Refinancing your student loans may save you anywhere from $100 to over $30,000 – it all depends on your current interest rate, loan balance, loan duration, and the sort of offer you receive. Our refinancing savings guide includes a summary of how much you may save in various circumstances.
How does student loan Refinancing work?
Student loan refinance is a procedure in which you acquire a new loan with possibly lower interest rates or more favorable terms than your current student loans and use it to entirely repay them. Then you repay your new debt in accordance with its terms. It will not reduce your debt, but it may help you pay less in the long term.
- By refinancing with a lower APR, you may reduce your overall loan cost by lowering the amount of interest and fees you pay.
- By extending the time period over which you must return your debt, refinancing with a longer loan term might lower your monthly installments.
Keep in mind that lengthier loan periods might result in higher interest payments over time. If you’re interested in decreasing your monthly payments, you may want to seek for a loan with a lower APR and a longer term.
Should I refinance my student loans?
While refinancing may seem appealing, it is not for everyone. Before you spend hours researching and comparing lenders, you’ll want to ensure that you’re in a position to benefit from improved terms through refinancing.
Refinance your student loans if…
- You have excellent credit. Excellent credit qualifies you for cheaper loan rates and costs. If you are unaware of your credit score, it is worthwhile to obtain one.
- Your income exceeds the amount owed. Your debt-to-income ratio is frequently taken into account by lenders when determining interest rates and levies. A low debt-to-income ratio increases your chances of obtaining a favorable refinancing rate.
- You are obligated to pay a high rate of interest. If your interest rates are high to begin with, your chances of obtaining a better bargain through refinancing are greater.
- You hold a master’s degree. While this is not always essential, some lenders like to see that you have utilized your student loans for purposes other than higher education.
Reconsider your student loan refinance if…
- You have a poor credit history. If your credit score is less than ideal, you may be better off keeping with your current rates. Though if you have a cosigner, you may be able to refinance with low credit.
- You are now jobless. It’s more difficult to get a better deal if you can’t demonstrate to lenders that you have the income necessary to repay your debts.
- You are in debt to a greater extent than you earn. A high debt-to-income ratio may result in higher interest rates and fees, making it more difficult to obtain a better bargain.
- You’ve recently entered the workforce. Recent graduates who are financially savvy may want to jump on the refinancing bandwagon as soon as they receive their degrees. However, they are unlikely to obtain the best rates – lenders favor those who have been employed for some time.
Let’s take a look at a case study
The table below illustrates the amount of money that one individual may save by refinancing a $40,000 student loan at a lower interest rate and shorter term.
- Balance: $40,000
- Interest rate: 6%
- Remaining loan term: 15 years
- New interest rate: 3.99%
- New loan term: 10 years
|Original loan||New loan||Your savings||Balance|
|Term||15 years||10 years||5 years|
They would save almost $12,000 in the long term, but would have to pay an additional $67 each month.
If done correctly, refinancing may save you hundreds of dollars in interest payments. However, saving money is not the only incentive to consider refinancing. These are some of the most often cited reasons for borrowers to refinance their student loans.
Top Reasons To Refinance Your Student Loans
- Reduce your monthly installments. Have you taken out a student loan without considering how much it will cost you each month? You are not alone in this. Private lenders usually do not provide income-based or graduated repayment programs, which means you may be liable for $800 per month immediately upon graduation. While refinancing does not automatically qualify you for an income-based repayment plan, extending the duration of your loan may make your monthly payments more reasonable.
- Increase your repayment flexibility. While no lender is more accommodating than the government in terms of repayment schedules, not all lenders are created equal. Some provide more comprehensive forbearance choices including in-school deferral, which means you won’t have to worry about repaying your debt if you decide to return to school or make a job change. Some even provide assistance to entrepreneurs.
- Lower repayments and flexibility could cost you. If you refinance for a longer term but are unable to qualify for a more competitive rate, you may save on a monthly basis but may wind up paying more on your loan. Pausing repayments to return to school also enables interest to accumulate during the period in which you are not paying payments. Prior to signing your loan paperwork, ensure that you have considered all of the loan’s charges.
- Consolidate several student debts. The reality is that the majority of Americans who have student loans have many — and with multiple servicers. Maintaining it might feel like a full-time job that you simply lack the time for. Refinancing to consolidate your college debt into a single loan (hopefully with more favorable interest rates) can significantly simplify repayments. Additionally, it might make applying for forbearance easier if you experience an unexpected financial hardship — such as being laid off.
- Take a cosigner off a loan. If your lender does not provide cosigner release, your only other choice is to refinance the loan in your name. Are you unsure that you will qualify on your own? You have the option of refinancing your debts with a new cosigner.
- Change your student loan service provider. If you are dissatisfied with the firm managing your student loan repayments, the only way to switch servicers is through refinancing if you have private student loans. Simply conduct research on your new lender’s servicer, as many employ the same business.
Is A Cosigner Required To Refinance My Student Loans?
If you have poor credit or a limited job history, you may require a cosigner to refinance your student loans.
How refinancing with a cosigner works
The cosigner application procedure differs per lender. Certain lenders examine just the information provided by your cosigner when assessing your eligibility and pricing. Others consider a mix of the two. Some take your cosigner’s credit into account when calculating your rates, but still need you to fulfill basic eligibility standards on your own.
However, not all student loan refinancing companies accept co-signers at the outset, so verify with your lender before beginning your application.
What To Consider When Refinancing Your Student Loans?
- Interest rates. Apart from determining which lender has the lowest rates, consider the fixed-rate and variable-rate alternatives.
- Fees. To prevent being charged excessive or unexpected costs, read the fine print, consult internet reviews, and contact customer support.
- Loan amount. Keep in mind the maximum amount you may refinance if your student debt exceeds $100,000 – many lenders impose refinancing limitations.
- Cosigner options. Perhaps your credit is less than ideal or your income is insufficient to qualify for cheaper rates. In that scenario, you’ll want to seek for a lender who will enable you to refinance with the assistance of a cosigner.
- Term lengths. Even if a lender provides extremely low interest rates, you may wish to consider another alternative if you cannot realistically repay your loan within the term lengths offered by the lender. Additionally, you’ll want to avoid taking on a loan for a longer period than required in order to prevent paying needless interest.
- Customer service. Even after all of your study and comparisons, it’s probable that you’ll come across something that leaves you perplexed. Not only does excellent customer service put you at rest, it also helps you avoid slipping into a debt cycle if you find yourself suddenly unable to repay your debts.
- Servicer. If you’ve encountered difficulties with the business that manages your student loan repayments, you’ll want to ensure that the provider with whom you refinance your loans employs a separate servicer.
- Perks. Discounts for loyalty, unemployment insurance, and preferential rates for parents, physicians, and attorneys are just a few of the advantages lenders provide. Determine whether you qualify for any of them — particularly if it means paying less than you would with competition.
How to apply for student loan refinancing?
Student loan refinancing is generally easier than applying for a student loan, but slightly more difficult than asking for a personal loan. Generally, you and your cosigner may apply online by completing a brief application that takes no more than a few minutes.
The most time-consuming aspect is frequently assembling your papers and waiting for your lender to contact your servicers. Refinancing your student loans may take up to a month or two in total.
Can Federal Student Loans Be Refinanced?
Yes, some private lenders will refinance federal student loans. You will, however, forfeit a number of federal advantages, including flexible repayment options and debt forgiveness programs.
What am I giving up when I refinance my federal student loans?
All federal loans come with special perks that you risk losing, including the following:
- Federal forgiveness programs. Federal programs allow certain professionals, such as public officials, teachers, nurses, and members of the military, to have a part of their student debt erased.
- Loan repayment assistance. Through some programs, physicians, attorneys, and other healthcare professionals may be able to repay a portion of their debts.
- Extended terms. Longer periods allow for lower monthly payments spread over a longer payback period.
- Income-driven repayment plans. Your payments are decided by your financial situation.
Refinancing Parent PLUS Loans
Parent PLUS Loans differ somewhat from other forms of federal student loans. They have a higher interest rate and are one of the rare instances in which refinancing can assist you save money on your total loan cost. Additionally, they are in the parent’s name, not the student’s.
Refinancing Parent PLUS Loans typically comes in two flavors: refinancing in your name or refinancing in your child’s name. When you refinance in your name, you retain responsibility for repayment of your loan, but you may qualify for lower rates or better conditions.
Refinancing in your child’s name enables you to obtain better interest rates, but more significantly, it enables you to transfer debt in order to qualify for other forms of credit.
Not all lenders will refinance Parent PLUS Loans; thus, before you begin your application, search for one that expressly states that it will.
Should You Refinance Your Student Loans?
If you’re one of 44 million Americans who owe money on student loans, you could consider refinancing. Even if you had a federally subsidized loan, it is possible that you borrowed during a period when interest rates were exceptionally high across the board.
Check out our article about A debt-free alternative to Student Loans.