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What Is Student Loan Refinancing?

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If you want to save money on your student loan repayment, you may have been advised to refinance. Depending on your financial circumstances, that may indeed be the best way forward.

But how exactly does refinancing save you money, and what should you consider before submitting an application? Here’s what to know about this strategy and how to decide if it could be a good fit for you.

What Is Student Loan Refinancing?

When you refinance a student loan, you take out a new loan with a refinance lender; that lender will pay off your old student loans, and you’ll begin making payments on your new debt. By refinancing your existing debt into a new loan, you could get a lower interest rate, lower monthly payment or both.

If you have multiple student loans, you can choose to refinance all, some or just one of them. For example, if you have federal and private student loans, you can choose to only refinance the private loans. Combining multiple loans into one can also help simplify your repayment.

While the government offers you the ability to consolidate your federal student loans, refinancing federal loans will convert them into private debt. That means you’ll lose access to federal loan benefits such as income-driven repayment (IDR) plans and loan forgiveness programs. For that reason, refinancing federal student loans generally carries more downsides than refinancing private debt.

How Does Student Loan Refinancing Work?

To refinance your student loans, you must apply with a new lender and provide your contact information, employment details and financial statements. The lender will run a credit check and verify your income before approving you. Some lenders may require a co-signer if you don’t meet the credit score and income minimums.

If you are approved, the new lender will contact your current lender to initiate the payoff process. Once that’s complete and your old loans are closed, you’ll begin making regular payments to your refinance lender.

5 Factors to Consider Before Refinancing

Before you fill out a loan application, you should stop and consider if refinancing is worth it. Here are the top items to think about beforehand:

1. The Type of Loans You Have

Borrowers with private student loans are usually better off refinancing than those with federal loans. If you have federal student loans, you have access to a slew of perks like IDR plans, which calculate your monthly payments as a percentage of your income. You could also qualify for loan forgiveness options as well as longer deferment and forbearance programs.

For example, when the Covid-19 pandemic began, the federal government suspended federal student loan payments and set interest rates to 0%. Since March 2020, borrowers with federal student loans have not had to make any payments. Private student loan borrowers, on the other hand, aren’t eligible for those benefits.

If you have federal student loans, make sure to carefully consider whether refinancing is worth it. But if you aren’t eligible for loan forgiveness and have a stable job with a robust emergency fund, refinancing your federal loans with a private lender could help you get a lower interest rate and pay less total interest.

2. Your Credit Score and Income

Your credit score and income are the two most important factors that will determine if you qualify for student loan refinancing. Most private lenders have a minimum credit score requirement of around 670. The income threshold varies among lenders but usually starts around $20,000.

While you may qualify for refinancing if you meet those minimums, those with average credit or inconsistent income will be offered higher interest rates than applicants with excellent credit and stable earnings.

If your income or credit do not meet the lender’s requirements, you’ll likely need to add a co-signer to qualify for refinancing. A co-signer is an adult, often a relative or close friend, who has good credit and agrees to be listed on the loan with you. If you can’t afford your payments or default on the loan, the co-signer is responsible for paying off the remaining balance.

3. What Interest Rates You Can Qualify For

A common reason to refinance is to secure a lower interest rate. Reducing your rate adds up; you could potentially save hundreds or thousands of dollars over the life of your loan.

Many refinance lenders will let you check your personalized interest rate estimate before you submit a formal application. Compare that interest rate range to your current interest rate, which you can find on your monthly statement. You can use a refinancing calculator to see just how much you could save by switching to a better rate.

If you can’t find a lender that can beat your current rate, then it likely doesn’t make sense to refinance.

4. What Loan Terms Are Available

The repayment term is the number of years you have to repay your debt in full. Lenders typically offer lower interest rates for shorter repayment terms and higher interest rates for longer repayment terms. Your monthly payments will be higher with shorter-term loans and lower with longer-term loans.

Many student loan refinance lenders offer loan terms of five, seven, 10, 15 and 20 years. Be sure to review how much is left on your current loan’s term—if you refinance and extend your loan term considerably, you will likely end up paying more in interest over the life of your loan.

5. How the Lender Can Help If You Can’t Afford Payments

While interest rates and repayment terms may be similar among the top lenders, there’s more variety when it comes to extra perks and features. Some lenders offer special programs to help you manage your debt, while others won’t do much to help you if you have trouble making your payments.

For example, SoFi offers help with the job-hunting process if you lose your job. You also won’t have to make payments for up to 12 months while you’re unemployed, while other lenders may offer a maximum forbearance period of only six months or less.

How to Apply for Student Loan Refinancing

  1. Research potential lenders. The first step is to compare refinance lenders, select the ones that offer you the best deal, and see if you can prequalify with those lenders. Prequalification lets you view the estimated interest rates and terms you may qualify for after submitting some basic information.
  2. Complete the application. Once you’ve chosen your top lenders, submit a full application online with each of them. Exact requirements vary, but expect to provide your personal information, income documentation and details about your existing student loans.
  3. Determine if you need a co-signer. If you are not approved for a loan, you may be able to add a co-signer to improve your chances. Contact the lender and see if they will accept a co-signer with your application. Even if you qualify for a loan, adding a co-signer could help you nab better interest rates.
  4. Finalize your choice. If you’re approved for the loan, you should receive the final interest rates and loan terms you qualify for. Review the documentation and make sure the interest rate, repayment term, forbearance options and any other features are acceptable.
  5. Complete the refinance. Once you’ve signed the final paperwork, the new lender usually pays off your old loans directly. Be sure to continue making payments on your old loans until this happens. Also confirm that your old lender records the loans as closed on your credit report when the refinance process is complete.
  6. Start making payments. Log into your new account on the refinance lender’s website and see when your first payment is due. Sign up for automatic payments, if possible, because it will likely come with an interest rate discount and prevent you from missing a payment.

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