Refinance Your Student Loans

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Monthly payments and interest are not currently being charged on federal student and parent loans. It may make sense to wait until this benefit has expired before refinancing federal student and parent loans. Private student loan borrowers, including those who have previously refinanced student loans, may benefit from refinancing. 

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The US Government CARES Act provides a holiday from federal student and parent loan monthly payments and interest accrual until at least 1/31/2021. If you were to refinance these loans, you would lose the benefit of not having to make payments or pay interest. It may make sense to wait until this benefit has expired before refinancing federal student and parent loans.

Frequently asked questions

What's the Benefit to Refinancing Student Loans?

 A key goal for those who refinance their student loans is to end up with an interest rate on the new loan that is lower than the weighted average interest rate of their original loans.

Be aware that the monthly payment on the new student loan refinance loan can be lower than your current total monthly payment even if the interest rate is higher.

Refinancing all (or several) of your original loans into one new loan will enable you to end up with one monthly payment to one entity. Dealing with one loan servicer is likely to be easier than dealing with several each month.

You may be able to refinance co-signed private student loans. If the new refinance loan doesn’t require a co-signer, then the co-signer is released from their obligation when the original loan is converted into the new one. Note, however, that sometimes a co-signer on a student loan refinance loan might make you eligible for a better rate.

More Commonly Asked Questions...

Do I have to refinance all of my original student loans?

No. It’s up to you to decide whether you want to refinance all or just some of your original student loans. Do the analysis suggested in the first question above to determine the weighted average interest rate of your existing student loans. If you have one or more loans that have interest rates lower than the student loan refinance loan, you might decide to keep them out of the refinancing. That way you can continue to take advantage of the lower interest rate, even as you improve the rate on the loans you do refinance.

What’s the difference between student loan consolidation and student loan refinancing?

Sometimes the terms “refinancing” and “consolidation” are used interchangeably in the context of student loans. But there is an important nuance. Student loan “consolidation” is most often used to refer to an option offered by the federal government for “consolidating” (basically, combining and refinancing) your federal student loans into one new loan. Private loans are not eligible for federal student loan consolidation. Federal student loan consolidation will result in a slightly higher interest rate on your combined loans. The new rate is the weighted average rate of the combined loans rounded up to the nearest 1/8th of a percent. You get the benefit of having one loan to manage instead of several, and you may also qualify for even more repayment benefits than the original federal student loans offered. 

The term “refinancing” in the context of student loans usually indicates a privately-offered (ie, not from the government) refinancing loan.

Some borrowers “consolidate” their federal loans to maintain their liberal benefits and “refinance” their private student loans. If you have both types of loans, this is an option to consider.

Note: some private lenders – especially ones that have been offering refinancing for a long time – refer to their refinancing product as a “consolidation” loan, just to make it confusing. If the product is offered by a private lender it is not a federal consolidation loan.

How hard is it to qualify to refinance student loans?

Relatively hard. To be eligible to refinance student loans, a borrower has to pass a relatively stringent credit and income test. Many lenders have minimum income requirements. Most lenders are looking for a borrower to have a credit score of at least 680 (there are some exceptions), income of at least $30,000, and a debt-to-income ratio no higher than 30%.

To qualify for the best rates, a borrower’s credit and income situation needs to be considerably stronger than the approximate minimums given here. 

How long does it take to refinance my student loans?

The time to refinance varies somewhat on the lender and also depends on the number of student loans to be included in the refinancing. The slowest part of the process is gaining the exact payoff amount from each of the original lenders / loan servicers. Most lenders have developed an efficient process, so on average it takes less than a week from application approval to the origination of the new refinance loan.

Should I choose a fixed or variable rate loan?

Most student loan refinance lenders offer the choice of fixed and variable options. Generally, the variable rate loans will be priced lower than the fixed rate option. The trade off is that you get a lower rate now, but have exposure to rate increases if underlying interest rates increase. Your choice should be based on your personal comfort with risk. If you’re confident that rates are likely to stay low over the time you’ll be in repayment – and if you have a relatively strong level of comfort taking risk – you might opt for the lower variable rate option. On the other hand, if you think rates are likely to rise during the time you’re in repayment – and if you have a low tolerance for risk – you might opt for a fixed rate loan.

Are there any other factors I should consider (besides interest rate) when selecting a lender for refinancing my student loans?

There are several factors that should figure into your choice of lender, even beyond the interest rate offered, including:

  • Borrower Benefits – Most lenders offer a rate discount for auto debit of your monthly payments, but some will include things like a further “loyalty discount” when you have a bank account or some other account with the lender.
  • Customer Satisfaction – You can research lenders’ Better Business Bureau ratings, as well as independent customer reviews provided by services like Trust Pilot, to get a feel for what it will be like to deal with this lender during your repayment.  
  • Special Features – Some lenders offer special features on their loan such as the ability to skip one payment each year or the availability of a financial adviser. If all else is pretty much the same, these kinds of features can make a meaningful difference.

Frequently asked questions

What Are the Possible Drawbacks of Refinancing Student Loans?

There are some situations you’ll want to avoid (or at least consider carefully) before refinancing your student loans, including:

Federal student loans (as well as the parent PLUS loan) offer a lot of flexibility for deferment, forbearance, and repayment choice. When you refinance federal loans into a new private student loan refinance loan, you will lose that flexibility. If you think you will need to take advantage of things like income based repayment or deferment for graduate school, you might decide not to refinance.

There are frequently situations where a borrower refinances their student loans into a new loan with a lower monthly payment, but incurs a higher interest rate. This is usually the result of the new loan offering an extended repayment period. While the lower monthly payment may be advantageous in the short term (especially as a young graduate establishes their career and income), the extended term means paying a higher interest rate for a longer period of time. 

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