If you’re one of the majority of college grads with student loan debt, making a plan to pay off what you owe may seem daunting. This is especially true if you’ve gotten stuck with student loans at a high interest rate.
Paying back student loans is indeed challenging and the debt burden you’re carrying may affect many aspects of your financial life. The good news is, being proactive about tackling your debt can help you repay your loans more quickly and easily – and can sometimes show you how to save you money on loan repayment.
If you’re looking for ways to reduce your debt, one of the options you might want to consider is student loan refinancing. Refinancing isn’t right for everyone under every circumstance, but it could save you a ton of money depending on the type of loans you’ve taken out and the terms of a refinance loan you could qualify for.
If you’re not sure if refinancing would be a good choice for you, this complete guide to student loan refinancing will tell you everything you need to know.
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What is Student Loan Refinancing?
When you refinance student loans, you obtain a new loan through a private lender. The proceeds from the new loan are then used to repay existing student debt. Instead of owing the lenders you owed before, you now owe your new lender.
How Does Refinancing Work?
When you refinance, you can shop around to find a new loan offered by one of many different private banks and financial services companies. There are online-only lenders that make refinance loans, or you can refinance through a local bank or credit union.
You will need to be approved by your new lender for a loan and will have to choose a loan that has reasonable repayment terms. The refinance loan may be a fixed rate loan, which means interest and payments will stay the same during the entire repayment process.
Or, you may refinance to a variable rate loan with an interest rate tied to a financial index. Although variable rate loans typically start with a lower rate initially than fixed rate loans, your rate and monthly payment change and can go up over time.
You’ll also select your repayment timeline up front with your new lender and can typically choose anywhere from a 5 year to a 20-year repayment timeline depending on the lender and the amount borrowed. Your repayment timeline, coupled with your interest rate and the amount you borrow, all determine the total cost of paying back your refinance loan.
After you’ve been approved for your new loan and agreed to loan terms, the proceeds from your new loan are typically sent directly to the lenders you currently owe. Your old loans are paid off in full and you work to repay the new loan as agreed.
What Kinds of Student Loans Can You Refinance?
All types of student loans can be refinanced, including both federal student loans and private student loans.
However, before you refinance federal student loans, you need to be aware that you are giving up many important protections for borrowers.
You won’t have as much flexibility in loan repayment options, won’t be able to put loans into deferment at all or into forbearance for as long, and you will no longer be eligible for any kind of loan forgiveness (e.g., Public Service Loan Forgiveness) of the newly refinanced federal loans.
How Do You Get Approved for a Refinance Loan?
Each private loan lender has their own criteria for determining if you’re able to get approved for a refinance loan.
Unlike when you initially applied for federal student loans, your credit score will matter a lot when determining if you qualify for a loan. Refinance lenders also typically look at your income and the total debt you have outstanding, as they want to make sure you can afford loan repayment.
Many lenders allow you to apply online to find out if you can get approved for a refinance loan. It may even be possible to apply with a soft credit check, which means no hard inquiry goes on your credit report.
A hard inquiry is placed on your report any time you apply for credit, remains on your report for two years, and could reduce your credit score if you have too many inquiries in a short time.
Can You Apply with a Cosigner for a Refinance Loan?
Many borrowers who want to refinance student loans in order to save money have trouble qualifying for the new loan they need. This could be because your credit history is too short and your score is too low, because you don’t have enough income, or for many other reasons.
If you’re unable to qualify for a refinance loan on your own, you could apply with a cosigner. A cosigner is another person who signs for the loan and who agrees to share legal responsibility for loan repayment.
If you, as the primary borrower, fail to repay the amount you have borrowed, the lender has the legal right to attempt to collect from the cosigner.
Cosigning a loan puts the cosigner’s credit at risk if you do not pay. The cosigner could become legally obligated for the entire debt balance, even—in some cases – if the primary borrower passes away or becomes totally disabled and can’t work.
The debt also shows up on the cosigners credit report, affecting his or her debt balance and perhaps making it hard for the cosigner to borrow in the future until the student loans are paid back.
Cosigning, in other words, is a very big ask. However, if a parent, close relative, or friend is willing to cosign, this could mean the difference between being approved for a refinance loan or being denied.
How Do Your Existing Student Loans Get Paid Off?
In most cases, when you refinance your loans, you provide details of your existing student debt to the lender you’re refinancing with. After your loan has been approved and you’ve signed the loan documents, your new lender will then send the money directly to your existing student loan lenders to pay off the outstanding balance due.
Your new lender typically has to wait a few days before paying off your loans in full to give you time in case you change your mind about refinancing. Once the payment has been sent, it can also take your existing lender a little time to process the payment and report your loans as paid in full.
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What are the Benefits of Student Loan Refinancing?
Student loan refinancing has some significant benefits, under the right circumstances. Some big advantages include:
- Saving on interest: If you can reduce the interest rate you pay on your current loan, you could save money on the interest you pay.
- Reducing your monthly payment: Your monthly payment on existing student debt can be reduced by lowering your interest rate or by refinancing to a loan with a longer repayment timeline. Be aware, though, that if you refinance to a loan with a longer payoff time, you could make your loan cost more in total since you’d be paying interest for longer – even if you reduce your rate.
- Removing a cosigner: If someone initially cosigned for your loans but you can now qualify on your own, refinancing could allow you to let the cosigner off the hook so he or she is no longer legally responsible for your debt.
If you don’t like your current loan servicer, refinancing also gives you a chance to switch to a new lender that might provide better customer service.
How Much Could You Save?
The amount you can save will depend on whether you reduced your new interest rate; how much you reduced your interest rate; how your new loan repayment term compares to your old one; and whether you incurred any fees during the refinance process such as an origination fee for your new loan or an early payoff fee on existing student debt.
Student loan lenders can sometimes assess fees like some mortgage lenders when paying off your mortgage faster. Be sure to understand how this will work before committing to any specific decision-making.
Say, for example, you had a $10,000 balance on your current student loans at an average interest rate of 12% and you had nine years of repayment remaining. If you refinanced to a new loan at an 8% interest rate and your new loan had a 10-year repayment term, you could reduce your monthly payment by $31 per month and could save a total of $1,840 in interest over the life of the loan.
But, if you’d refinanced to a new loan with a shorter repayment term of 7 years, you could’ve saved even more: your monthly payment would’ve been $4 higher but you’d have saved about $3,307 in interest costs.
What are the Costs Of Student Loan Refinancing?
The costs of student loan refinancing depend on the terms of your new loan and the terms of your old one.
If your new loan charges origination fees or application fees, this will add cost – but not all lenders do. And, if your old loan charges an early payoff fee, then this could raise your costs as well.
If you shop around and find a lender with no fees and your current lender doesn’t charge you to pay off your debt, then the refinancing process may cost you nothing at all.
What are the Downsides?
Refinancing student loans can have some downsides, though, so you need to consider the before you take the plunge and get a new loan to pay off existing student debt. Possible downsides of refinancing include:
- Losing federal borrower protections: If you refinance federal loans, you won’t be able to choose income-based payment plans anymore, so won’t be able to cap your monthly loan payment at a percentage of income. Putting loans into deferment will no longer be an option and you’ll have far fewer options for loan forbearance, which means you will not be easily able to pause payments at times of hardship. And, loan forgiveness will no longer be available, while if you’d kept your federal loans, you could potentially have had part of your loan balance forgiven for working in public service work or paying loans for a long time under income-based repayment.
- Potentially increasing costs: If you can’t qualify for a new loan at a reduced rate, if you incur fees for refinancing, or if you borrow for a much longer time, you could increase the total cost of loan repayment.
- Difficulty qualifying: Some borrowers have a hard time qualifying for a refinance loan. This could mean you have to find a cosigner or aren’t able to refinance at all.
How Can You Decide if Refinancing Is Right for You?
If you’re considering refinancing your student loans, you should shop around and compare loan terms to find out what your new interest rate would be and how much refinancing would cost you. You’ll then need to weigh the pros and cons – including any borrower protections you might have to give up.
After careful consideration, if you can save money on refinancing without giving up borrower protections you’re likely to take advantage of, you may just decide refinancing is the right approach to make student loan repayment more affordable for you.
If you decide to refinance, just make sure you understand all the terms of your new loan – and that you’ve gotten several quotes from different lenders to find a loan that’s right for your financial situation. Include these lessons as some practical money management skills and continue building your path toward finding financial independence.
About the Author
Nate Matherson is one of the many millennials who graduated with over $50k in student loan debt, but one of the few to actually refinance his student loans twice!
About the Site Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey and connect with and help others who share the same goal.
Some of my favorite things to discuss include investing in index funds, how to save money, travel hacking with help from the Reddit churning (r/churning) community, house hacking and optimizing the benefits of my condo vs. apartment living, and tax topics like the earned income tax credit, common tax deductions, tax reform in 2018, or other useful tax topics. I want this to be a journey for us all to learn how to make a lot of money and pursue the lives we want.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see my the disclaimer on my About Young and the Invested page.