How to Refinance Student Loans

Americans have approximately $1.5 trillion in student loan debt, with monthly payment amounts for borrowers aged 20 to 30 averaging about $351. If you’re among the 44 million or more Americans who are burdened with student loan debt, not only are you not alone, but you also have some options to improve your situation.

Before you start shopping around for a different loan, get a no-cost copy of your credit report. You’re entitled to one copy from each of the three major credit bureaus (Experian, Equifax and TransUnion) every 12 months. Look for any errors that need to be corrected, note your credit score and assess your strengths and weaknesses.

Learn about helpful tools you can use to assess your position, such as a student loan refinance calculator. If you have less-than-perfect credit, you may need to take some time to work on it, or secure a cosigner with a positive credit history in order to qualify for optimal student loan refinance rates when you start the process. Read on to learn more about the basics of refinancing your student loans and what you can do to get started.

Refinancing vs. Consolidating Student Loans

Consolidating student loans rolls multiple student loans into a single loan, often with a fixed interest rate. These loans often lower your monthly payment but give you a longer repayment term, which means that you have paid more in interest by the time you pay the loan off. Refinancing student loans involves taking out a new loan to pay off one or more student loans.

While consolidation loans often extend your repayments, refinancing may shorten your loan term to help you pay off your student loan debt faster, which also saves you money on the total interest of the loan. Like consolidation, refinancing gives you one single bill to pay, often with lower monthly payment amounts. While federal lenders and private lenders offer consolidation, refinancing is only available from private lenders.

Refinance Private Student Loans

Private student loans often carry higher interest rates than federal loans. Refinancing can save you valuable money in interest over the life of the student loan, while also reducing the monthly payment amount in many cases.

Before you refinance your private student loan, ask yourself why you’re refinancing. Whether you’re looking to lower your interest rates or to simplify your loan repayments, the “why” should help guide your search for a lender. Shop around to see which lenders offer the right rates and terms that meet your needs before applying for private loan refinancing.

How Does Refinancing Help?

Depending on your current interest rate, refinancing can dramatically lower the amount of money you pay over the life of your student loan. To illustrate how this works, take a look at Brian’s three student loans, each of which carries a 15-year term.

  • Loan One has a balance of $15,000 and a 6.8% fixed annual percentage rate (APR)
  • Loan Two has a balance of $10,000 and a 10.5% fixed APR
  • Loan Three has a $6,000 balance and a 7.2% fixed APR

Brian has a total of $31,000 in student loan debts, each with a separate payment and each with its own APR. Before he refinances his loans, Brian’s monthly payments include:

  • Loan One: $133.15, which comes to a total of $23,967 by the end of the loan
  • Loan Two: $110.54, which comes to a total of $19,897.20 by the end of the loan
  • Loan Three: $54.60, which comes to a total of $9,828 by the end of the loan

Brian pays $298.29 every month on his original loans. If he keeps these payments as they are currently, he pays a total of $22,692.20 just in interest charges over time.

Now, say Brian refinances his $31,000 in loans to get a 4.2% fixed interest rate on his new loan that paid off this three separate loans. His new monthly payment is $232.42, which comes to a total of $41,835.60 over the course of his 15-year loan. With his new, refinanced loan, Brian only pays $10,835.60 in interest charges, which saves him more than 50% of what he would have paid originally.

If Brian already locked in low fixed rates on his loans, refinancing them might not have provided substantial help. Whether refinancing helps you or not depends on a variety of factors, most notably your current rates, the rates that you qualify for from lenders and the difference between the two.

Refinance Federal Student Loans

There are two types of student loans: federal and private. While private loans go through private lenders and banks, federal loans are provided through the U.S. Department of Education. The Direct Loan Program is a federal loan program, which includes subsidized loans for students with financial need and unsubsidized loans that have no financial need requirements. Federal loans limit the amount of money that you can borrow, but they don’t require you to undergo a credit check and may offer interest rates that are lower than those of private loans.

There’s no federal refinancing program, which means that you need to refinance your federal student loans with a private lender. You need to meet that lender’s credit standards to qualify, and your interest rate might actually go up, depending on the terms of your original loans.

Can you refinance student loans?

Yes. In most cases, you can refinance your loans through student loan refinance companies. Each lender has its own criteria, but most look at your annual income, your college degree or certificate of enrollment and your credit score. In some cases, you might need a cosigner with excellent credit to help you get the most effective rates possible for your budget.

Should you refinance your student loans? That really depends on your individual situation. If you have a federal loan with a low fixed rate, you might be better off looking into other federal programs that can provide some relief. If you have high or variable interest rates, a refinance could save you a substantial amount of money in the long run.

 

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Published August 11, 2016 Updated: August 29, 2018
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