The Complete Guide to Refinancing Student Loans

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What if there was a way to lower the cost of your student loan at an incredibly high cost? Here’s what refinancing promises: Ideally, you’ll save thousands of dollars in interest over the life of the loan. But that’s not necessarily the whole story. Here’s everything you need to consider before refinancing.

You’ve probably heard the term refinancing before. This is the process of transferring a current loan to a new one with a completely new set of conditions, rates and small print. There are mortgage refinancing, auto loan refinancing and yes, student loan refinancing. A private lender takes over your student debt and you get a brand new loan.

NerdWallet processed some of the numbers and calculated that the average student loan borrower could save about $ 1,145 through refinancing. Your own savings will depend on a number of factors: the amount you owe, the terms of the loan, and the difference between your old and new interest rates. If you do something that you know about compound interest , you know, that interest quickly accumulate. The new rate can make a big difference.

You can refinance a private or federal loan, but it is important to know what you are giving up when you do it.

Are you okay with losing your federal loan options?

Your federal loan includes several options to help you if financial times get tough. For instance:

We’ve written about how these options work . However, when you refinance your federal loan, it becomes a private loan, which means that you will lose those benefits. If you think you may find yourself in a difficult situation in the future when you need to use these options, you should think twice before refinancing.

Difference between consolidation and refinancing

As we said earlier , consolidation will refinance your loan into a new loan with a new repayment schedule. You are probably wondering how this differs from refinancing?

The purpose of refinancing is to get a higher rate, while consolidation is basically about avoiding default on your loan or simply consolidating multiple loans into one. Lender SoFi lays out a few more general differences between consolidation and refinancing:

There is also a difference between federal and private consolidation. In federal consolidation, your new interest rate is determined based on the average of all loans that you are consolidating. With a private consolidation, you can get a lower rate because the new interest rate is based on your loan and not your previous rate. So yes, consolidating a private loan can also mean that you refinance it inadvertently.

Find out if you are eligible

Unfortunately, many people who could benefit from refinancing are not eligible. As a rule, you need good credit and a fairly high stable income. Different lenders have different criteria, but here’s what the Washington Post writes about this :

However, the grim reality of refinancing is that most borrowers – the average undergraduate graduate with $ 29,000 in debt – are not eligible for the deal. Refinancing education requires a stable income and a high credit rating. Citizens Bank takes on federal and private student loans from borrowers with a minimum FICO score of 660 … The average SoFi client earns $ 150,000, said CEO Mike Cagney, and has an average FICO score of 770. The company has never had a client. default.

It makes sense, though. If the lender wants to lower your rate, he wants to make sure that you are going to pay. Yes, that pretty much means: you have to make a decent living and you have to have a lot of credit. Additionally, some lenders only offer refinancing options for bachelor’s or master’s degrees.

Of course, your eligibility may vary depending on the lender. MagnifyMoney has a list of lenders and their requirements . Here are a few of their list, which have some flexible criteria:

  • Citizens One (Citizens Bank): To get the best deal, you must have at least a bachelor’s degree. They will look at your credit history and will want to make sure that at least the last three student loan payments were made on time. If you do not have a degree, you need to make the last 12 payments (principal and interest) on time. You must be earning at least $ 24,000 per year. They offer fixed rates from 4.74% and variable rates from 2.33%.
  • Help : This service will find a community bank. Local banks can actually be expensive. You must have good credit history for 2 years, have a debt-to-income ratio of less than 45% and an annual income of at least $ 24,000. Fixed rates are available starting at 6.22%.
  • Upstart : You must have a degree (or must graduate within 6 months). A minimum of 640 FICO is required. Fixed interest rates from 5.7%. It looks more like a traditional personal loan than refinancing a long-term student loan.

Student Loan Hero also offers a list of reasons why borrowers are often rejected and what you can do. For example, if you are not earning a high enough income to refinance, you might consider asking a parent to subscribe. Cosigning is not for everyone, but it is an option nonetheless. Plus, if you don’t qualify, it probably boils down to improving your credit and paying off any other debt.

Decide on your terms

Let’s say you are eligible and decide that refinancing is right for you. Great; now it is time to choose and understand the terms of your new loan. If you have a lender in mind (and you can use a tool like Student Loan Hero to find one), here are the main loan features you want to look out for:

Fixed and variable rates

The lender will likely offer a fixed or variable rate option.

The fixed rates are usually slightly higher because they remain the same throughout the life of the loan. Variation rates are lower, but a little more risky. You can start with a good low rate, but it can easily increase depending on the economy. For example, if you’re in the States and the Federal Reserve decides to raise rates, your own variable student loan rate is likely to increase and you pay more per month. You may even pay more than you would if you had a higher flat rate; you will never know. Are you willing to take such a risk? You have to decide for yourself.

As you make your decision, you’ll want to know how often the lender adjusts this variable rate, as well as if there is a limit to how high they can raise it, as suggested by student loan attorney Heather Jarvis .

Loan term

As with any loan, you also want to decide on the length of the new loan. The longer it takes you to pay off, the more interest you will end up paying. However, if your loan term is short, your monthly payments will be higher.

Most lenders offer different options: 5, 10, or even 20 years. Some of them even have hybrid loans where you pay a fixed rate for the first five years and then switch to a variable rate for the last five years.

Either way, know your options and weigh them against your income to decide what’s best for you.

Protections and discounts

Find out what happens if you have problems repaying your loan. Even if you don’t expect it, it’s helpful to know what kind of protection your lender is offering. Some of them will allow you to delay payments temporarily if you lose your job, CBS explains .

They also suggest checking for discounts. Some lenders will allow you to lower your interest rate if you use their automatic payment feature.

You will also want to know how they handle additional monthly payments in excess of the minimum. As we stated earlier, some lenders will apply any additional payments on top of your interest, rather than use them to repay the principal where it really matters. The fix is ​​probably as easy as making a phone call or writing “contact the principal” on the check. However, you want to know how they handle it.

Refinancing can definitely save you some money, but you need to know what you are getting yourself into. If you have a federal student loan, you also want to know what to give up (these are the hardship options). As with any account, read the fine print, ask for details, and make the best decision based on your financial situation.

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