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How To Refinance Your Student Loan

Being a student is not easy. Even tough you can work while studying, money is still a problem. Also, With the increasing demand for high-profile employees, many people decide to pursue a degree or further qualify and continue their education. Can you refinance your student loan and stay in life?
Author: Jack Wickens
Jack Wickens

Writer, Contributor

Experience

Jack is a personal finance writer who has been writing for more than a decade. His passion for educating consumers and helping everyday families earn more and live better. He is most knowledgeable with years of experience covering topics such as savings, budgeting, and responsible credit use and always happy to share his expertise with readers.

Review & Fact Check: Baruch Mann (Silvermann)

Jack Wickens

Writer, Contributor

Experience

Jack is a personal finance writer who has been writing for more than a decade. His passion for educating consumers and helping everyday families earn more and live better. He is most knowledgeable with years of experience covering topics such as savings, budgeting, and responsible credit use and always happy to share his expertise with readers.
Author: Jack Wickens
Jack Wickens

Writer, Contributor

Experience

Jack is a personal finance writer who has been writing for more than a decade. His passion for educating consumers and helping everyday families earn more and live better. He is most knowledgeable with years of experience covering topics such as savings, budgeting, and responsible credit use and always happy to share his expertise with readers.

Review & Fact Check: Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Financial Expert, The Smart Investor CEO

Experience

Baruch Mann (Silvermann) is a financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. See how we make money.

Table Of Content

With the increasing demand for high-profile employees, many people decide to pursue a degree or further qualify and continue their education.

Even though there are plenty of opportunities for students to work while studying, money is still a problem. The tuition fees are sometimes enormous. This is the reason why so many people take out student loans to support themselves and pay their annual fees.

As the cost of tuition continues to increase, student loan debt also increases. In this chart using Experian data, you can see that in 2014, student loan debt was at $1 trillion. This has steadily grown over the last six years, hitting a high of $1.57 trillion in 2020.

Student Loan Debt Growth (Trillions)

This data only confirms the importance of student loans nowadays. Many people, however, have problems with repaying their student debts or opt for lower interest. Let's look at the options you have to refinance your student debt.

Why Would You Consider Refinancing?

Before you sign the papers, you have to be aware of your purpose. what is the reason you are doing this? what do you want to achieve by refinancing or consolidating your student loan?

Below you can find the 7 most common reason for people to do it:

  • Lower Interest Rate – Maybe this is the most common reason for people to take out a new loan – better interest. If you can negotiate better terms overall, it would be great.
  • Reduce The Total Amount Of Debt – If you manage to get lower rates and shorter period of repayment, definitely you will decrease the total amount of money you owe. This move would be wise only if you could afford the monthly payments.
  • Pay Less Each Month – By lowering your interest rate, the chances are you will end up paying less each month. If you manage to prolong the period – even less so. Be careful, though. Expanding the period of the loan will definitely result in increased total costs.
  • Make It Simple – Maybe you have a couple of student loans. This is a debt consolidation where you can combine several student loans and make it simpler and easier to manage. Let's say you will have only one payment a month, not three.
  • Free Yourself Of Cosigners – It's terrible to have problems repaying your loans and have a co-signer at the same time. If you refinance your student loan, you might remove the cosigner and be free.
  • No fees – Usually, refinancing loans shouldn't have application and origination fees. However, some of them will charge you and you have to look carefully before signing your new contract.
  • Change your lender – Maybe you are not happy with your current bank and you want to change the lender. They, on the other hand, might give you better terms on your new loan.

Why You Shouldn't Consider Refinancing?

In many situations, refinancing your student loan may not be the bets option for you. Here are some drawbacks to consider:

  • You Might Lose Federal Protections: Federal student loans come with specific safeguards that aren't available to borrowers who take out loans from private lenders. Interest freezes, debt forgiveness, and other protections may be lost as a result.
  • Not Everyone Is Eligible: Just like with other sorts of loans, there are eligibility standards that must be met, and not everyone will be able to fulfill them. You'll need a decent credit score as well as a low debt-to-income ratio to qualify. There may also be other requirements that prevent you from receiving approval.
  • Lower Rates Aren't Guaranteed: Your credit score will play a role in determining your new rate, but there are no promises that it will be lower than your present rate. As a result, it's critical that you do your homework and compare rates before beginning the process.
  • You May Pay More in the Long Run: While it may be more convenient to lower your monthly payment right now, taking out a longer-term loan may result in you paying more in the long run. Before signing your loan documents, always verify the total amount of the loan and make sure you're satisfied with the terms.

Types of Refinancing and Consolidation

In this chart using NSDLS data, you can see the outstanding student loan debt and loan type. The highest student loan debt is $796 billion from Stafford Combined loans. This is followed by consolidation with $536 billion. At the other end of the scale, Perkins carries $6 billion in student loan debt.

Student Loan Debt Outstanding (Billions) Loan Type

It's good to know that there are mainly three types, depending on the loans you have:

1. Federal Student Loan Consolidation

Federal student loans are loans funded by the US government.

How does it work?

If a person has several of these, they can qualify for a federal student loan consolidation. You will not get a random interest here, but rather a weighted average of the loans combined. This means that your new interest rate might be lower than the one on some of your old loans, but it could also be higher than some.

Like any other loan, good credit score and record of payments is compulsory if you want the bank to approve you.

2. Private Student Loan Consolidation

This is for borrowers who have only private loans, which are given by a lender – bank, credit union, etc. This consolidation is possible only if a person has private student loans. In addition, a good record of payment and credit score, which determines the interest on the new loan.

Student loan refinancing is very similar to the previous one. Using it you can consolidate your private student loans to pay less each month. There is one major difference – here you can work with lenders that offer to consolidate both private and federal student loans.

3. Federal And Private Loans Refinancing

As previously discussed, depending on the type of student loans there are mainly two options – refinancing and consolidating. When consolidating their debt, borrowers can unite only one type of their loans – federal or private.

For example, a student takes a consolidation loan to unite his federal student loans. Refinancing, on the other hand, combines both private and federal student loans. Only private lenders offer this type of refinancing.

Why would you combine them? It would give a better rate, better terms, and one monthly payment. Refinancing your loan means that you will take out a new one to cover and pay off your existing debts. This, on the other hand, means new conditions and terms. Before consolidating or refinancing, know that federal loans offer some special benefits.

For example, forgiveness or repayment plans. You can also “pause” your payments for a while. Once you go for refinancing, you won't be able to avail of these benefits. It's irreversible, so be careful when you refinance your current debts.

More Ways To Reduce Your Interest

Don't jump on taking new loans for the sake of lower interest rate. What if your current contract allows you to use some other benefits you didn't even know about? Undoubtedly, a refinancing loan is the best and most effective option, but consider these:

  • Sign up for automatic payments. This  may reduce your rate by 0.25%
  • Paying your monthly installments on time for several months in succession might give you some benefits.
  • People who have federal student loans are not penalized for prepaying their loans. Think about paying more some months, and the term of your loan will decrease.

Questions To Ask Before Refinancing

Now that you know the basics of student loan refinancing and consolidation, it's time to ask yourself several questions before you proceed.

  • What's My Goal? – What do you want to achieve? The thing you want to accomplish most will shape your actions and the type of refinancing you'll get.  It will dictate every step toward achieving the task.
  • How Much I Can Afford? – Be clear about it. Know your finances and plan carefully.
  • What's My monthly payment Limit? Here you need some maths. Calculate your discretionary income (this is what's left after taxes, social security and basic living costs). Some claim it's usually between 10-15% of your total income. Dedicate 10% of your discretionary income to monthly payments.
  • Can I Get a Lower Interest Rate? It depends on many factors, as you know, but usually federal loans offer a lower rate than private ones. The main factors determining your refinancing loan rate are your current loans' rates, your credit score, your current terms and conditions and your payment history.
  • Is My Credit Score Good? Before refinancing you have to take a look at your credit score. Nowadays, many lenders provide their customers with a monthly credit score. Just check your monthly statement. Also, there are websites that show your credit rating. Credit karma  and Credit Sesame are two of the most common ones. A great credit score can always guarantee better terms on your student refinancing loan.
  • What Are The New Conditions? Before taking the new loan, check what the new terms and conditions will be. For example, federal student loan consolidation usually offers between 10 and 30 years as a repayment period. Terms of refinancing loans range between 5 and 20. As regards the interest, if you consolidate your federal loans you will get a fixed rate for the whole period. When it comes to private student loans, private lenders offers two types of rate – fixed or variable interest rate. This is a hard choice sometimes because depending on the market conditions you can either lose or make a profit if you opt for a variable rate. A fixed rate is definitely a safer option because it does not change during the whole term So, when you have some information about your new loan's terms, conditions and interest compare with your previous one.

What You Should Look For?

When looking for a refinancing lender, you might be amazed at how many options there are. Fortunately, whether you're looking for a mortgage, a car loan, or even student loan refinancing, there are a few things to look for that will help you determine if the organization is the appropriate fit for you.

  • Provide Pre-approval: Pre-approval is a useful tool for determining what rates you are eligible for. This enables you to begin the refinancing process and weigh your options before deciding whether or not to proceed.
  • Supply a Variety of Products: Whether you want a fixed rate, variable rate, or other terms, having a lender that can provide you with information on a variety of products is beneficial. You'll be able to compare payments and costs before choosing on the best choice for you.
  • Offering Attractive Terms and Rates: Each lender has its own set of terms and rates, but not all of them will be suitable for your needs. As a result, it's critical that your lender provides appealing terms and prices.
  • Realistic Lenders: While it may look that a lender will approve your loan right away, this could be a red flag. There are some shady businesses that aim to entice consumers to borrow money they don't have. As a result, it's critical to seek out lenders who are honest about their lending constraints.
  • Reasonable Fees : Many lenders charge origination fees that are a percentage of the loan amount. Other fees, such as late fees, document fees, and so on, may apply. Fees can quickly mount up and wipe out any potential savings. So, search for lenders who have a fee structure that is reasonable.

How To Compare?

Once you've decided to refinance your student loans, you'll need to shop around for lenders and ask the necessary questions to discover the best deal. Fortunately, there are a few pointers that might assist you in making comparisons and finding the greatest offer.

1. Find the Lowest Interest Rate

This is the most obvious suggestion, but it is one that many people neglect. Choose the lender with the lowest interest rate, but keep in mind that not all lenders publicize their best rates. Some lenders advertise a 1.8 percent APR yet do not offer any benefits. A lender, on the other hand, may offer a 2.25 percent base rate with a 0.50 percent refund if you sign up for auto payments. As a result, the overall rate is lower than with the first lender.

2. Keep Current Rate Trends in Mind

You'll find fixed and variable loan deals, so decide which is best for you. Consider the present trends to put this in perspective. When there is economic uncertainty, for example, you may prefer the security of a set rate. If base interest rates are currently high, however, it is a good idea to choose a variable rate that will decrease as the base rate falls.

3. Examine the Total Cost

While the monthly payment will have an influence on your day-to-day expenses, you need also think about the whole cost of the loan. Even if you choose a loan with a lower interest rate, if you take it out for a longer period of time, you will end up paying more in the end.

4. Will You Require a Cosigner?

There are a number of criteria that determine whether you can get your student loan refinancing approved. Some lenders will need you to offer a cosigner if you don't have excellent credit. Although a cosigner can help you get the best rates, some people choose to keep their finances distinct from their family.

5. Fees

Finally, double-check any costs that may be associated with your loan. You may opt to choose another lender if the lender has severe payment standards and will slap you with a large cost if you are a day late on your payment.

Bottom Line

Before going to your lender and asking for consolidation or refinancing, you have to be perfectly aware of your current situation. What is the reason to do it? Are you unable to repay your loans? Or maybe the high-interest rate troubles you.

Keep in mind: Often financial problems stem from a person's spending habits and bad management. Instead of taking out a new loan, see if you can restructure your budget and expenses. Check with your lender if you qualify for some other benefits.

If you really face serious financial issues, let's say have no job and other predicaments, then consider refinancing or consolidation.

Refinance Your Student Loan - FAQs

You may refinance your student loan at any time and as often as you need. There are many reasons why refinancing multiple times makes sense. This is especially true if your financial situation improves or private lenders lower interest rates.

Refinancing usually does not charge any origination fees or other fees, and student loans do not come with prepaid fees. If you can find a lower interest rate, you can save yourself money every time.

Many lenders require you to graduate to qualify for the refinancing offer. But there do exist lenders that refinance loans for non-graduates. For example, Citizens Bank provides refinancing loans to eligible people who have not completed a degree, but the application requirements are slightly different.

To be eligible, you must have at least $10,000 in student loans to refinance, and you must pay 12 qualifying loans after leaving school. You must be a U.S. citizen, permanent resident, or foreign resident with a valid social security number.

Yes, but it depends on the lender and what they allow. Moreover, not all lenders allow you to refinance with a principal (co-signer), so your first step should be to study the policies of various lenders. You will find that they vary, so ensure you compare several.

In the end, allowing a principal is not the only proof you should look for in a refinancing lender-you want to ensure that you can get a competitive interest rate, which can actually help you save for the long term.

If your annual income exceeds federal student debt and you do not plan to apply for a public service loan relief, then refinancing may be a reliable long-term strategy. However, you may not want to refinance when you are unemployed or think you might be unemployed.

So even though it may be an option, refinancing during periods of unemployment (or expected unemployment) is a bad idea. This is because refinancing federal loans turns them into private loans. After that, you now owe the bank instead of the federal government.

Discover Bank is mainly known for its credit card business and launched Discover Student Loans in 2007. Its refinancing loans are most suitable for borrowers who may need leeway in repayment or borrowers who have not graduated.

Its personal loans are best for students who may need some leeway in making payments. What’s more, Discover provides generous repayment flexibility to borrowers struggling to make payments. Also, international students can obtain qualifications through co-signers, and there is only one repayment period option available to minimize debt.

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