If you’ve just graduated and are about to start paying on your student loans or if you are already well into repayment, you could still benefit from a student loan refinance. Refinancing is best done when the market conditions are right (i.e. interest rates are low) and the new terms better meet your needs than your existing loan.
Your decision to refinance should take into consideration a number of factors, including:
- What your current interest rate is
- What your current monthly payment is
- If you have a cosigner
- Your level of satisfaction with your current lender
- How many loans you currently owe on
- Your current level of income
- Your current credit score and credit history
- If you have federal or private Student Loans
We will discuss in depth each of the consideration factors to help you determine if there’s a reason you should refinance your student loan worthy of taking the plunge.
1. Save Money with a Lower Interest Rate
Student loan refinance occurs with private lenders. This is good because they are always competing with each other and as a result, you the borrower get to enjoy competitive interest rates. A vast majority of student loan borrowers have federal student loans, and there are some considerations that should be evaluated for students with federal loans.
For federal student loan borrowers, the government sets your interest rate and that’s that. This means there’s a high probability the marketplace of private loan lenders will be offering better rates than what the government has offered. However, before you jump at the savings understand the trade-offs.
Should you choose to refinance your federal loans with a private lender, you will forfeit your federal loan benefits which could include deferment, forbearance or forgiveness. The government has more options for students suffering from financial hardship, not that private lenders aren’t sensitive to this too, but the government clearly has more favorable options for students.
If you think you might need to take advantage of those benefits, it’s not recommended you take your loans out of the federal loan program. However, if you feel confident in your fiscal health over the next few years as your pay down your student loan, opting to save money could be an easy decision to make.
When looking at rates, private loan lenders offer two types of rates, fixed and variable. Fixed interest rates are similar to your federal interest rates (if you borrowed your loans after 2006), in that they do not change over the life of the loan. So, going from a 5% interest rate over 10-years to a 4% interest rate over the same period could equate to some nice savings
Private student loan lenders also offer variable interest rates. These typically start out lower than fixed rates, and are subject to change over time as the market changes. This means that not only could it go down, but the variable interest rate could also go up and up and ultimately be more than the fixed rate if things aren’t going well in the market.
Variable rates are generally more attractive to borrowers who are confident they will be able to pay off their loan quickly, before the interest rates could rise. Their decision likely includes a higher monthly payment over a shorter period of time; by over paying your monthly payment you are freeing yourself from the loan earlier than you would if you only made your minimum monthly payment. It all comes down to what’s more important, saving more money overall or saving money right now in the form of a lower monthly payment. If you do choose a variable interest rate, make sure you can afford your payment at the highest interest rate – you’ll see an interest rate range in your loans terms.
2. Lower Your Monthly Payment
While a lower interest rate will certainly lower the monthly payment, that reduction might not look very significant over the life of the loan which could be 10, 15, or 20 years or more. If your needs dictate a lower monthly payment, a student loan refinance could certainly achieve that by changing the loan terms to lengthen the repayment period.
Paying a loan over a longer period of time will definitely cause the payment to drop more noticeably, but keep in mind the longer you pay on the loan the more you will pay in interest over the life of the loan. If your budget requires you to save the money today, then this might be the right solution, even if it does cost more in the long run.
Remember, most lenders do not penalize you if you pay your loan off early. If you find yourself in a better financial situation and can afford to pay more on your loan than the minimum monthly payment, then by all means do that. That extra money you pay, will pay down the outstanding balance faster reducing the length of the repayment on the loan and minimizing the amount of interest paid overall.
| Loan Type | Amount Borrowed | Current Payment | Current Term | Total Cost of Loan | |
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| Loan Type | Amount Borrowed | New Payment | New Term | Total Cost of Loan |
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New Monthly Payments:
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3. Release Your Cosigner
Most students entering college have no credit or credit history. This situation necessitates the need for a cosigner when getting a student loan. In many instances, this cosigner is a parent. If you want to remove your cosigner from your loan, this can be done with a student loan refinance. This is because a refinance is effectively a new loan that pays off the old loan. This new loan can be all yours if you so desire.
Bear in mind though, to qualify for a loan on your own you will need to demonstrate to your new lender that you make or have enough income to make the payments and have a strong credit history to show that you are a responsible borrower. I If you still need a cosigner, you can apply for the new loan with a different cosigner.
4. Change Lenders for Better Customer Service
Sometimes it happens that we aren’t satisfied with our current lender or loan servicer (in the case of federal loans). One way to change this is to refinance your student loans with another lender, preferably one that offers the type of customer service you are looking for.
Many credit unions are known for offering excellent customer service for example and it might be worthwhile to refinance your student loan at a credit union if you qualify for membership, as that is a requirement to do business at a credit union.
5. Bundle Loans Together to Make Payments More Manageable
It’s not uncommon for students to graduate college with multiple loans, since each year students are required to resubmit the FAFSA (Free Application for Financial Student Aid). Each year new loans are issued. If it turns out that the federal loans were not enough to cover the cost of attendance, there may be private loans to contend with too. This could result in a number of payments due each month on different days with different minimum payments making the repayment process a logistical nightmare.
If this is you, and you are struggling with several loan payments and would like to simplify the process. refinancing student loans will allow you bundle these individual loans together to be one loan. This will make the entire process easier to manage by only having to be concerned with the one loan now.
How to Get the Very Best Terms
Banks are businesses and as such want to ensure that the money they loan you will be repaid. This is why they are very concerned with your work history, level of income, credit score and credit history. All these items speak to your ability and willingness to pay your debts on time. Someone with a demonstrated ability to pay debt on time and a sufficient level of income will indicate to lenders their ability to pay and responsible behavior. These type of people are ideal candidates for loans in the lenders eyes.
To attract these desirable borrowers, lenders will often offer better interest rates and terms to individuals with excellent credit and more than sufficient income. They want your business just as much as you want them to help you. It’s mutually beneficial and they know it, which is why they work hard to woo you to choose them with low interest rates and favorable terms.
More Options if You Have Federal Student Loans
If you have federal student loans and worry that you might someday need that financial hardship protection that is offered within the federal loan program, you still have options. The U.S. Department of Education offers programs for loan forgiveness if you work for qualified employers for a set period of time. There are income-driven repayment plans to lower your monthly payment to be more manageable with respect to your income and expenses.
Lastly, they offer Direct Loan Consolidation where you can take all those loans and bundle them together, but your interest rate will essentially be the same. The rate one for the new one single loan will be the weighted average of all the loans included in the consolidation rounded up to the nearest 1/8th percent. Meaning you could effectively be paying slightly more in the end but you will still retain your federal benefits and now have a more manageable single loan payment.