Depending on your specific financial circumstances, refinancing your student loans could save you money — though how much depends on your credit history, how much you owe, what kind of refinancing plan you choose, and more.
In this article, we’ll walk you through how student loan refinancing works and the various ways in which it may save you money in the long term.
Table of Contents
Key Points
• You could save money by refinancing your student loans, but it depends on several factors, including your credit history, how much you owe, and what kind of refinancing plan you choose.
• Refinancing your student loan can help you lower your monthly payment and interest rate and pay less interest over a shorter loan term.
• Most credit lenders will accept loan applications from people with a credit score of 670 and above, but they may not offer the lowest interest rates until your credit score is higher.
• Make sure to research how refinancing your student loans might impact you and the banks or financial institutions that offer student loan refinancing to get the best deal.
• Consider adding a cosigner to your application if your credit history needs work.
What Is Student Loan Refinancing?
Refinancing your student loans essentially means taking out a new loan to cover the cost of your existing loans and then paying that new loan off instead. You can think of it as trading your old student loan, or loans, for a new one.
Along with saving money, one of the primary reasons people refinance their student loans is to simplify their life and repayment schedule if they have multiple student loans they’re paying each month. Refinancing may allow the borrower to get a lower interest rate or change their loan terms. Keep in mind, though, that refinancing federal student loans with a private lender makes you ineligible for federal benefits, such as income-driven repayment plans and student loan forgiveness.
The money-saving aspect of refinancing student loans can work a couple of different ways. Let’s take a closer look.
How Does Refinancing Student Loans Save You Money?
Student loan refinancing can save you money in a couple of different ways:
• Refinancing may score you a lower monthly payment, which means you’ll have more income available in your budget each pay period.
• Depending on your credit score and how it’s shifted since you took out your original loans, refinancing could also result in a lower interest rate, which may help you spend less on your student loans as a whole (as well as potentially lowering your monthly payment amount).
• Finally, refinancing your student loans may also allow you to repay the loan over a shorter time span (in other words, get a shorter loan term), which can be an easy way to save money in interest over the course of the loan’s overall lifetime and simply help you get out of debt faster.
Of course, all of these various outcomes will depend on your credit history, what kind of refinancing loans you qualify for, and how they stack up compared to your original loan. And keep in mind that lowering your monthly payment might also mean a longer loan term, which means it doesn’t actually save you money in the long run. You may pay more interest over the life of the loan if you refinance with an extended term.
Still, for some, a lower monthly payment is a critical step toward a healthier overall financial life, so it may be worthwhile depending on your circumstances.
The best way to figure out if refinancing your student loans will actually save you money is to use a loan calculator to determine how much you’ll pay over the remaining term of your original loan versus the total amount you’ll pay over the entire lifetime of the new loan.
Whichever loan comes up with a lower overall number is the one that saves you the most, but again, under some circumstances, paying more over the long run may make your present-day financial life easier.
Take control of your student loans.
Ditch student loan debt for good.
How Much Could You Save by Refinancing Student Loans?
The specific amount you might save by refinancing your student loans depends on many factors, including how much you have left to pay off on your original loan (and its interest rate), your credit history, and your current financial standing.
However, in most cases, if your current loan’s interest rate is 10% or higher, and you have a credit score of 670 or more, chances are you could save some money by refinancing, although you may not be able to take advantage of the lowest interest rates. Let’s look at an example.
Let’s say you have $30,000 in outstanding student loans with eight years left on the loan’s term and a 10% interest rate. Over those eight years, with interest, you’d pay a total of $43,701.59, which means $13,701.59 in interest alone.
Now, say you refinance that loan and instead get a new one for the same amount — $30,000 — but with a five-year loan term and a 5% interest rate. Over the lifetime of that loan, you’d pay a total of $33,968.22, or only $3,968.22 in interest. That’s a pretty substantial savings!
However, your monthly payment would go up over $100 for the second loan, from $455.22 to $566.14, and that’s not including any origination fees or other expenses related to taking out the new loan.
Still, a savings of almost $10,000 in total interest might be worth it for some borrowers.
How Can I Refinance My Student Loans?
Refinancing your student loans is pretty simple these days, thanks to the internet. You’ve already embarked on the first step: research.
Along with researching what it means to refinance your student loans and how doing so might save you money, you should also research different banks and financial institutions that offer student loan refinancing. This allows you to compare and contrast the various programs, including their interest rates, their loan term options, and other features.
Once you’ve found a few companies you feel comfortable with, it may be worth requesting quotes from each of them to learn which will offer the lowest interest rate or monthly payment.
In the majority of cases, you’ll be able to complete the entire application process, from the initial rate quote to the official application, online. You’ll need to provide documentation proving your identity, residence, college graduation (or enrollment), and the loan payoff statements from your current lender.
Other Student Loan Refinancing Tips from SoFi
Ready to take the leap into refinancing for yourself? Here are some tips to help make the process as smooth (and helpful) as possible:
• Shop around for more than just rates. While low interest rates or monthly payments may be attractive, there are other important factors when choosing who to call your student loan refinancing servicer, such as whether or not you’re able to pay off the loan early without facing penalties.
• Get as many of your ducks in a row as possible ahead of time. The higher your credit score, the better your employment situation, and the lower your other existing debts, the more money you stand to save by refinancing your student loans. Tackle as many of those projects and save as much money as you can ahead of time before applying.
• Consider a cosigner. If your credit history could still use some shining up, adding a cosigner to your application could help boost your chances of getting approved, and possibly for a better rate. But proceed with caution: your cosigner is legally responsible for your loan to the same extent you are, and if you fall behind on your payments, it can impact their credit score, too.
The Takeaway
Refinancing your student loans can help you save money by lowering your interest rate, shortening your loan term, or both. Refinancing may also help you make ends meet in the short-term by lowering your monthly payment.
Note that by refinancing federal student loans, you lose access to federal benefits, such as income-driven repayment plans and student loan forgiveness. If you’re using or plan on using these benefits, it’s best to hold off on refinancing.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQ
What isn’t a good reason to refinance student loans?
Everyone’s financial circumstances and needs are different, but it’s important to keep in mind that if you refinance federal student loans with a private lender, you may lose access to income-driven repayment plans and federal student loan forgiveness programs, which aren’t available to those with private loans. However, some private lenders may offer hardship assistance and deferments.
Does refinancing student loans lower monthly payments?
Refinancing your student loans can lead to many different outcomes depending on your current loans, your credit history, and other factors related to your financial situation. But yes, in some cases, refinancing your student loans can lower your monthly payments. However, lower payments may also mean you end up paying more interest on the loan overall.
How much do you have to make to refinance student loans?
Each bank and lender has its own specific requirements as far as student loan refinance eligibility, and they may or may not specify a minimum income. It’s best to contact the lenders you’re considering and ask them directly what the income requirements are.
Photo credit: iStock/hobo_018
SoFi Student Loan Refinance SoFi Loan Products
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: 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.
SOSLR-Q126-033