Did you know that upon graduating, the average student loan borrower has approximately $37,000 in student loan debt? Meanwhile, the average graduate student holds significantly more—sometimes up to hundreds of thousands of dollars.
No matter which way you slice it, that much student debt amounts to a lot of interest payments, made by both the collective holders of over $1.44 trillion of student loan debt, and by each individual borrower.
If you’re one of those borrowers that’s tired of paying hundreds or even thousands of dollars toward student loan interest, there’s some good news: Student loan borrowers have many options for repayment.
One of the more compelling options for borrowers to have a look at is student loan refinancing. Through refinancing with a private lender, some student loan borrowers have the opportunity to lower the interest rates on their loans.
Lowering an interest rate isn’t the only reason that borrowers are refinancing. Below, we’ll dive into the details of who refinances student loans and how to refinance student loans. And by the end of the next few paragraphs, you’ll hopefully be able to answer the question, “Should I refinance my student loans?”
How Student Loan Refinancing Works
What is student loan refinancing? Refinancing is the process of paying off your existing loan, or multiple loans, with a new loan. Ideally, the new loan would have a better rate of interest or terms that work better for the borrower than the current terms. For example, the borrower may want to switch from a fixed to a variable rate or extend their term so their monthly payments are lower.
To understand why a borrower might refinance, it helps to first understand the major parts of a student loan. Every student loan is comprised of the following variables:
1. The value of the loan (the “principal”)
2. The interest rate on the loan
3. The repayment period (also known as the loan’s term)
When a borrower refinances their student loan(s), they are typically looking to change either the second or third list item, or both. Keep in mind that refinancing means forfeiting federal loan benefits like income-based repayment plans, deferment, and forbearance. Here are some of the most common potential outcomes from student loan refinancing:
Lower Interest Rate
By lowering the interest rate on a loan, the borrower may pay less in interest over time. Those who qualify for a lower interest rate typically have a solid credit score and income.
Switch to a Fixed/Variable Rate
It is also possible to refinance a loan from a fixed rate to a variable rate, or vice versa. A fixed rate doesn’t change over the life of a loan. Federal student loan interest rates are determined by federal law and depend on loan type; since 2006, new loans adjust their interest rates every year on July 1. A variable interest rate typically uses an underlying interest rate benchmark and fluctuates accordingly.
Oftentimes, variable interest rates start lower than fixed rates, but you’re taking a risk given that they could rise at some point in the future. Refinancing can give you the flexibility to choose between fixed or variable rates.
Lower Monthly Payment
By changing the student loan repayment period, a borrower may be able to lower their monthly payment. By extending the loan repayment period, monthly payments get lower, because the borrower is now taking longer to pay off the loan. Borrowers who go with this strategy should be aware that although their monthly payments are lower, they will likely owe more in total interest over time.
Shorter Loan Term
It is also possible to refinance a loan to a shorter repayment period. This strategy generally results in a higher monthly payment, but can save the borrower money in interest over time. And it can help you get out of debt faster.
Some graduates may want to consider refinancing simply for the benefit of consolidating multiple student loans into one new loan, and thus one easy monthly payment.
It should be noted that multiple student loans can be effectively consolidated through the process of refinancing, but this is different than Federal Loan Consolidation. Federal Loan Consolidation is a program offered by the federal government that allows borrowers to wrap each of their federal loans into one loan with a weighted average of their original loan interest rates rounded up to the nearest 1/8 of 1% (0.00125%).
Should I Refinance My Student Loans?
To know who refinances student loans and whether you should too, the first step is to identify your types of student loans. Student loans come in two main varieties: federal and private.
Federal student loans are backed by the U.S. government’s Department of Education. These are the loans that borrowers apply for using the Free Application for Federal Student Aid (FAFSA®) form. Private loans, on the other hand, are obtained through a bank, credit union, or other lender, and these loans are not backed by the U.S. government.
Some banks are only able to refinance federal loans, and some are able to refinance both federal and private loans. Always be sure to ask whether a student loan refinancing company can refinance the types of loans that you currently have. Next, use that information to ask yourself the following questions:
1. Am I planning on using a student loan forgiveness program?
Because refinancing is the process of paying off your existing loans with a new, private loan, you will lose any access to the programs offered by federal loan programs, such as student loan forgiveness or income-driven repayment.
If you are currently using an income-driven repayment plan and working towards student loan forgiveness, you’ll probably want to think twice before refinancing your federal student loans. And only the federal government offers forgiveness programs to graduates who are working in certain areas of public service.
2. Am I currently using an income-driven repayment plan?
Flexible repayment plans such as one of the income-driven repayment plans are another offering by the federal government on federal student loans. Private loans don’t generally offer any such programs. If you need to keep your monthly payments low and have exclusively federal student loans, refinancing might not be right for you. Refinancing with a private lender forfeits your access to the government’s income-based repayment plans.
However, if you want to shorten your loan term and can afford to pay more, refinancing might help because it may allow you to pay off your loans at a lower interest rate.
3. Am I planning on using a forbearance or deferment program?
Both forbearance and deferment allow the borrower to suspend their payments for a certain period of time and for a variety of reasons, such as economic hardship or military service.
A key difference between the two is that the government pays interest costs during periods of deferment on Perkins and subsidized loans. During periods of forbearance, you are responsible for paying the interest that accrues on any federal loans you have.
Some private lenders offer programs that are similar to forbearance. One such program is SoFi’s unemployment protection program, which allows qualified borrowers to suspend their loans while they look for a new job. SoFi also has a deferment program for qualified borrowers to pause payments if they go back to graduate school.
If it is likely that you would ever need one of the federal government’s forbearance or deferment programs, then this might be a reason to put off refinancing student loans, because you give up your access to these federal programs if you refinance with a private lender. Again, make sure to do your research before making a decision.
4. Do I have a good or great financial history?
There’s a bit of a misperception that federal loans will always offer a better interest rate than private loans. Due to the low interest rate environment and because of student loan refinancing companies looking to shake up the industry by providing competitive rates and top-notch customer service, many borrowers may be able to achieve a better private loan rate.
This could be especially true for borrowers that have good credit and a solid financial foundation. Even if you think that this isn’t you, it costs nothing to check and see if you qualify for a better rate.
Steps To Refinance Student Loans
Prepare Your Personal Financial Information
If you decide that refinancing is right for you, or you just want to give it a shot and see if you qualify for a better rate, it’s a good idea to shop around at different lenders to check their rates. But before you do that, you’ll want to have your basic personal financial information ready. In general, potential lenders need some combination of the following information about you to give you a quote:
-Total Student Loan Debt
-Total Housing Costs
-Credit Score Estimate
The information a borrower needs to provide varies from lender to lender, but this is the basic idea.
Check Rates and Terms with Multiple Lenders
Because student loan refinancing companies set their own rates and terms, it is important to do some shopping around. Not only will you want to get rate quotes, but you may also want to ask questions like the following:
-Are there other fees, such as origination fees?
-Is there a prepayment penalty if I want to pay my loan off early?
-Can the lender refinance both federal and private loans?
-Is there a forbearance program if I am laid off from my job?
-How do I access customer service?
-What is the loan application timeline?
If a company interests you, you can submit the information that you gathered from Step 1. With this information, the lender will likely run a soft credit check. This should not affect your credit score, but make sure the lender guarantees it won’t.
If you meet a lender’s eligibility requirements, they’ll generally provide you with multiple offers, including offers with different term lengths and interest rates (both fixed and variable rates).
Choose a Lender and a Loan
After you’ve had the chance to review both the loan offers and the lenders themselves, it’s time to decide.
While many borrowers gravitate toward the loan with the lowest rate of interest, it is worth remembering that the lowest rate might not amount to the lowest amount of total interest paid on a loan.
The longer the loan’s term, the more interest a borrower will pay. For example, if you have a loan term of 10 years, you’ll have to pay off the entire loan balance plus the interest that was accrued over the 10 years. But, if you extend your loan term to, say, 20 years, that means 10 more years of interest accruing on your loan.
Also, a loan that charges an origination fee could end up costing more than a loan with a higher rate of interest that does not charge an origination fee. Often, an origination fee is added to the balance of the loan, with the interest rate calculated on top of this new figure.
Again, weigh all of the information you discover.
Gather Your Documents
Once you’ve chosen a lender and a loan, you’ll probably submit documentation that supports the information you provided during the initial rate check, as well as identifying information.
Although it will vary by lender, you’ll likely need some combination of the following:
-Proof of citizenship
-Valid ID number
-Paystubs, tax returns, or other income verification
-Statements for all of the loans you are planning to refinance
If you are applying for a refinance with a co-signer, they will need to provide this information as well.
Upon turning this information into the lender, they typically run a hard credit check and send the application through a final approval process. How long this process takes will depend on the lender, but it could be as short as 24 hours and as long as a couple of weeks. Check with each lender to be sure.
A lender should inform you if any of your documentation is missing, but you may want to check back in after a few days if you haven’t heard from a customer service representative.
Wait for Your New Loan to Be Approved
Continue making all payments on your existing loans while you wait. Soon, you should hear from your new lender about the status of the refinance application, including information on where new payments are to be directed.
Once your loan is approved, consider signing up for auto-pay (if they offer it and you haven’t already). Many lenders offer a discounted rate for borrowers who allow payments to be automatically deducted from their accounts.
And there, you’ve done it! You’ve learned how to refinance student loans. If you ultimately decide that refinancing is right for you and venture down this path, good luck and enjoy your new, shiny student loan.
To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.