Focus on Refinancing Your Student Loans

For many students, loan repayment can be a complicated and costly undertaking that includes multiple lenders, multiple monthly repayment commitments, and multiple monthly deadlines. Loan refinancing can help simplify this process and control your costs. Many private lenders offer student loan refinancing programs that allow you to consolidate your existing federal and private loans under a single, new private loan. There are several benefits, including simplification of your loan repayment schedule and a lower overall monthly payment, but there are also some potential drawbacks with student loan refinancing, especially if you enjoy certain protections through your federal loans. Read on to find out if student loan refinancing makes sense for you!

For additional tips on managing your loans, choosing a repayment plan, or reducing your risk of default, check out our Focus on Repaying Your Student Loans.

How Does Refinancing Student Loans Work?

Student loan refinancing converts multiple federal and private student loans into a single monthly payment. While federal student loan consolidation may be an option for multiple federal student loans, this is not usually an option for borrowers with multiple loans from both public and private lenders. This is where student loan refinancing comes in.

Student loan refinancing is typically offered by private lenders who are willing to consolidate both your federal and private student loans into a new loan with a single monthly repayment plan. In order to refinance your student loans, you’ll need to determine:

• Whether you would actually benefit from student loan refinancing
• Whether you are eligible for student loan refinancing based on your financial outlook
• Whether or not you can receive favorable repayment terms including lower monthly payments and a lower interest rate

What are the Benefits of Student Loan Refinancing?

Student loan refinancing can offer a number of valuable benefits, especially to borrowers who must make multiple payments to both public and private lenders each month.

• Refinancing consolidates multiple monthly payment plans into a single monthly installment plan. This makes it easier to schedule, manage, and afford your monthly loan responsibilities.
• By lowering your overall monthly payment responsibilities, you lower the risk of financial hardship as well as the risk of defaulting on any of your loans.
• Lowering your monthly payment also decreases your debt-to-income ratio (DTI), which is an important factor in determining your eligibility for future lending opportunities like leasing a vehicle or purchasing a new home.
• Your new loan should also offer a lower interest rate than your existing loans, which will ultimately save you money across the life of the loan.

Should I Refinance Student Loans?

The number one reason to refinance your student loans is to save money. How much money can you save by refinancing your student loans? While it depends on the balance of your debt and your financial outlook, Forbes estimates that some borrowers will save as much as $20,000 over the life of the new loan just by refinancing!

A good student loan refinancing plan allows you to save money by:

• Consolidating multiple loans into a single monthly payment
• Lowering your interest rate

In order to determine whether or not you should refinance your student loans, you should be sure that it will ultimately save you money. There are three questions you must ask first:

1. Do I have multiple loans to repay through both federal and private lenders?
 

Refinancing is most valuable to those who are managing multiple monthly payments, especially in cases where private loans may prevent you from enjoying the benefits of total federal consolidation.

2. Can I lower my interest rate by refinancing?
 

Be sure that your new loan carries a lower interest rate than that of your existing loans. Take steps to determine that your new interest rate and repayment terms will actually save you money in the long run.

3. Will refinancing result in the loss of federal loan protections or the loss of opportunities for loan forgiveness?
 

Be sure that you don’t already benefit from protections or loan forgiveness opportunities through your federal loans. By refinancing, you’ll be converting these into private loans. Doing so will eliminate any federal protections or progress already made toward federal loan forgiveness.

Presuming these three conditions—that you are carrying multiple loans; that you do find a lower interest rate; and that you don’t already enjoy protections or benefits on your federal loan—you would likely benefit from student loan refinancing.

How Can I Qualify for Student Loan Refinancing?

There’s a short, easy answer to this question.

You would likely qualify student loan refinancing if you have:

• Good Credit
• A Paying Job
• A low debt-to-income ratio

Lenders will use your credit score to determine your likelihood of repaying your loan, and they will use your income to determine your actual ability to pay your loans. Lenders will also look closely at your debt-to-income ratio (DTI)—which is the balance between your income and your monthly debt payments (i.e. mortgage, car payments, credit card debt, student loans, etc.). A DTI of higher than 40% (which indicates that more than 40% of your monthly income is spent paying debts) would likely limit your opportunities for student loan refinancing.

According to Forbes there are a few additional conditions which may vary from one lender to the next, but which could impact your eligibility for a beneficial student loan:

• Some lenders may place limits on balance size. If your student loan burden exceeds this threshold, you may not be able to consolidate the sum total of your loan debt.
• Certain lenders may also require you to have graduated, or to have earned a specific degree level, in order to be eligible for refinancing. This is because borrowers who do not complete college or earn a degree are at a higher risk of financial hardship, missed payments, and defaulting.

What Credit Score Do I Need to Refinance My Student Loans?

Your credit score is the single most important determinant of your eligibility for loan refinancing. Lenders view your credit score as an indication of your ability to repay your debt, and will use this figure to calculate the risk of taking on your loans. If you are viewed as a high risk, lenders will either be unwilling to take on your loans, or will only do so at a higher interest rate. In the latter case, this interest rate might ultimately overshadow any benefits from refinancing.

Your credit score is based on a scale from 300 to 850. Though credit scoring models may vary, the standard credit score breakdown looks like this:

• Poor: 300-629
• Fair: 630-689
• Good: 690-719
• Excellent: 720-850

In order to be eligible for student loan refinancing, you would need a credit score that is Fair, at a minimum. Most lenders will require a score of at least 650-680 before considering your eligibility. The higher your credit rating, the more likely you are to qualify for a favorable interest rate.

Can I Refinance My Student Loans if I Have Bad Credit or No Credit?

Some prospective borrowers may struggle with bad credit. If you have a history of late or missed credit card payments, you’ve had bad debt referred to a collection agency, or you’re carrying an exceptionally high debt balance, your credit score may prevent you from qualifying for loan refinancing.

It’s also possible that a very limited credit history could prevent you from qualifying for refinancing. For instance, recent graduates who haven’t yet held a credit card, auto loan, or other major credit expense in their name may lack a complete credit history. This limited data makes it harder for a lender to evaluate the risk of lending to you. As a result, you may not qualify for student loan refinancing.

In either of these cases, you do have the option of securing a cosigner with a full credit history and a good credit rating. Your parents or spouse may be a good candidate for cosigning on your refinanced loan. However, it is very important to remember that your cosigner would be directly impacted by your ability to meet your new loan commitment.

Late or missed payments, or a default on your loan, would have a negative effect on your cosigner’s credit rating and financial outlook. Be sure that you are prepared to meet your loan commitments before asking a close personal relation to take on this risk.

If you don’t have a cosigner, you may consider embarking on an effort to improve your credit rating. In fact, this is an advisable course of action either way. In order to do so:

• Sign up for a free credit monitoring service like Credit Karma or Credit Sesame and begin tracking your own credit scores. You can also check your credit for free through each of the three major credit bureaus: Equifax, Experian, and Transunion.
• Find, and work to pay off, any bad debts on your credit report.
• Identify and dispute any inaccurate, negative credit alerts.
• Pay all of your upcoming debts and bills on time, every month.
• And most importantly, be patient, and remain committed to your financial health. If you do the right things over time, your credit score will eventually improve. You can revisit the idea of refinancing your student loan when you’re credit rating is ready.

Does Refinancing Student Loans Hurt Your Credit?

In general, refinancing your student loans will not significantly impact your credit rating. However, when you submit an application for loan refinancing, this will prompt a “hard credit inquiry.” Typically, this inquiry will result in a roughly five-point drop in your credit rating. This is a modest decline that can usually be repaired quickly as long as you stay current on your overall debt commitments.

However, this does suggest that there is a greater risk to your credit rating in submitting multiple loan refinancing applications. This underscores the importance of doing your homework first. Find the most favorable loan opportunity available to you and reach out to the lender with any questions. Be sure you understand the terms and conditions of any new loan in full. It doesn’t cost anything to ask questions. A credit inquiry is only prompted when you actually submit your application. If you can limit yourself to just a single application, the impact on your credit score will be minimal.

In order to prevent any negative impact on your credit rating, make sure you:

• Only submit your application for student loan refinancing after conducting extensive research on the best opportunities
• Continue to repay your student loans on time until your application is approved and your new loan repayment period begins
• Maintain timely and full payment throughout the life of your refinanced loan

Is There a Downside to Refinancing?

While student loan refinancing can be beneficial to the right borrower, there are drawbacks for less-than-ideal borrowers. Most notably, consolidating your loans with a private lender will result in the loss of any protections or forgiveness opportunities on federal student loans.

For instance, your federal loans may allow you to enter into an income-driven repayment plan. This ensures that your monthly loan repayments don’t exceed a threshold which is determined by your actual income. In this case, the federal loan provides certain assurances in the case of lost income or financial hardship.

Your new loan will eliminate this possibility, which means you would likely have less recourse and fewer options in the event of lost income. If you lack stable, long-term employment security, you may want to consider a federal income-driven repayment plan in lieu of student loan refinancing.

To learn more about this and other repayment plans, check out our Focus on Repaying Your Student Loans.

The same risk holds true for student loan forgiveness programs. If you are enrolled in a student loan forgiveness program that would ultimately eliminate the remaining total of your loan debt after meeting certain conditions, or exceeding a certain number of years, refinancing would eliminate this possibility. If you are already far enough along on the path toward forgiveness, you would likely want to avoid refinancing.

For more on these programs, check out our Focus on Federal Loan Forgiveness.

This also underscores the greater value of refinancing earlier in the life of your loan. The greater benefits of student loan refinancing may be felt across the lengthy duration of your loan repayment. Moreover, refinancing at that juncture would add additional time to the length of your repayment plan. If you’re already relatively close to meeting your debt responsibilities, the effort of refinancing might outweigh the benefits. In this case, only seek refinancing if you are presented with the opportunity for a considerably lower interest rate opportunity.

What is a Good Rate to Refinance Student Loans?

In a general sense, this will depend largely on the interest rates on your current loans. The primary goal is to find a new loan with a lower interest rate. Your interest rate eligibility will depend on your credit rating, income, and DTI. Interest on refinanced loans will typically range between 3% and 6.5%.

How favorably you view these interest rates will depend on your current interest rate. Do your research, make contact with reputable lenders, and ask plenty of questions before submitting an application to refinance.

What is the Best Company to Refinance Student Loans?

Simply stated, the best company to refinance student loans is the company that will give you the most favorable conditions, including a low monthly payment, a lower interest rate, and a number of protections in the event of financial hardship. Of course, you want to be sure that your lender has a positive reputation in general, and is recognized specifically in the area of student loan refinancing.

Shop around and get quotes from multiple lenders before proceeding. According to its criteria, which include interest rates, flexibility, and consumer protections, Investopedia identifies the following as its Top Ten Student Loan Refinance Companies:

• Credible: Best Refinancing Marketplace
• RISLA: Best Overall
• Splash Financial: Best Interest Rate
• SoFi: Best Benefits
• Discover: Best for No Fees
• CommonBond: Best Repayment Options
• Citizens Bank: Best for Borrowers Who Didn’t Graduate
• PenFed Credit Union: Best for Spousal Loans
• Laurel Road: Best Parent Loan Refinancing

For more on the borrowing and repayment process, check out our Guide to Financial Aid for College.