When you refinance your student loans, you take out a new private loan to repay your existing education debt. For many borrowers, refinancing is a good strategy if you meet the eligibility requirements and qualify for a better interest rate or a lower monthly payment. You may even be able to pay off your loans faster.
But if you refinance your federal student loans, you may miss out on government-exclusive income-driven repayment plans or federal student loan forgiveness programs. If refinancing one or more of your student loans might be the right move for you, consider the following:
- What is refinancing?
- Is refinancing right for you?
- Check your credit score
- Compare refi rates
- Confirm that you can afford your new monthly payment
- Gather your documents
- Apply to lenders
- Make sure you understand your loans
- Complete your application with your selected lender
- Make your payments
What is refinancing?
Student loan refinancing allows you to consolidate one or more of your existing private and/or federal student loans into a single loan through a bank or another private lender.
The goal of refinancing could be to…
- Qualify for a better interest rate
- Get a lower monthly payment by extending the repayment term
- Releasing a cosigner on your current loan.
- Switch to a friendlier lender or one with better repayment terms, discounts or benefits
Refinancing is different from student loan consolidation. When you consolidate your federal loans via the Department of Education, you don’t lose federal protections, like access to loan forgiveness programs or forbearance. You can also extend your term, which may lower your monthly payment, and unlike refinancing, you don’t need good credit or a cosigner to qualify.
For refinancing, on the other hand, every private lender has its own eligibility criteria. Your financial background, income, and credit score will be considered when underwriting your loan.
| Good to know: If you aren’t eligible for refinancing because of your income or credit score, you may be able to apply with a cosigner. Be aware, however, that cosigners assume responsibility for repayment if you can’t handle monthly dues on your own. |
Is refinancing right for you?
Before choosing to refinance your student loans, weigh the benefits and drawbacks. Keep in mind that when you refinance your federal student loans into a private loan, you can’t backtrack and turn the loan back into federal student loans or recoup any of the benefits of the federal loan program.
You’ll also want to see if swapping a fixed-rate loan, which is available with most federal loans, for a private variable-rate loan makes sense for you. It’s not the right move for many borrowers because if interest rates take a jump, your monthly payment could also go up.
By refinancing with a private lender, you also won’t qualify for certain federal repayment plans and programs that are available with federal student loans, like deferment, forbearance, cancellation, and income-driven repayment (IDR) plans.
But if you have a stable income, strong credit, and you don’t feel you’ll benefit from federal forgiveness options, then refinancing your loans into a single private loan may be a choice worth considering.
Check your credit score
Generally, student loan refinancing lenders look for borrowers with good to excellent credit. That’s because your credit is a measure of how well you pay your bills and if you’re financially responsible. Lenders also want to be confident you’ll repay your new refinanced loan based on the terms spelled out in your loan documents.
In general, you’ll likely need a credit score in the range of 650 to 680 to qualify for refinancing as an independent borrower. To get the very best rates, you’ll need a score of 700 or above.
If you have a thin credit history or your credit score is lower than 650, you might have trouble qualifying, or your lender may require a cosigner. Working to improve your credit prior to applying for student loan refinancing is best to ensure the process moves along smoothly.
Compare refinancing rates
The main goal when refinancing your student loans is to either lower your interest rate (to save money on interest) or to lower your monthly payment by changing your repayment term. The best way to ensure you reach your goal is to compare multiple lenders and refinancing rates.
Confirm that you can afford your new monthly payment
Refinancing student loans only makes sense if you can afford the new monthly payment. If your budget is tight, you recently had a change in salary, or your debt has increased substantially, meeting your repayment responsibilities may be tricky, even if your payment is lower.
Creating a budget and sticking to it is key to understanding whether you can afford your new monthly dues — or not. If you’re wondering if you can repay your new student loan and how long it will take, use a student loan repayment calculator.
It’s good to know that some private lenders offer deferments for financial hardship if you lose your job or have a medical emergency. This will allow you to temporarily postpone your payments. But not all lenders offer this benefit, so ask potential lenders prior to taking out your new loan.
Gather your documents
After prequalifying and once you’ve decided on a lender, you’ll need to gather your documents and complete a more formal loan application. You may be asked to provide your personal information, including:
- Personal identification, like a driver’s license or state I.D.
- Proof of citizenship
- Pay stubs and recent tax returns
- Employment salary and employer contact information
- Private student loan details, like the loan amount and your existing loan balances
- Loan details, including your current balance and loan account numbers
If you decide to add a cosigner to your application, you may need to fill out a separate application and submit the same information for your cosigner or have them create their own.
Apply to lenders
After supplying information, perhaps to verify what you noted while prequalifying, your lender will likely perform a hard credit check, which can temporarily cause a dip in your credit score.
| Did you know: When you prequalify, lenders perform a soft pull on your credit file, which typically doesn’t cause a drop to your credit. That’s why it’s helpful to shop around and prequalify with multiple lenders before filing a more formal application with your preferred lender. |
The final loan approval process can take anywhere from about 24 hours to more than two weeks, but the time frame varies from one lender to the next, so check to be sure. If your credit keeps you from getting a new loan, keep in mind that a creditworthy cosigner can help.
Make sure you understand your loans
All of the details in your new, refinanced loan are very important but can sometimes be challenging to understand. If you don’t truly understand the conditions of the loan, you may be getting a bad deal. Knowing the meaning behind a few key terms can help.
| Key term | What to know |
|---|---|
| APR | Annual Percentage Rate (APR) is the annual interest rate you pay on your loan after accounting for lender fees. |
| Origination fee | A student loan origination fee is a fee charged by some lenders to process your loan. Many refinancing lenders don’t charge origination fees. |
| Repayment term | The repayment term is the length of time (usually 5 to 20 years) that you have to repay your new loan. You may qualify for multiple term options. |
| Prepayment penalty | Some lenders (but not many) charge a prepayment penalty for paying off your refinanced loan before the end of the term. |
| Late payment fee | You might be charged a late payment fee each time you are tardy making your payment. |
| Credit score | Your credit score represents your ability to repay debt based on a number of criteria, including credit history. It’s what lenders use when deciding to write you a loan or extend credit. |
Make your payments
When you refinance your student loans with a private lender, payments typically begin almost immediately (except if your lender honors your existing loan’s grace period or deferment).
But some lenders may allow you to make interest-only payments or pause your repayments (via deferment or forbearance) for a set period of time under certain circumstances. This can be a huge benefit if you find yourself unable to make your payments on your new loan because of an unforeseen emergency.
If you’re like most people, you also have more than a few bills to pay each month. Signing up for automatic payments though your refinancing lender’s loan servicer — the company that manages your repayment — can make it much easier to ensure your payments are made on time every month. This also ensures your credit doesn’t take a hit if you miss a payment or are late.
If possible, making extra payments whenever possible is also beneficial. After all, the more you pay toward your loan in extra payments, the less time there is for interest to accrue and capitalize onto your outstanding balance.
Refinancing some or all of your student loans and enjoying a lower interest rate or a lower monthly payment may even let you start an emergency fund, pay off other high-interest debt, or take some of the stress out of student loans altogether.