Refinancing your student loans can help you save money.
Like, thousands of dollars over the life of your loan.
But refinancing is not always the right answer, and can actually hurt more than it helps. Before you refinance your loans, you’ll want to understand the entire process, including the benefits and the hidden downsides.
In this article, we’ll review the basics of refinancing your loans, how to actually complete the refinance process, and how to go about finding a high-quality lender that can save you money and help lower your monthly payment.
What is Student Loan Refinancing?
Student loan refinancing is the process of replacing your current student loans with a new private loan. This is typically done to combine several loans into one (known as “loan consolidation”) or to gain a more favorable interest rate or payment terms.
When you refinance your current loans, the new lender will pay off your current student loan balances, and you will start making payments to the new lender. This can help simplify your monthly debt payments and organize your finances, especially if you have multiple loans to manage.
To refinance your student loans, you must apply for a new loan, and qualify based on your credit profile (and score), income, current debt obligations, and other factors. And while student loan refinancing can lower your payments, it is not the best option for every borrower.
Should You Refinance Your Student Loans?
Honestly, it depends.
There are several great reasons to refinance your student loans, including:
- Lower monthly payments. You can lower your monthly payments when refinancing your loans to a lower interest rate or longer loan term. This can help free up your cash flow and ease the burden on your monthly budget.
- Lower interest rates. In some cases, you may be able to secure a lower interest rate than what you are currently paying. This will lower the total amount of interest you pay over the life of the loan.
- Consolidating several payments into one. If you have multiple student loans, it can be a hassle to pay them all each month. Refinancing can allow you to combine all your monthly loan payments into a single payment.
- Shorter loan term length. If you want to get out of debt faster, you may be able to refinance your student loans into a shorter term length. This can shorten the time to debt freedom, and save you money in interest. Be aware this may make your loan payment go up.
- Remove co-signers. In addition to improving your own financial liability, if you have them, you may want to remove your co-signer(s) from your loans. Not all lenders forgive student loan debt in the event of the borrower's death, so what happens in the event of death is an important aspect of student loan debt to understand.
But there are also several reasons to avoid refinancing your loans, including:
- Lose access to federal loan protections. Federal student loans offer loan forgiveness programs, income-based repayment options, and other borrower protections. But if you refinance to a private student loan, you will no longer have access to those protections.
- Higher payoff amount. If you refinance to a longer loan term length, or higher interest rate, you may end up paying more. Combined with possible fees from refinancing, it may end up costing you more in the long run.
- Higher interest rates. While refinancing can lower your rates, this may not always be the case. With rates higher than usual right now, a refinance may actually cause you to pay a higher rate, and in turn, more interest each month.
Before you refinance your loans, consider both the upsides and downsides of student loan refinancing.
How To Refinance Your Student Loans (5 Steps)
Once you’ve decided to refinance your loans, follow the five simple steps below:
1) Check Your Credit Score and History
Before you apply, you want to check your credit score and history to make sure you don’t have any red flags. The higher your score, the lower your rate will be, so it is worthwhile to get a gauge of your current score, and (if needed) find ways to improve it before applying.
You can review your credit history at the three main credit bureaus using annualcreditreport.com for free. It will have no impact on your credit score, and you can get an itemized list of all activities on your credit profile for each credit bureau.
You can check your credit score through free online apps (like CreditWise or Credit Karma) or see if your bank offers credit score reporting. While there are several types of credit scores reported, getting a general idea of where you fall will help you when applying for a student loan refinance to see what your potential interest rates will be.
2) Compares Rates (and Terms)
It’s important to shop around when looking for any type of loan, especially when you are looking to refinance a larger amount of debt. There can be major differences in your loan interest rates (and choices) between lenders, so we recommend getting pre-approved at several top lenders before choosing where to refinance.
Once you narrow down your top choices, find the one that has the best reputation, checking out sites like TrustPilot to find out what other borrowers are saying about that company. You can also review the Consumer Financial Protection Bureau (CFPB) annual report on student loan companies to make sure they are doing everything above board.
Larger lenders will naturally have the most reviews and success stories (or not) to learn from so it might be helpful to start your process with a couple of the largest, like SoFi or Earnest (especially if they specialize in your profession).
3) Get Pre-Approved and Choose Your Loan Details
Once you’ve narrowed down a company you want to work with, it’s time to get pre-approved for the loan and choose your terms. You will need to submit some basic information for pre-approval, including:
- Personal information (name, address)
- Current loan balance(s)
- Estimated credit score
- Estimated income
4) Complete The Loan Application
You will need to gather the follow information to complete your loan application:
- Proof of income
- Loan or payoff verification statements
- Proof of employment (Current pay stubs or tax returns)
- Proof of residency (utility bill or other proof)
- Proof of graduation (most lenders won’t refinance before graduation)
- Government-issued ID (driver’s license, passport)
- Social security number
You may also need to answer further questions via an interview with the lender or over email. Once you complete the loan application, the lender will evaluate your application, run a credit check, and may have follow-up requirements as well.
5) Sign Loan Documents
Once you have received approval from the lender, you will need to finalize the loan by signing the loan documents. This may include a promissory note and other documents that confirm your agreement to repay the loan.
Once the loan documents are completed, it may take a few days for the loan process to complete. Your new lender should pay off your old loan(s) directly, and you will receive a new statement for the refinanced loan amount, rate, and monthly payment.
Potential Downsides of Refinancing Your Student Loans
While refinancing your loans can be a great way to save some money, there are some downsides to student loan refinancing that you should consider first.
Student Loan Forgiveness
There are several programs for student loan forgiveness, including public student loan forgiveness (PSLF), death and disability loan discharge, and a new proposal from the Biden Administration that may forgive loans for even more borrowers. But these programs are only available on federal student loans.
If you refinance your student loans with a private lender, you will lose access to these programs, and any future programs for student loan forgiveness. This can have a significant impact on your student loan debt and total payoff amount, as well as your monthly budget.
Losing Federal Loan Benefits
There are additional federal loan benefits outside of student loan forgiveness, including:
- Student loan moratorium (pausing payments)
- Income-based repayment plans
- Fixed interest rates (always)
- Forbearance and deferment options
- Free loan consolidation
If you refinance to a private loan, you will no longer be eligible for any of these federal benefits. Some private lenders do offer similar benefits, so it is important to research the types of plans and benefits available before signing on the dotted line.
Paying More For Your Student Loans
While refinancing can help lower your monthly payments, you can also end up paying more with a refinanced student loan than with your original loan. This can be due to a few factors:
- Longer loan terms. If you lengthen your loan repayment term, you may end up paying more over the life of the loan.
- Higher interest rates. If you refinance and your rate goes up, you may end up repaying more interest than with your original loan. Plus the loan interest resets and you pay more in interest in the first few years than over the last years of the loan.
- Loan fees. Some private lenders charge high fees, such as origination fees, prepayment penalties, and other loan fees. This can end up costing you more over the life of your loan.
Refinancing your student loans can be an easy way to save some cash now, and lower your overall cost for your loans in the long run.
Truly, you can save thousands of dollars if you do it right.
But, you need to weigh all the options, and remember, refinancing federal loans can lose a lot of benefits. Plus, if you don’t run the numbers, you may end up actually paying more for your refinanced student loan than your original loan.
And if you decide to refinance, make sure you use a highly-rated lender that you can trust.
Frequently Asked Questions (FAQ)
How much does it cost to refinance student loans?
The costs to refinance your student loans will vary, depending on the loan terms, lender requirements, and type of loans being refinanced. Some lenders don’t charge any up-front fees (such as SoFi), which means it’s essentially free to refinance.
Other lenders charge a loan origination fee, which is a fixed amount or percentage of the total loan amount. This is usually added to your total loan balance, so while you don’t pay out of pocket, it is still costing you money.
How long does it take to refinance student loans?
The process can be as quick as days, or as long as a few weeks.
If you have an excellent credit score, and all your paperwork ready to go, you can apply for a loan, get approved online, and submit your documentation the same day. If there are no additional needs from the lender, you can complete the process within a day or two.
If you have a poor credit score, not enough income, or if the lender needs additional verification to complete your application, the process can take a while. This varies lender to lender, and is personal to your current financial situation.
What’s the minimum credit score to apply for a student loan refinance?
While some lenders do not have a minimum credit score for applying to refinance, many require at least a 600 credit score or higher to be considered. It’s important to note that a lower score may require a co-signer or co-applicant, and may charge a higher interest rate on your loan.
What’s the difference between private and federal student loans?
There are several differences between private and federal student loans, including:
What type of student loan is best to refinance?
Private student loans that have a high interest rate are the best to refinance, as you lose no federal benefits, and can significantly lower your monthly payment and overall cost of your student loans.
How to find the lowest rate when refinancing student loans
To find the best rate for your student loans, you will want to shop around with top lenders. Many offer a pre-approval process to see your rate and monthly payment terms before applying, and this does not impact your credit score.
There are also student loan marketplace companies like Credible that will compare multiple lenders with a single application.
Does refinancing my student loans affect my credit score?
Yes, it can. Most lenders require a hard credit pull to approve your loan, which can have a temporary impact on your score. But since your loan balance is not changing, the impact should be short-lived.
Can I refinance just my private student loans?
Yes, you can keep your federal student loans and choose just to refinance your private loans. In many cases, it is a good idea to hand on your federal student loans for the benefits and ability to qualify for services like public student loan forgiveness.
Is Navient forgiving private student loans?
Navient recently settled a lawsuit for $1.85 billion, with nearly all of it going toward forgiving student loans. A majority of the forgiven loans are for Navient private student loans that were deemed “subprime.”
According to the settlement, “Navient will cancel the remaining balance on nearly $1.7 billion in subprime private student loan balances owed by nearly 66,000 borrowers nationwide.”
More details on the settlement can be found here.