The term “student loan refinance” can sound intimidating, particularly if you’ve had negative experiences with lenders in the past. However, refinance is more straightforward than you think, and can put you in the driver's seat of your financial health.
What Is Refinancing?
Refinancing is the process of taking out a new loan on existing debt, usually at a lower rate or longer term. In the real estate world, people often refinance their mortgages when interest rates are lower than when they purchased. This allows them to reduce their interest rate from, for example, 5% to 3.9%, thus saving potentially thousands of dollars over the lifetime of a loan.
Student loan refinancing most typically occurs when a borrower takes multiple loans and combines them into one loan. This often results in a lower interest rate or shorter payment term. Some borrowers can also refinance for a lower interest rate if they’ve achieved a better credit score than when they first took out the loan. There are a few other reasons to refinance like releasing a cosigner or choosing a better lender, but mostly, people refinance in order to pay less every month and over time.
What’s In It For the Banks?
If the goal is to pay the bank less after a refinance, why are lenders interested in allowing you to do it? The answer is simple: They still make money.
In fact, banks profit from your student loan refinance in a few ways, none of which should affect the price you pay:
- Banks can sell your loan to another lender to free up capital for them to bring in new loan business.
- Lowering payments decreases the likelihood borrowers will default.
- Loans are often sold between banks—your original lender may have already sold your loan, so refinancing allows your current lender to sell it again, thus making money.
- Student loan interest is amortized. This means that the ratio of payment to interest in your monthly bill starts out with a higher amount of your bill going to interest. The ratio evens out the longer you have your loan. When you refinance, amortization starts over, allowing banks to profit off that higher ratio of interest.
- Banks can earn money on any fees associated with your refinance. This doesn’t necessarily mean you, yourself will owe fees.
Yes, banks profit off your refinance. However, they aren’t the only ones who win. If you qualify, a student loan refinance can benefit you as much as it benefits the banks.
So Why Isn’t Everyone Refinancing?
All of us would like to pay less into our student loan debt. Yet there are two things that may hold people who are aware of student loan refinancing from actually doing it.
Student loan refinancers each have proprietary methods of determining whether a borrower is eligible for a refinance. Most start by looking at your loan amount, your credit score, and your current occupation and salary. Depending on these and other factors, you may or may not be a candidate for a student loan refinance. No matter what, it’s free and easy to check if you qualify, so it’s a good step to take.
Type of Loan
If all of your loans are federal loans, you may have a few extra points to consider before choosing student loan refinance. Refinancing a student loan with a private loan could exclude you from future eligibility in programs like student loan forgiveness or income-based repayment plans.
Where Do I Get Started With a Student Loan Refinance?
Now that you know the basics, it’s time to start tackling your debt with student loan refinance. Getting quotes is fast and easy. We suggest checking out our student loan refinance checklist as a first step.