Should I refinance my student loans?
One of the most common questions I get about student loans is whether or not it makes sense to refinance. Why? We’re looking for any way to lessen the burden and make it easier to pay off our student loans. Here’s everything you need to know about refinancing your student loans and how to determine if refinancing makes sense for you.
What does it mean to refinance my student loans?
Refinancing your student loans entails taking out a new loan with a lower interest rate to replace your current student loans. There is potential to save a lot of money over time because we’re paying a lower interest rate. Sounds good, right?
How the process works to refinance your student loans
If you decide to refinance your student loans, you’d need to determine which lender you’d like to use for the refinance. You can compare terms (like interest rate, monthly payment, and flexible payment options) for multiple lenders without affecting your credit score since this just involves a soft credit check. Some lenders will have you make a profile.
After you’ve determined which lender you’d like to use, you fill out an application and wait for approval. Continue to make payments on your student loans until your new lender tells you otherwise.
You’ll then set up your monthly payment with your new lender. Many offer a decrease in interest rate for automatic payments.
What information will I need to fill out an application to refinance my student loans?
For most student loan refinancing applications, you’ll need the following information:
Social security number or government ID number
Drivers License or passport number
Proof of income - pay stubs or a job offer letter
Federal and private student loans statements
If you have a cosigner on the loan, you’ll want this information for them as well. Ask the refinancing lender if you’ll need any other documentation so you can have it handy when you apply.
Private vs. Federal - does it make a difference when it comes to refinancing?
You can refinance both your private and federal student loans. What’s important to know is that when we refinance our federal loans, they become private loans with a new lender.
We can no longer opt into the various flexible federal repayment options like income-based repayment. You will also no longer be eligible for federal student loan programs like Public Service Loan Forgiveness and Teacher Loan Forgiveness.
If you are benefiting from some of the flexibility of your federal student loans, you can look into other ways to decrease the interest rates. You may be able to get a small reduction in rate for making automatic payments and maintaining a track record of on-time payments.
Is refinancing the same as consolidation?
Nope! Student loan consolidation means rolling all of your student loans into one. The payment becomes simplified in that you’re making one payment instead of multiple payments, but the terms of the loans themselves don’t change. You are not paying a lower interest rate.
Student loan consolidation is only available for your federal loans and would result in a Federal Consolidation Loan. When you consolidate you can lower your monthly payment by stretching out the period over which you are paying back your loans but it doesn’t change the amount of interest you are paying.
It’s important to know that consolidation restarts the clock on federal forgiveness programs.
Refinancing, on the other hand, is taking out a completely new loan with new terms to replace your current student loans. We do this to reduce the interest rate we’re paying so that we pay out less money in total over the course of paying down the loan.
Am I a good candidate for refinancing?
In order to get terms that make it worth it to refinance, we will have to meet certain qualifications. Each lender has their own mix of requirements, but they’ll look at a number of factors including your credit score, your income, and your current debt to income ratio.
You can pull your credit score on Credit Karma, myFico, and NerdWallet, among many other places. There’s a common misconception that it hurts your credit score when you check it, but that’s not true. You can check your credit score as many times as you’d like and it won’t affect your score.
Lenders will also look at your income to make sure you can afford the monthly payments. They not only look at the amount you are earning but also your income in relation to the amount of your monthly debt payments. Your debt-to-income ratio is the total of your minimum debt payments divided by your total income. The lower the better.
If you aren’t a good candidate on your own, you can bring in a cosigner to improve your application. You’ll want a cosigner with good credit, steady income, and a low debt-to-income ratio. Being a cosigner comes with responsibility. If you aren’t able to make payments on the loan, your cosigner will be required to make the payments.
Will refinancing my student loans save me money?
The whole point of refinancing your student loans is to save you money, so we want to be sure we’re accomplishing this goal. The key to saving money is lowering the interest rates on our student loans.
With that said, we sometimes don’t see our payments go down when we refinance our student loans. They may go up if we reduce the term of the loan or the amount of time it will take to pay it down. In other words, instead of paying off our loans in ten years, we might be required to pay them off in five years. Our monthly loan payments will be bigger but more of that money is going towards principal than interest. As long as the monthly payments work with our income and lifestyle (ie our budget), that’s okay.
It’s fun to calculate how much money we’d save over the course of our loans by refinancing. You can use a calculator like this student loan refinance calculator to calculate the total savings.
If you aren’t saving money, you probably had low interest rates on your student loans to begin with. If you don’t qualify for favorable terms, you can work to increase your credit score or lower your debt-to-income ratio.
Can I afford the new monthly payment?
This is a really important question. Even with the best of intentions, if the monthly payments aren’t workable, it’s going to cause us a lot of stress and might cause us to take out more debt. You can put together a spending plan or use a budgeting spreadsheet to help you figure out what you can afford as far as monthly payments.
You can always pay off your loans more quickly than required if you decide to go with a more conservative payment plan.
How do I choose which lender to refinance my student loans?
If refinancing is a good option for you, the next step is to choose a lender. Comparing the terms of the loan is really important. Each lender has a slightly different way of evaluating you as a candidate, so expect to receive different offers and options from different lenders.
It’s also worthwhile to look at consumer reviews. How easy was the company to work with? What is customer service like? Is the site or app easy to use? Overall, are people who refinance with this lender happy? When we refinance our loans we’re entering into a new, long-term relationship with a new lender. We want to make sure it we’ll have a positive experience working with them.
Also take into account the repayment options that are available. Some lenders offer flexibility in repayment like allowing you to pause payments during job loss or providing a six month grace period before payments start after you graduate college.
Are there tax implications to refinancing your student loans?
After you refinance, the interest on your student loan will still be deductible as long as the new loan is still considered a student loan. It’s definitely worth confirming with your lender if this is a tax benefit available to you.
In Conclusion
Refinancing our student loans is a great way to reduce the amount of interest we are paying so that we pay less in total over the course of paying down our loans. That leaves us with extra money we can put toward other financial goals. Apply through this page to get a $300 welcome bonus when you refinance. (If you use our link, we’ll get something, too.)
Refinancing isn’t for everyone. It’s only worth it if we save money on interest and if we are able to make the new monthly payments. If we qualify for federal student loan forgiveness programs or want to make some form of income based payments, it probably doesn’t make sense to refinance since we’d lose both of those options.