You make it out into the real world – and all of the sudden – it dawns on you that you’ve got adult bills to pay, and the student loan debt you racked up in school is looming over your head like a dark cloud.
Depending on how much debt you accumulated, your starting salary may not be enough to comfortably make your student loan payments.
But don’t despair! Refinancing your student loans or consolidating your federal student loans can help cushion the blow of repaying your student loan.
What Is Student Loan Refinancing?
Student loan refinancing is when a private lender (like a bank, credit union or state-based organization) pays off your existing private and/or federal loans and gives you a new loan with a new set of terms, including (hopefully) a lower interest rate.
Unlike refinancing a home mortgage, you can typically refinance student loans for free.
Most private lenders won’t charge you to prequalify and apply for refinancing – but not all private lenders are created equal. Make sure to read your loan agreement carefully before you commit to signing on the dotted line. Some lenders do charge an origination fee, application fee and/or late payment fee.
We’re assuming you didn’t choose Loan Terms 101 as a college elective, so we’ve got a quick breakdown of what those fees are (should you encounter them):
The fee is a percentage of your loan amount that a lender charges to process your loan. (You’ll likely have to pay for an origination fee with federal student loans.)
It’s a one-time fee that covers the cost of processing a submitted application. (We know you know what this is; we just want to make sure you account for the potential cost.)
You’re charged a late fee when you miss a monthly payment or make a past due payment.
How Does Student Loan Refinancing Work?
When you refinance your student loans – which you can only do through private lenders – the end goal is to lower the interest you’re paying on your loans. You could save thousands of dollars with an interest rate reduction. The money you save could be used to pay off more expensive debt, to start or build your retirement investments or to splurge a bit (within reason, of course!).
If you’ve got $35,000 in student loans with a 7% interest rate, you’ll be paying about $406.38 every month over a 10-year loan term.
After refinancing your loans and qualifying for a lower interest rate – let’s say you get a 5% rate – your monthly payments would drop to $371.23.
Not only would that be a savings of $4,218.00 during the loan’s repayment term, but it’s money you could spend better elsewhere.
Federal Student Loan Consolidation vs. Private Student Loan Refinancing
While their origins are different, federal student loans and private student loans do the same thing: help you pay for school. If you’re thinking about restructuring your student loans (think: changing the terms of your loan agreements), the process is different for each type of student loan.
Federal student loan consolidation
When you consolidate, you combine all of your federal student loans into a single loan with a single payment at a fixed interest rate. And – good news – you can consolidate your federal loans for free (except for the cost of the origination fee) through the office of Federal Student Aid.
Refinancing your federal student loan
You can also refinance your federal loans with a private lender. But keep this in mind: When you refinance your federal student loans, you lose access to federal repayment and forgiveness programs. Some of those benefits include applying for student loan deferment, loan forbearance, income-driven repayment plans or the Public Service Loan Forgiveness program.
Case in point, as part of the 2020 federal COVID relief package, the U.S. government put a temporary hold on federal student loan payments. If you refinance your federal student loans now, you’ll have to start repaying your loans before the end of the federal freeze.
Private student loan refinancing
When you refinance, you combine private and/or federal loans into one private loan with one monthly payment and (hopefully) a lower interest rate. To figure out the interest rate on your new loan, private lenders will need your:
- Credit score
- Proof of income
- Debt-to-income (DTI) ratio
- Payment history for all existing student loans
- Details about your overall financial health
Will I Qualify for Student Loan Refinancing?
As long as you meet the qualifying income and credit criteria set by a lender, you qualify to refinance your student loans.
When To Refinance Student Loans
That’s one answer we can’t give you. Only you know the answer to that question, but we do believe you should take refinancing under some serious consideration if:
You want to lower your interest rate
Depending on your credit score (the higher, the better), when you refinance your student loans, you will lower your interest rate. When you consolidate your federal loans, you don’t get a better rate. The fixed-rate on your consolidated loan will be an average of all your rates rounded up to the nearest one-eighth of 1%.
Your credit report and score are strong
The higher your credit score (mid-600s and higher), the more likely it is that you’d qualify for a lower interest rate when you refinance.
You have student loans with high, variable interest rates
If you have private student loans with variable interest rates, consider refinancing so you can lock in a fixed rate. Even if your loans have low rates now, they can rise as market rates fluctuate and your loan will become more expensive to repay.
You want to remove your co-signer
With strong credit, you can release a co-signer from any debt liability by refinancing the loan into your own name.
Look over the terms of your student loan agreement before you apply. Some lenders allow you to remove a co-signer only after a certain number of on-time payments have been made.
Reasons Not To Refinance Student Loans
It may come as a surprise, but student loan refinancing isn’t always the right choice – and not everyone is eligible to refinance.
You may pay more interest over your loan term
When you refinance, you might increase the amount of time you’ll have to pay off the loan. So, while refinancing can lower your monthly payments, you may end up paying more in the long run.
Your credit score isn’t high enough
You need a credit score of at least 650 or higher and a steady income to refinance your student loans.
If you don’t have either, you’ll have to consider recruiting someone (think: family or friends) to co-sign the loan.
Next Step: Student Loan Refinancing
Paying back student loans will never be anyone’s definition of fun. But refinancing can help make managing your student loan repayment easier – and potentially less expensive.
The Short Version
- Student loan refinancing only happens through a private lender – and the federal government only consolidates federal student loans
- Refinancing can make repayment easier to manage, but it can also increase the time it’ll take to pay off the loan and make you lose out on federal forgiveness or repayment plans
- Research your lenders. Make sure that you not only meet their refinancing criteria but that you’re getting the best interest rate possible
U.S. Department of Education. “Biden-Harris Administration Extends Student Loan Pause Through August 31.” Retrieved April 2022 from https://www.ed.gov/news/press-releases/biden-harris-administration-extends-student-loan-pause-through-august-31
U.S. Department of Education. “Fact Sheet: Public Service Loan Forgiveness (PSLF) Program Overhaul.” Retrieved October 2021 from https://www.ed.gov/news/press-releases/fact-sheet-public-service-loan-forgiveness-pslf-program-overhaul
Federal Student Aid. “Consolidating your federal education loans can simplify your payments, but it also can result in the loss of some benefits.” Studentaid.gov. Retrieved October 2021 from https://studentaid.gov/manage-loans/consolidation