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Beginner's Guide to Refinancing Your Student Loans

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Repaying student loans can be stressful but refinancing may help make your life a bit easier. Here are three reasons refinancing may be a good choice for you.

  • Refinancing may lower your interest rate to help you reduce overall costs.
  • A new loan with a longer term may lower your monthly payment, which can help with other debt obligations or living expenses.
  • Refinancing lets you simplify repayment by bringing all your student loans together so you only have one student loan payment a month.

There are many things to consider before jumping into refinancing, though. Use this guide to determine whether or not it is a good option for you.

How does student loan refinancing work?

Student loan refinancing allows you to gather all or some of your loans into one new loan, often at a lower interest rate that may help you pay less over time or provide you with a longer repayment term that will lower your monthly payment. This is a great option if you have multiple student loans, but you can also refinance if you have just one loan.

Is there a difference between student loan refinancing and consolidation?

Yes; although the terms are often interchangeable. Student loan consolidation most often refers to the federal program. Student loan refinancing usually refers to programs offered by private lenders.

What is student loan consolidation?

Consolidation typically refers to combining your federal student loans into one new federal loan with a new term. It does not necessarily provide a lower interest rate as your new rate will be the weighted average of the interest rates on the loans being consolidated. Student loan consolidation is not usually considered a money-saving option. With a consolidation loan, though, you may be eligible for different income-driven repayment plans and certain loan forgiveness programs as long as parent PLUS loans are not included when you consolidate.

How is student loan refinancing different?

Refinancing is offered by some banks, credit unions and other specialized student loan lenders. This type of loan allows you to combine federal and/or private loans together for a new rate and term. Repaying with a lower interest rate, and thus lowering your overall costs, is one of the main benefits of refinancing. Rates are generally determined based on your current financial strength. Cosigners can help you qualify if you are fresh out of college and don't have much credit built up yet as well as help you obtain lower rates.

  Federal Direct Consolidation Loan Private Student Refinance Loan
What type of student loans are eligible? Federal Federal and private
Do I need to meet specific credit criteria? No Yes
Can this simplify repayment? Yes Yes
Will this reduce my interest rate? Not significantly Possibly; depending on your current loans and your credit score today

What are your student loan refinancing goals?

In general, most people only think about refinancing if they believe they'll get a lower interest rate, but that is not the only reason to refinance. If you're considering a refinance loan, it's important to find the loan that can help you meet your goals.

young kid dressed in business clothes using a calculator

Do you want to pay less overall?

Refinancing your loans to repay at a lower interest rate is the most common reason people state they want to refinance. If that is your goal and you qualify for a lower interest rate loan, refinancing can definitely help you pay less overall. Just be sure the new loan term is similar to the remaining terms on your existing loans. If you qualify for a lower interest rate but choose a longer repayment term than your current loans, you likely will not pay less over the life of a loan.

a $25,000 loan with 10-year repayment and 7 percent interest rate, refinanced at a 5.25 percent interest rate could lower monthly payments by $22 and lower total interest paid by $2,645

You can also choose a shorter repayment term to reduce your overall cost, although that often means higher monthly payment amounts.

graphic showing how shorter repayment terms affects loans

A $25,000 loan with 7 percent interest rate and 10-year repayment, refinanced at a 5-year repayment rate would raise monthly payments by about $205, but lower total interest paid by about $5,131.

The best way to reduce costs over the life of the loan, if you can afford the higher monthly payments, is to refinance to a loan with a lower interest rate and a shorter repayment term.

a $25,000 loan with 7 percent interest rate and 10-year repayment, refinanced at a 5.25 percent interest and a 5-year repayment would raise monthly payments by about $185, but lower total interest paid by about $6,354

Are you looking to lower the amount you pay each month?

If your current monthly student loan payment amount is too high or you're struggling to make payments on time and have enough money left over for living expenses, refinancing to a new loan with a longer repayment term is an option. You will likely pay more over time as interest accrues daily on student loans. This means that the longer you're repaying a loan, the more interest you will pay. One strategy to keep in mind if you need lower payments now and decide to refinance to a longer repayment term is to pay extra as your budget changes in the future. That way your loan can be paid in full sooner and you will pay less in interest.

a $25,000 loan with 7 percent interest rate and 10-year repayment, refinanced at a 15-year repayment rate would lower monthly payments by about $66, but raise total interest paid by about $5,614

Would you like to only make one payment each month?

Another popular reason to consider refinancing is to stop making multiple payments to different lenders each month. If you refinance all your loans into one new loan, you will only have to make one payment each month instead of remembering to pay all the lenders monthly.

Are there drawbacks to refinancing student loans?

Refinancing may help you save money and simplify student loan repayment, but there are a few things to consider before refinancing. Not all student loans are the same and you'll want to research the benefits and repayment options different refinance lenders offer.

young kid in business suit sitting at desk covered in sticky notes

Federal student loans have benefits and repayment options that are not available for private student loans. If you choose to refinance federal loans into a private student loan, you will lose the federal loan benefits that go along with them. Most federal student loans come with different options for repayment, such as income-driven repayment plans, as well as more deferment and forbearance options and loan forgiveness programs for certain borrowers. These vary depending on the type of federal loan. Federal parent PLUS loans do not have the same benefits as federal loans made to student borrowers.

If you do not foresee any difficulty making your minimum payments and you do not intend to apply for a federal loan forgiveness program, then refinancing federal loans into a new private refinance loan may be a viable option for you.

Private student loans vary by lender. Research your current lender's repayment plans and the options for you to postpone payments should you run into a short period of financial hardship, as you may lose those benefits if you refinance. A new refinance lender may offer similar or different benefits and assistance options.

Will applying to refinance your student loans hurt your credit score?

Refinancing student loans doesn't typically impact credit scores significantly.

When considering your options, check to see if the lender offers a pre-qualification option that provides you with the rates and terms you are eligible for before making a decision to apply. Most of the time, this step does not impact your credit at all since it only involves a soft credit inquiry.

Once you complete an application and authorize a full credit inquiry, your credit score may be impacted a bit but typically only by a few points. If, however, you apply for loans with multiple lenders over a period of time, your credit score may be impacted more.

What do lenders look at when you apply to refinance?

Lenders review a few main factors about your credit history when you apply to refinance as they want to know you will be able to repay your new loan. As with most loans, they consider your credit score and payment history as well as your income and debt levels.

Before refinancing, you may want to know your credit score to see if you are eligible for better rates. It's important to understand, though, that credit scores vary based on the consumer reporting agency and the calculation used, so the credit score you see from one source may not match the one the lender uses.

What steps should you take to refinance your student loans?

If you think refinancing is a good option for you, take these steps to refinance your student loans.

1. Determine your goals when it comes to student loans.

  • Are you looking to lower your interest rate?
  • Do you want to lower your monthly payment amount?
  • Is simplifying student loan repayment so you have just one monthly payment important?
  • Do you hope refinancing will result in a combination of the above?

2. Review your current student loan status.

  • Do you have federal and private, only private, or only federal student loans?
  • Who is your loan servicer?
  • Are your current interest rates fixed or variable?
  • What are your current interest rates? How many years are left until your current loans are fully repaid and what are your payment amounts now?

3. Seek the best lender to fit your financial needs.

  • Does the lender provide customer service on its own loans? Or will your loan be sent to another company for servicing?
  • Does the lender have a good reputation for customer service?
  • Is the lender solely focused on student loans? Or does it have other products they'd like to sell you?
  • What sort of repayment plans, hardship assistance options and benefits does the lender offer?

4. See if you can pre-qualify or get a rate quote before you complete an application. This will let you assess your new interest rates and repayment term options and determine if refinancing is the right option for you.

5. If you decide to proceed, submit an application to be approved for refinancing.

Feelin' good about refinancing?

two young kids in business suits counting stacks of money from money bags

Complete our pre-qualification process to see what rates you can receive. There's no credit impact, and you only have to answer a few quick questions to reset your student loans and reduce your stress!

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