5 Key Benefits of Refinancing Your Student Loans
7 min read
Posted on June 23, 2022
You just graduated from college. And now, amidst feeling overwhelmed at your first job and your mom suddenly rejecting the opportunity to do your laundry, your student loan lender has sent you a bill for your first (hefty) student loan payment.
The result? Complete overwhelm.
We get it. The financial implications of adulting can be confusing, stressful and expensive.
Fortunately, repaying your student loan does not have to be a stressful experience. Whether you have federal student loans or private student loans, you may have options to reduce the burden of your monthly payment, such as student loan refinancing. That’s when one or more loans are consolidated into one new loan from a private lender.
To get you started on building a more manageable student loan repayment plan, we’ll walk you through the five key benefits (and potential downsides) of refinancing student loans, as well as when it may make sense to refinance your student loans.
1. Get a Lower Interest Rate
One of the biggest benefits of student loan refinancing is the potential to obtain a new interest rate on your debt. And, if that interest rate is lower than your original rate, the money saved may add up quickly.
However, a lower interest rate may only be an option for you if the lender finds that your credit score and/or credit history improved since your original loan application.
For example, if since taking out your student loans you have consistently paid your monthly credit card and student loan payments on time and have a steady stream of income to balance out your debt-to-income ratio, a lender may view you as less risky and offer a lower interest rate in return.
Another way to prove a reduced risk to a lender and thus potentially receive a lower interest rate is to add a co-signer to refinance student loans, which effectively provides a safety net to the lender.
If your credit score/credit history has not improved, you may not be eligible for a lower interest rate.
2. Lower Your Monthly Payment
Another benefit of student loan refinancing is that the lender may offer you a repayment plan that includes lower monthly payments.
One way a lower monthly payment may present is if, as discussed above, you apply to refinance and the lender offers you a lower interest rate. Another potential way to lower your monthly payments may be to apply for refinancing and request a longer repayment term, such as changing from a 10-year repayment plan to 15 or 20 years.
But, although a lower monthly payment today may be a big relief, keep in mind that a longer repayment term means more money paid out over time because of interest. Accordingly, if you decide refinancing to a longer-term is the best route for you, as you make a higher income down the line you may want to consider increasing your monthly payment to combat those extra interest costs.
3. Manage Your Debt With Ease
From a less technical perspective, a benefit of student loan refinancing may be the reduced complexity of having one loan versus multiple student loans.
When you refinance and pay off multiple loans with a single new private student loan, you are left with one lender, one interest rate, and one monthly payment — making the management of your student loan debt all the easier.
4. Switch to a New Lender
If your loans are currently with the federal government and you would like to instead work with a private lender, a benefit of student loan refinancing is that it allows you to do just that.
But why would you want to change from a federal student loan to a private student loan? Because a private lender may offer lower interest rates, better loan terms (such as a longer repayment term or variable interest rate), or discounts for electing autopay for your monthly payment.
Another reason to change lenders may simply be to work with a lender who provides better customer service. You could have a long-term relationship with the lender, so you want to be happy with the treatment you receive.
Keep in mind though, that if you switch from one private lender to another, you could incur an origination fee from the new lender, up to 1% of the loan value, for the administrative costs of processing the loan.
5. Remove a Co-signer
One of the less-discussed benefits of student loan refinancing is the option to remove a co-signer from your student loan debt.
As most of us are in our teens when taking out student loans, and thus don’t have a credit history, it’s common to have a co-signer. With the release of the co-signer, you may experience improved relationships thanks to the removal of shared financial burden. This may also help to improve the co-signer’s creditworthiness through the reduction of debt on their end.
The option to release a co-signer varies by lender and is based on your personal credit history at the time of refinancing, so may not be available to all applicants.
Are There Potential Cons to Refinancing Your Student Loans?
Although there are plenty of benefits to student loan refinancing, there are also some potential downsides to consider when thinking about refinancing your student loans.
Potential cons of refinancing student loans include:
- Eligibility Restrictions: If a lender does not believe you are creditworthy, they may reject your application. Alternatively, they could offer terms that are worse than those on your existing loans.
- Loss of Grace Period: If you have student loans with the federal government, refinancing with a private lender would result in the loss of the six-month grace period, whereby student loan monthly payments are delayed until six months after graduation.
- Loss of Access to Federal Student Loan Programs: Refinancing federal loans with a private lender would result in the loss of access to federal student loan programs, such as COVID-19 temporary interest rate of 0%, fee waivers and rebates on the principal, Public Service Loan Forgiveness, income-driven repayment plans and economic hardship repayment deferrals.
- Interest Rates: Depending on the current economic environment, interest rates on federal student loans may be lower than on private loans, in which case, refinancing a federal student loan to a private loan would not make sense.
- Extended Term: If you are near the end of your repayment period, refinancing may result in the addition of years to your repayment term, which may make the loan more expensive over time.
Who Should Consider Refinancing Student Loans?
To provide additional clarity, let’s look at who would benefit most from student loan refinancing. Hint: the benefits of student loan refinancing won’t benefit everyone.
You may want to consider refinancing student loans if:
- You have an excellent credit score, or at least one that is better than when you applied for your existing loans.
- You have mostly or only private student loans.
- Your research suggests new terms may save you a good chunk of money.
- Your existing private student loan has a variable interest rate and you are looking to refinance with a fixed interest rate.
Frequently Asked Questions About Student Loan Refinancing
What are the eligibility requirements to refinance student loans?
Although eligibility requirements vary by lender, typically to qualify for student loan refinancing you must have the following:
- A low debt-to-income ratio (no more than 30%).
- A history of on-time payments.
- Good to excellent credit (preferably 700 or higher).
Other eligibility considerations may include a requirement that you have graduated, have a minimum income level, and/or are a US citizen or permanent resident.
The good news is, that if you don’t currently qualify for student loan refinancing, you can re-apply again if your situation changes.
What are the other repayment options available for student loans?
If you decide student loan refinancing is not the best route for you, there are other options available, including:
- Deferment: A temporary freeze on making monthly student loan payments, during which time interest will not accrue. The federal government offers deferment for up to 3 years.
- Forbearance: A temporary pause on making student loan payments, though in this case interest would continue to accrue. The federal government offers forbearance for up to 1 year.
- Student Loan Forgiveness: If you have a federal student loan, you may be eligible for student loan forgiveness. There are currently no programs available for private student loan forgiveness.
The availability of deferment and forbearance for private student loans varies by private lender.
What is the difference between student loan consolidation and student loan refinancing?
You may have heard the term “student loan consolidation.” This is another alternative to refinancing your student loans. And although many believe the two to be the same, they are different.
- Student Loan Refinancing: Offered by private lenders, refinancing is the issuance of a new loan with new repayment terms and a new interest rate to pay off multiple loans. Refinancing is available for both federal student loans and private student loans.
- Student Loan Consolidation: Primarily offered by the government for federal student loans, consolidation is the act of combining multiple federal student loans into one. The new loan will have an interest rate equal to the weighted average of your existing federal student loans.
Does refinancing my student loans hurt my credit score?
Only to the extent that you lose a point or two when the lender runs a credit inquiry to validate your creditworthiness. The resulting decrease in your credit score could rebound within a year.
And in fact, refinancing may help your credit. For example, if lower payments mean you are more consistent with your monthly payments, that may lead to a higher credit rating. Some lenders may even offer a discount for putting your monthly payments on autopay, allowing you never to miss a payment, improving your credit score, and saving you money.
Can you refinance a loan more than once?
Absolutely! Just as your financial standing may change (hopefully for the better!), interest rates in the market may also change.
In either case, you may want to consider refinancing your student loans to take advantage of the potential benefits of student loan refinancing that are available under improved conditions — in particular when it comes to getting a lower interest rate.
The downside? Private lenders will run a hard credit inquiry every time you apply to refinance your student loans, which could impact your credit score.
What is the difference between a fixed interest rate and a variable interest rate?
You may have noticed we referenced “fixed interest rates” and “variable interest rates” a few times throughout this article. We want to reiterate the difference between the two.
- Fixed interest rates do not change over the term of the loan. In other words, with a fixed rate if your interest is 5% when you receive a loan, it will be 5% until you repay the loan or refinance.
- Variable interest rates (also known as floating rates) change throughout the loan term based on economic conditions in the market.
So what does this mean for you? For one, there are times when a variable interest rate may be lower than a fixed rate. However, the reverse may also be true. Because of this instability, it may be difficult to budget for student loans with variable interest rates.
The information provided in this blog post is not intended to provide legal, financial or tax advice. We recommend consulting with a financial adviser before making a major financial decision.