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Student loan refinancing has been growing the last few years, with many new companies entering the space and promoting offers to student loan borrowers.
But just because you have student loans doesn’t mean refinancing is the right option for you. There is a lot you need to know about when it comes to student loan refinancing:
- How it works
- What it means for you
- Private loans versus Federal loans
And that’s just a small list.
This is the ultimate guide to student loan refinancing and we cover everything you could need to know if you’re thinking about refinancing your student loans. Let’s get started.
What Is Student Loan Refinancing
Student loan refinancing is the process of taking out a new student loan to pay off your old student loan. That sounds confusing, but think about it for a second.
Imagine you have an old student loan (or multiple) at a higher interest rate and you’re looking to save money. You simply get a new loan from a student loan refinancing company, and use the money from that loan to pay off the old loan.
In fact, the student loan refinancing companies make this easy because they’ll pay off your old loans through the process of getting your new one.
Refinancing a student loan means you’re taking out a new private student loan to pay off these other loans. So remember everything you need to know about private student loans.
Changing Repayment Plans And Payment Amounts
When you have a Federal student loan, you can easily change your repayment plan by simply calling your lender or logging into StudentLoans.gov. Federal loans offer a lot of repayment options, such as income-based repayments, graduated plans, and extended plans.
However, private student loans don’t allow any flexibility in this. If you want or need a lower payment, you have to get a new loan. This is another area where student loan refinancing comes into play.
How Student Loan Refinancing Is Different From Student Loan Consolidation
Student loan refinancing is different from student loan consolidation, but many people use the terms interchangeably and it can be confusing.
Student loan consolidation is a special program offered by the Department of Education to simply combine all your Federal student loans into a single Federal student loan. Student loan consolidation only applies to Federal student loans, and it’s a free program. Learn more about student loan consolidation here.
Student loan refinancing is the process of taking out a private loan to replace your other student loans. This term gets confused for consolidation because many people consolidate multiple private loans into one new loan. You can refinance both private and Federal loans, so that adds another level of confusion to the term.
If you have Federal loans, you typically want to consolidate. If you have private loans, you typically want to refinance.
What To Look For When Refinancing Your Student Loans
The most important thing to look for when refinancing your student loans is what is the new loan going to do with your payment, and how did the company do that for you.
There are two levels that student loan refinancing companies can pull to change your monthly payment: the interest rate and the length of the loan.
One of the primary ways you can save money by refinancing is by getting a lower interest rate on your loan. Right now, interest rates are historically low. So if you have a loan from the early 2000s, it could make sense to refinance into a loan with a lower interest rate.
Second, maybe your credit score has improved since you originally took out your loans. If you remember from our article on everything you need to know about private loans, your credit score is a huge factor. Maybe with your improved score you can qualify for the best interest rates available.
The other way that you can lower your payment when refinancing your student loans is by extending the term or length of the loan. Maybe you have a 10-year loan now, and by making it a 20-year loan, you can almost cut your payments in half. Just remember that you’ll likely pay more interest over the life of the loan with a longer loan.
Can You Refinance Private Loans?
So you can refinance other private loans you already have? Absolutely. Student loan refinancing originated by simply refinancing other private student loans. Think of it like refinancing your mortgage on your house.
If interest rates drop enough, you could save a lot of money by refinancing your loans.
Also, remember what we said earlier – if you can’t afford your private loan payment, you can’t simply call and get it changed. You need a new loan. That’s where student loan refinancing comes into play.
However, before you think you can refinance all the time, you need to make sure your loans allow it. Check to see if your private student loans have any type of prepayment penalties. Some loans don’t allow you to refinance for at least a year, and charge penalties if you attempt to do so.
Can You Refinance Federal Student Loans?
If you have Federal loans, you might be looking at your interest rate of 6.8% and wondering if student loan refinancing makes sense for you.
Yes, you can refinance your Federal student loans, but you should only do it in one specific scenario. We put together a step by step process that shows you when exactly you should consider refinancing your Federal student loans.
As always, remember that a private loan will now replace your Federal loans, so really make sure you read our guide.
Can You Refinance Multiple Loans Together?
Yes, you can refinance multiple individual loans into one new loan. As we mentioned above, this is where some confusion arises because people mistake consolidating your loans with the process of Student Loan Consolidation.
If you have multiple private student loans, it can simplify things to have a single loan to make payments on. If you have Federal and private student loans, I don’t recommend combining them unless you’ve read our Federal student loan refinancing guide and are positive you’re never going to need the benefits of your Federal loans.
Can You Refinance More Than Once?
What happens if you refinance today, and next year interest rates drop again? Well, you can typically refinance again and again, as long as your student loan doesn’t have any type of prepayment penalty or prohibition.
Just remember too that your loan term will continue to expand out if you keep refinancing into new loans. Some lenders like Earnest offer very flexible repayment terms, but most stick to the standards of 10, 15, or 20 years.
When Is The Best Time To Refinance Your Student Loans?
The best time to refinance your student loans is before you “need” to. What do I mean by this?
A lot of people wait until they can’t afford their debt, and then look for options to refinance.
If you’re considering student loan refinancing, your credit score plays a big role in whether you’ll qualify or not. If you start missing loan payments, your credit score will drop and you might not qualify (or you might need a cosigner).
So, there are two times when I think you should look at student loan refinancing:
- Immediately after graduation
- If the interest rate drops by 1% or more
Immediately after graduation is the best time to simply get everything in order. If you have multiple loans, you can refinance them into one. You can also refinance into a payment plan that might be more affordable.
Second, you should revisit your loans once a year. If the interest rate has dropped by more than 1%, it can save you a lot of money to refinance your loans. Just make sure that you’re not adding too much to the length of the loan when you do this.
Should You Refinance Your Student Loans?
So, now that I’ve answered all the major questions that come up when dealing with student loan refinancing, there is just one question left: should you refinance your student loans?
The answer is yes, if:
- You have private student loans and need a lower payment
- The interest rate has dropped by more than 1% on your existing private loans
- You want to combine multiple private student loans
- You have Federal student loans on the standard 10-year plan and do not qualify for forgiveness or income-based repayment plans
The answer is no, if:
- You are trying to consolidate multiple Federal student loans (do student loan consolidation)
- You don’t need to change your private loan repayment amount or plan
- You have cosigner release and don’t need to remove anyone from the loan
- You have Federal loans and take advantage of income-based repayment plans
- You have Federal loans and take advantage of student loan forgiveness programs
How To Compare Student Loan Refinancing Companies
If you’ve decided that refinancing your student loans does make the most sense, it’s important that you compare student loan refinancing companies.
You need to shop around and find the lender with the best interest rates, no fees, and a term length that makes sense for you.
Another big consideration is the need for a cosigner. Ideally you shouldn’t have a cosigner for your student loans, but if the lender is requiring one, make sure that they also have provisions for cosigner release. A typical cosigner release agreement is on-time payments for 3 years.
The easiest way to comparison shop for student loan refinancing is to use a comparison engine like Credible. We love Credible because they shop loans at almost every major student loan lender. It’s quick, easy, and you can save money.
If you don’t want to use a comparison engine, we’ve reviewed almost every major lender. You can see how we rate each company individually on our Student Loan Lender Comparison Tool. You can go to each company and submit your information individually if you want (it’s just tedious and time consuming).
Final Thoughts On Student Loan Refinancing
Student loan refinancing can make sense in some situations, and is a bad move in others. It definitely can save you money, but you really need to do your homework before you jump into it.
I know that student loan refinancing lenders are pushing hard out there advertising how the can save you money. But if you have Federal loans, it really might not make a lot of sense to refinance.
Finally, don’t be confused anymore between student loan refinancing and student loan consolidation.
Remember, if you want an easy way to shop for student loan refinancing, check out Credible.
Photo Credit: ndul / 123RF Stock Photo
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