.
- It can simplify your life
- It can reduce interest rates and lower monthly payments
- You can choose a better loan servicer
- If your original loan had a cosigner, you can remove the cosigner when you refinance
- You can put a Parent PLUS loan in your name
- You lose some federal loan perks
- You cannot apply for federal student loan forgiveness programs
The benefits of refinancing
Let’s look more closely at the most noteworthy positives to refinancing your student loans through a private lender.
It can simplify your life
If you are currently making separate payments on two or more student loans, refinancing these loans will result in only one monthly payment.
It can lower your monthly loan payment
The goal of refinancing a student loan is to get a better interest rate. This results in a lower payment.
You can get a better loan servicer
If you’re unhappy with the lender who currently services your student loan, why not do your research to find a better fit? This is possible when you refinance.
You can remove a cosigner
Maybe one of your student loans required a parent or friend to cosign. If that loan is paid off during a consolidation and refinance, your cosigner will be off the hook. What a relief!
You can put a Parent PLUS Loan in your name
Parent PLUS Loans are a type of student loan given to parents so they can pay for their child’s education. Perhaps you needed your folks to take out the loan when you began school, but now you’re earning your own money and want to relieve their burden. The way to do this is to refinance the Parent Plus Loan and put the new loan in your name.
Can you refinance both private and federal student loans?
What if you have a mix of federal and private loans? Can you refinance all of them?
Yes, it is possible to refinance both federal and private loans into one new loan. You just need to get approved for a refinance loan large enough to pay them all off.
Should you refinance all of your student loans?
You’re worried about losing federal loan perks
If you’re worried about losing some of the federal perks that you can’t get with private loans, you may want to hold off on refinancing those federal loans. This includes income-driven repayment plans. It also includes deferment and forbearance options if you suffer a difficult financial period.
You want your federal loans forgiven
If you want your federal student loans forgiven, don’t refinance them under a private loan. There are a few programs that allow for federal student loan forgiveness, including teacher student loan forgiveness and public service loan forgiveness. If you refinance a federal loan, you will no longer be eligible for forgiveness. However, there are private student loan forgiveness alternatives you can consider.
The table below summarizes the loan forgiveness and repayment options available for federal and private student loans.
Which loans are best for a refinance?
Private student loans with high or variable interest rates
Interest rates vary over time depending on the federal funds rate set by the Federal Reserve. So, if your loan has a variable rate, you’ll likely experience interest rate changes throughout the life of your loan. This makes your monthly payments unpredictable and, therefore, potentially more difficult to keep up with. You don’t need to worry about that with a fixed interest rate, though, as your monthly payments will remain the same throughout the life of the loan.
Because interest rates are always changing, you’ll want to compare your current rates with the rates offered by top lenders. Do the math, and see how much you’ll save in the long run by refinancing.
Federal student loans that need to be extended
If you’re struggling to make on-time payments and want more control over your repayment terms, you can lower your monthly payments by refinancing your loan with a longer term. For example, the Standard Repayment Plan on a federal student loan is 10 years. You can drastically lower your monthly payment by refinancing that loan to a 15-year or 20-year plan.
Keep in mind, though, that a longer repayment term means you’ll be making more payments as well as paying more in interest over the life of the loan. So, if it’s feasible, try paying your loan off early. Or consider refinancing again with a shorter repayment term down the road. You may also want to refinance your federal student loans if you have a secure job with a high income. Locking in a lower interest rate may be worth the risk of giving up federal loan perks, especially if you have a secure job with a stable income. Here are five scenarios where refinancing student loans makes sense.
When can you seek a refinance?
You can refinance anytime after graduation. However, some lenders will require income for six or 12 months. So, if you’re a typical student, you may need to wait. However, you can get around this if you have a cosigner.
When should you refinance a student loan?
Well, the short answer is, any time that you can save. But here are some situations when you are more likely to get a lower rate.
When you get a job
Once you graduate and land a job, you will be eligible to apply for refinancing. This is a good time to shop around and ensure you have the lowest rate possible.
If your credit score has increased
When your credit score increases, you can qualify for better rates. Therefore, if you’ve been paying your bills on time and managing your credit well, keep tabs on your credit score. When it goes up, especially to a new credit rating (fair to good, good to excellent, and so on), check the refinancing rates.
When interest rates drop
Private lenders base their interest rates on indexes, most commonly the London InterBank Offered Rate (LIBOR) or the prime rate. The indexes are closely correlated with the federal funds rate. So keep an eye on the market to see when the rates are going down. When they do, apply to see if you can lock in a good deal.
If your income increases
Lenders often look at your monthly and annual income when you apply for a loan, so an increase in income can improve the APR you qualify for. If you get a raise, wait a few months, then apply with your new income stats.
These are a few of the situations when it’s a good idea to shop around for a new loan. However, you can periodically check in with lenders just to see if you can qualify for a better deal. Most let you apply without hurting your credit score, so you have nothing to lose.
What are lenders looking for?
When seeking any type of loan, including a refinance of your student loans, lenders will take a hard look at your credit history and your ability to repay your loans. What exactly will lenders be looking for?
Most lenders want to see that you either have a steady job or a job offer. The longer your history of steady employment is, the better. Most lenders are looking for six to 12 months of steady employment. How high does your income need to be? That all depends on your debt-to-income ratio.
Debt-to-income ratio (DTI)
A DTI looks at your ability to manage monthly payments based on your income and your debts. Your DTI is calculated by dividing your monthly debt payments by your monthly gross income. Most lenders are looking for a DTI no higher than 35% to 40%.
Who isn’t eligible for a refinance?
If you’re still in school, you can’t refinance your loans. But that’s OK because you aren’t required to start repayment until six months after graduation. Also, you have to complete your program of study and graduate. Generally, lenders consider you ineligible if you didn’t complete your degree. PLUS loans are an exception. If you’re the parent borrower, some lenders will let you consolidate or refinance your loans even if the degree isn’t completed.
Tips for improving your chances
If your credit score and DTI aren’t up to snuff for a refinance, work on improving both of these. Then try refinancing again in six months.
How can you make the needed improvements? Pay down your debt. Put all of your extra income for the next six months toward debt. Forget about buying new clothes, going out for dinner, or taking expensive vacations; just focus on paying your debt. This will improve both your credit score and your DTI.
Earn extra money to put toward debt. How can you do this? You can sell stuff you don’t need. You can take on an extra job or some freelance work. There are lots of options out there for a side hustle. You just need the energy and drive and the right opportunity.
FAQ on student loan refinancing
Should I refinance my student loan?
How soon can I refinance my student loans?
You may want to refinance private student loans as soon as you qualify for a lower interest rate. You generally must wait until after you finish school to refinance. Don’t refinance federal student loans if you’re making payments on an income-driven repayment plan or seeking federal loan forgiveness.
Can I refinance my student loans after consolidation?
If you have previously consolidated your student loans — whether through the government or a private lender — you can still refinance them if you are eligible.
Does refinancing student loans hurt credit?
Refinancing your student loans doesn’t typically harm to your credit. If you move forward with a full application, a “hard pull” credit check will be performed. This hard inquiry could affect your credit score, but not too much. Drops in credit scores due to such inquiries are typically five points or fewer. If you submit multiple full applications, however, your credit score could take a bigger hit.
How often can you refinance a student loan?
Student loan borrowers can refinance their student loans as many times as they like, so long as their credit and income remain strong. Lenders do not typically put restrictions on how often loans may be refinanced, although borrowers may need to move to a different lender if a refinance was recently completed.
If you’re ready to get started, review all the top lenders here and do a side-by-side comparison to find the best one for you. There’s no time like the present to improve your finances.