Upon graduating, the average student loan borrower has just over $37,000 in student loan debt. Meanwhile, the average graduate student holds significantly more — sometimes up to hundreds of thousands of dollars.
If you’re tired of paying hundreds or even thousands of dollars toward student loan debt, there’s some good news: You can apply for student loan refinancing. Refinancing through a private lender could give you the opportunity to lower the interest rates on your loans and save money over the life of the loan. However, you do lose access to federal benefits, so make sure you fully understand how refinancing works before moving forward.
How Student Loan Refinancing Works
Student loan refinancing is the process of paying off your existing loan loans with a new loan. Ideally, the new loan would have a better interest rate or better terms. For example, the borrower may want to switch from a fixed rate to a variable rate or extend the term in order to lower their monthly payments. (Note: You may pay more interest over the life of the loan if you refinance with an extended term.)
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 such as income-based repayment plans, deferment, and forbearance.
How to Refinance Student Loans in 7 Steps
If you’re considering refinancing your student loans, you’ll want to compare lenders and select the loan with the best interest rate and term. Once you choose a lender, you’ll apply for the loan and start making payments to the new lender. Here’s a more in-depth look at how to refinance your student loans in seven steps.
1. Should You Refinance Student Loans?
The first question you need to ask yourself is, “Should I refinance my student loans?” To answer the question, you need to understand more about student loans and the specific types of student loans you have. 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 they are not backed by the U.S. government.
Determine which types of loans you have and which ones you’re wanting to refinance. Federal student loans, for example, can be consolidated into one loan with one monthly payment, known as a Direct Consolidation Loan. If you’re planning on using federal benefits, this option could be the best. If you want to refinance private loans only or federal and private loans, a traditional student loan refinance is what you’ll need. Keep in mind, though, that you will lose access to federal benefits when refinancing with a private lender.
Recommended: Consolidate vs Refinance Student 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 working towards student loan forgiveness, you’ll probably want to think twice before refinancing your federal student loans.
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.
3. Am I planning on using a forbearance or deferment program?
Both forbearance and deferment allow the borrower to suspend their payments for a period of time and for a variety of reasons, such as economic hardship or military service. Student loan forbearance and deferment are for federal student loans only. If you think you may need this benefit in the future, it may not be best to refinance with a private lender.
Some private lenders, however, do 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.
4. Do I have a good or great financial history?
When you refinance your student loans, your lender will base your interest rate off of your credit score, credit profile, debt-to-income ratio, payment history, and other financial data. If your credit score is less than ideal, you may not qualify for a lower interest rate, which could defeat the purpose of refinancing. It’s best to be aware of where you stand credit-wise before moving forward with a refinance.
2. Prepare Your Personal Financial Information
If you decide that refinancing is right for you, it’s a good idea to shop around at different lenders to check their rates. 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 to give you a quote:
• Total student loan debt
• Debt-to-income ratio
• Credit score estimate
The information a borrower needs to provide varies from lender to lender, but this is the basic idea.
3. Compare 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, such as:
• 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 you gathered from Step 2. 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).
4. Choose a Lender and 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 interest rate, 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 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.
5. Gather Necessary Documents
Once you’ve chosen a lender and a loan, you’ll 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 cosigner, they will need to provide this information, as well.
Once you’ve gathered all your documentation, it’s time to apply for your new refinance loan. Upon turning this information into the lender, they typically run a hard credit check and send the application through a final approval process.
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.
7. Waiting for Approval
Once you’ve applied for the loan and submitted all your documentation, all that’s left to do is wait for your approval. 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.
Once your loan is approved, consider signing up for autopay (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.
Pros and Cons of Refinancing Student Loans
As with anything, there are both pros and cons of refinancing student loans. While you could receive a lower interest rate and lower monthly payment, you will lose access to federal benefits and programs.
Pros and Cons of Refinancing Student Loans
|Lower interest rate possible||Lose access to federal forgiveness and repayment programs|
|Lower monthly payment possible||May pay more in interest over the life of the loan|
|Switch from fixed to variable rate, or vice versa||Fees may be charged|
|Can change the loan term||Lose any remaining grace periods|
|Condense multiple loans into one loan with one payment||Must have good credit to qualify for the best rates|
Refinancing Student Loans With SoFi
And there, you’ve done it. You’ve learned how to refinance your student loans in seven steps. If you decide that refinancing is right for you, SoFi offers an easy online application, competitive rates, no fees, and other member benefits such as career coaching and financial advice.
Does refinancing student loans mean the same thing as consolidating student loans?
Refinancing and consolidating student loans are similar and often used interchangeably, but they do mean different things. A student loan refinance is done through a private lender and combines multiple federal and/or private loans into one loan with one monthly payment. With this type of financing, you lose access to federal benefits. A student loan consolidation, on the other hand, is done through the U.S. Department of Education and combines multiple federal loans into one. Your payment does not typically decrease, but you do keep access to federal benefits and streamline your monthly payments into one.
Can refinancing a student loan help to pay off debt faster?
Yes, refinancing student loans can help you pay off your student loan debt quicker. Ideally, you’ll reduce your interest payment and shorten the length of your loan. This allows you to pay less money in interest overall and get rid of your debt as soon as possible.
What are the downsides of refinancing student loans?
The biggest downside to refinancing student loans is losing access to federal benefits, repayment plans, and forgiveness programs. However, if you are in a field that’s not eligible for forgiveness and you don’t plan on needing a deferment or forbearance, it could be worth the savings to move forward with a refinance. As always, it’s best to heavily weigh the pros and cons for your specific situation before moving forward.
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.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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