You can refinance student loans by taking out a new loan and using it to pay off one or more of your student loans. If the interest rate on the new loan is lower than the interest rate on your student loans, you can save money on interest payments. You may also be able to lower your monthly payment, combine several monthly bills into a single, convenient payment, or release cosigners from their obligations.
Student loans from private lenders are usually considered the best candidates for refinancing. Refinancing student loans from the federal government can be risky, as you will lose access to a number of repayment options and possibilities for loan forgiveness. If you have multiple federal student loans, you may choose to combine them using a Direct Consolidation Loan. You won’t get a better interest rate, but you will be able to make one monthly payment instead of several.
Why Refinance?
There are several reasons for refinancing student loans.
- Refinancing can get you a better interest rate, especially if your credit has improved since you got your loan. A lower rate could save you thousands of dollars over the life of a loan.
- If you’re having trouble meeting your monthly installments, you may wish to refinance to lower your monthly payment. This is often achieved by extending the loan term, which may raise the total interest you’ll pay over the lifetime of the loan. This may still be better than missing payments, which can have a serious impact on your credit.
- Borrowers can refinance student loans to release cosigners from their obligations. Some lenders will allow you to release a cosigner during the term of the loan, but if yours will not, you will need to refinance to release your cosigner.
- If you have many student loans, you may wish to refinance to consolidate those monthly bills into one convenient payment. That can help you keep your payments organized and make them on time.
It’s important to know why you are refinancing and what goals you wish to achieve before you start the refinancing process.
Refinancing or Consolidating Private Student Loans
Most students have a limited credit history. They often need to get a cosigner or pay high- interest rates to get a private loan. If you have established a good credit record since your graduation, you may be eligible for much better rates. You may also wish to release a cosigner from their obligation, or lower your monthly payment. Refinancing can help you achieve these objectives.
Your credit score will play a critical role in determining the interest rate you will be offered. Your lender will also consider your income and the amount of other debt you are carrying when deciding whether to issue a loan and what the interest rate will be. If your credit is good and your finances are stable, you may be offered a rate substantially below the rate you are paying on your current loans.
You will have to consider the terms you are offered carefully and decide whether refinancing is getting you a better deal and whether it will help you achieve your objectives.
How to Refinance Private Student Loans
A bank, credit union, or online lender will pay off one or more student loans and replace them with a new private loan. You’ll have to shop for the best loan terms, and you’ll have to read the fine print and understand the entire agreement.
Lenders may expect you to provide these or other supporting documents:
- Proof of employment, such as a W-2 form, tax return, or pay stub.
- A loan verification statement for each loan you want to refinance.
- A utility bill or other proof of your address.
- Your Social Security number or government ID to prove citizenship.
Many lenders won’t refinance student loans if you haven’t graduated, so you should also have proof of graduation.
Each lender you ask for a quote will make a hard inquiry on your credit report. If you keep your inquiries within a two-week period, the credit reporting companies will usually recognize that you are shopping and register only one hard inquiry, minimizing the impact on your credit.
You may get a better rate if you add a cosigner, but be sure the cosigner fully understands their obligations. They will have to repay the loan if you cannot or if something happens to you. Lenders will count your loan as part of their total debt load, and that could affect their credit or make it more difficult for them to get a mortgage.
You may be offered a fixed or variable interest rate. Variable rates can go up without warning. If you are refinancing to get a better interest rate, you may wish to be wary of variable rates.
Some lenders offer discounts for making consistent on-time payments, and you may be able to get a discount by borrowing from the same bank that handles your other accounts. These discounts can offer significant savings.
Refinancing or Consolidating Federal Student Loans
Federal student loans are paid back over a fixed period. The interest rate on a federal student loan is fixed and can’t be changed. Federal student loans come with a variety of payment options and benefits:
- Federal student loans usually carry lower interest rates than private loans.
- Federal student loans offer income-driven repayment plans that scale your monthly payment to your disposable income. These plans can make payments much more manageable, especially if you have a limited income and you’re under financial stress.
- If you make on-time payments under an income-driven plan for 20 or 25 years the government may forgive the remaining amount, though there may be tax penalties.
- Some public workers may qualify for tax-free loan forgiveness after as little as 10 years.
- Many federal loans come with forbearance or deferment programs that let you pause your payments without penalties if you have medical problems, lose your job, or go back to school.
- If you miss payments, federal student loans give you more time before declaring you delinquent or in default than a private lender would.
- Federal loans may be discharged if the borrower dies or is disabled.
- Federal loans may be eligible for further loan forgiveness programs in the future.
A federal loan cannot be refinanced with another federal loan. You can refinance federal loans using a private loan, but you will lose access to all of the repayment and forbearance plans and other advantages of government loans. If you refinance a government loan with a private loan, it cannot be returned to government status.
If you are paying more than one federal student loan, you can consolidate your loans with a Federal Direct Consolidation Loan, which is from the government and retains access to the federal benefits. You won’t get a lower interest rate, but you will be able to combine your monthly student loan pills into a single, convenient payment.
Think Carefully Before Refinancing Your Federal Student Loans
If you have established good or excellent credit since you graduated, you may be able to get a private loan at a lower rate than your government loans. An offer of a lower interest rate may tempt you to refinance, but that may not always be a good idea.
If you replace your federal loans with a private loan, you will lose access to all of the current government payment options and deferment programs and any future student debt forgiveness programs. There is no way to restore that access once you give it up.
If your credit is excellent, you have a substantial and reliable income, and your goal is to pay off your loans as fast and cheaply as possible you might consider refinancing federal loans, as you probably won’t need most of the programs you’d lose. Remember that your situation could change and consider your options carefully before committing to refinancing.
The Bottom Line
Refinancing is a useful tool that has helped many people manage their student debt more effectively. Whether it’s the right tool for you will depend on the type of loans you have, your financial and credit status, and your objectives. Knowing what options are available and what you intend to accomplish by refinancing will help you to make the right decision for you.
