When I was paying off my student loans, student loan refinancing was still in its infancy. It was a new service that many banks weren’t providing.
Nowadays, with the average student loan balance exceeding $30,000 per borrower, student loan refinancing is a huge industry. But many students are still unaware that’s an option, even though companies like SoFi buy Super Bowl ads and build their own stadiums. According to a 2016 report from Credible, about eight million borrowers would qualify for student loan refinancing.
Learning how to refinance your student loans can save you thousands of dollars, accelerate your debt payoff, and change your financial life.
5 Steps to Refinance Your Student Loans
Refinancing your student loans is a straightforward process, but it can be daunting if you’ve never refinanced a loan before.
1. Figure out if it makes sense to refinance.
Before you start shopping around with different lenders, consider what you’re giving up if you refinance. Borrowers with federal loans have access to a variety of repayment plans, including deferment and forbearance options. Once you refinance your federal loans, all those benefits will go away.
Choosing to refinance federal loans should be a careful decision, especially if your job isn’t secure or you live on a variable or seasonal income.
Freelance writer Janet Berry-Johnson refinanced her federal loans with a private lender because her federal servicer wouldn’t apply extra payments for the principal. She considered the benefits of keeping her federal loans but decided she had enough of an emergency fund to risk it. For her, saving on interest was more important.
“I think it depends on your circumstances and how comfortable you’d be making those payments in case something happens,” she said.
It’s much easier for those with private loans to refinance because they’re likely not giving much up by refinancing. Private loans rarely have income-based repayment or deferment options. When you refinance from one private lender to another, you’re likely not sacrificing anything the way you are with federal loans.
Financial educator Catherine Alford recently refinanced her loans because of low interest rates. She had already refinanced two years ago but found lower rates now.
“At this time, during the pandemic, I would only recommend refinancing student loans if you currently have private student loans,” she said. “If my loans would have been federal student loans still, I would have left them where they were to take advantage of federal loan incentives and options at this uncertain time.”
Plus, private loans often have higher interest rates, and borrowers with good credit scores and solid incomes can now qualify for rates lower than what they initially received.
Another reason to refinance your loans is to remove a cosigner. It’s common for parents to cosign on loans for children, but if your parent is trying to refinance a mortgage, they may not want those loans on their credit report anymore. Refinancing can remove them as a cosigner and put the loans solely in your hands.
2. Compare your refinancing options.
Some lenders only offer fixed-rate loans while others have both fixed-rate loans and variable-rate loans. As the name suggests, fixed-rate loans have an interest rate that stays the same for the entire loan. The rate on a variable-rate loan may change as the overall interest rate landscape changes.
Variable-rate loans have a starting rate that’s lower than fixed-rate loans, but because the rate increases, borrowers take the risk that their payments will also increase over time.
Whether you choose a fixed-rate loan or a variable-rate loan depends on your risk tolerance and if you can afford a higher payment.
Lenders usually offer a range of terms between five to 20 years. This may mean that you could end up refinancing for a longer term than you have right now. If this happens, you can end up paying more interest over the life of the loan even if the total APR is lower than what you have currently.
When you’re comparing lenders, terms, and rates, figure out what’s most important to you. Do you want to reduce your payment so you have more room in the budget to save for retirement? Do you want to pick the lowest interest rate? Remember, even if you choose the lowest payment, you can still pay extra every month.
If you have loans from law school, medical school, or your MBA, you may be able to find a lender that deals with those specifically. You may get a lower rate this way.
3. Choose a lender.
The most important comparison between lenders is the APR, which includes the interest rate plus any fees. Don’t just ask the lenders with the interest rate is, ask them what the APR is, too.
When comparing lenders, one of the most important factors is their fees. These include application, origination, and prepayment fees. Many lenders, like SoFi, don’t charge any of these fees so steer clear if you find a lender who does.
Content writer Brett Holzhauer has refinanced his student loans about once a year since graduating in 2015. Now, his student loans are with First Republic Bank, where he pays a 2.2% interest rate. Plus, the bank will refund all interest fees if he repays the loan within four years or less.
Even though refinancing every year might seem like overkill, he estimates he saved thousands in interest.
“I’ve always been shopping and trying to understand what rates are currently,” Holzhauer said. “I’m always looking to see what’s out there.”
If you’re considering refinancing, do your research first. Every few months, take a minute to Google “interest rates for student loan refinancing” or something similar. See what lenders are advertising and if you could get a much lower rate. Because student loan refinancing companies often waive origination and application fees, refinancing student loans is much less expensive than refinancing a mortgage.
4. Complete your loan application.
Once you choose a lender, you’ll start the process of filling out the complete loan application. Many lenders will ask for extra documents to verify your income, such as pay stubs and tax returns.
This process can be complicated and frustrating, especially if you don’t know where to find these documents. Berry-Johnson is a CPA so she said it was easier for her to locate what her lender, SoFi, was asking for.
You can easily find this information, including your income, on your tax returns. You can visit your IRS account online or review any paper copies you might have to find the requisite information.
If you have a cosigner – someone who is legally responsible for your loans if you default on them – they may also be required to provide information. The lender will want to make sure that the cosigner can also afford these monthly payments if you can’t.
5. Finalize your loan.
Some lenders have a recission period, which is like a brief cooling-off period during which time you can cancel the loan. But you should be careful about using this. Applying for a loan results in a hard inquiry on your credit score, so if you back out, your credit will likely be a few points lower than when you applied for the loan.
Once the loan is approved on both sides, the new lender will take over your student loans from the old servicer. It’s important to make sure that all the payments go smoothly during this time and you don’t miss a payment. Even if you normally use autopay to pay your loans, it’s a good thing to double-check your payments for the first couple of months to make sure that the new lender is receiving them.
Refinancing Your Student Loans Isn’t the Only Option
If you don’t want to refinance your federal loans or don’t have a high enough credit score to qualify, don’t despair. Those with federal loans should consider consolidating their loans because that may open more repayment and forgiveness options.
Some borrowers with federal loans may qualify for Public Service Loan Forgiveness. Some professions, such as teachers or nurses, have their own forgiveness programs run by states and the federal government.
If you weren’t approved by a lender for a refinancing loan, work on improving your credit score so you do qualify in the future. You can do this by looking up your credit score through a free service like Credit Karma or Credit Sesame and understanding why your score is low. If you have a negative mark on your credit report that is close to falling off, then you may be approved or qualify for lower rates.
Increasing your income by getting a raise can also make you a better loan candidate because many lenders want to see borrowers with a low debt-to-income ratio. Getting married may also increase your chances if you file taxes jointly.