Editor's Note: Since the writing of this article, President Biden signed the debt ceiling bill on June 4, canceling the federal student loan payment pause as of Aug 30, or “60 days after June 30.” Later this month, the Supreme Court will decide whether the Biden-Harris Administration’s Student Debt Relief Program can proceed. Loan payments are expected to resume in October.
Student loan refinancing is the process of taking out a new loan to pay off your existing loans. If you qualify for a lower interest, one of the main benefits of refinancing is saving money over the life of the loan.
While you can refinance both private and federal loans, you’ll lose access to federal protections and repayment programs if you refinance federal student loans. Refinancing student loans can be a good choice for borrowers with private student loans or for those who aren’t planning to take advantage of federal programs.
Here’s what to know about refinancing student loans so you can decide if this option is right for you.
Can you refinance private student loans?
Yes, private student loans can be refinanced. If you want to end up with just one payment — and if you also have federal student loans — the lender you choose must also allow you to refinance both federal and private student loans together.
Before you refinance federal loans, however, be sure you understand that you’ll lose access to federal benefits and protections, such as deferment, forbearance, forgiveness, and income-based repayment plans.
Wondering “should I refinance my student loans?” Refinancing student loans makes the most sense if you can lower your interest rate, reducing the amount of money you spend over the life of the loan.
You may be able to save even more if you’re also able to shorten the term of the loan. Or if you want to lower your monthly payments to free up your cash flow, you may be able to extend the term of the loan, though it could end up costing you more money in the long run.
Paying Off Student Loans: Fixed vs Variable-Rate Loans
When you refinance, you want to secure the best terms for your loan. You may have the option of choosing between a fixed-rate loan or variable-rate loan, or shortening or extending the loan term. It’s important to understand all of the options so you can decide what’s best for you.
• have the same interest rate throughout the life of the loan
• are not affected by interest rate changes, up or down
• typically have a higher interest rate than the variable loan rate
• typically come with a lower initial rate than the current fixed rate
• fluctuate or “float” based on interest rate changes, up or down
• vary based on the movement of an index, which could be the prime rate or the Intercontinental Exchange London Interbank Offered Rate (LIBOR)
Some people feel more comfortable with a fixed interest rate. It can make budgeting easier, since the payment amount typically doesn’t change from month to month unless you have a late or missed payment, which can result in extra fees. And if you’re paying off your loan over 10 years, you’re less likely to know what interest rates will be doing over the next decade, so a fixed-rate loan may be safer.
But if you plan to pay off your balance reasonably quickly, then choosing the variable rate might be a good option, since it typically comes with a lower starting rate, and a relatively quick payoff could help reduce the money you spend on interest. Just be sure to ask your lender how much the rate can change each time (or its “cap”).
Is Refinancing Student Loans Worth It? A Look at Loan Terms
When choosing the best term, it’s important to think about the cash flow you’ll need to meet your other financial commitments, both now and in the future. Then, choose a term that works for your budget, remembering that the shorter the term, the less interest you pay back overall.
When you first get out of college, for example, you may have a lower salary, but be interested in saving up for bigger purchases, such as a down payment on a house. In that case, it can make sense to refinance to a longer term — and then, once your cash flow is better, you can refinance again with a shorter term.
Private Student Loan Consolidation
As mentioned earlier, when you refinance student loans, you can end up with one payment. When you consolidate federal student loans, you also end up with one payment and, because of this, it’s easy to confuse the two processes. But it’s important to understand the difference between refinancing and student loan consolidation.
If you have federal loans, you might be able to consolidate them into one loan through a federal program called Direct Loan Consolidation, with the resulting interest rate being the weighted average of all the loans’ original rates.
Through this process, you gain the convenience of only having one payment, but you don’t generally save a lot of money. It may seem like you do if you lengthen your loan term, because the monthly payment can go down — but that just means you’ll pay more in overall interest.
Recommended: Understanding How Student Loan Consolidation Works
Direct Loan Consolidation can only be used to consolidate federal student loans. If you want to combine both your private and federal loans into a single loan, you’ll need to look into student loan refinancing.
Student Loan Refinancing: A Closer Look
When you refinance, you can combine federal and private loans into one payment — which is just like consolidation. But as opposed to having to accept a weighted average of your loans’ original rates, you ideally qualify for a lower interest rate. The catch is that your federal loans will no longer qualify for federal protections such as deferment or forbearance. Here are a few commonly asked questions about refinancing.
What happens if I lose my job?
Some private student loans have a deferment feature and most federal programs have one. During deferment, payments may be decreased or even suspended, but interest usually continues to accrue.
If I pay off these loans too quickly, will it hurt my credit report?
Having open loans that you pay on time can have a positive impact on your credit score, and your credit rating can be positively impacted when you effectively manage your payments. Paying off your loans earlier than planned, however, is unlikely to be cause for concern. Before you refinance, however, check that the terms of your loan don’t have any prepayment penalties.
Benefits of Refinancing Student Loans
If your goal is to combine your student loans into one easy payment, you’re well-qualified as a potential borrower, and you’re not planning to use federal repayment programs or protections, refinancing may be a good option for you.
You can lower your interest rate, which lowers your payment, and you can typically choose between fixed rates and variable rates for even more payoff flexibility. You can select a shorter term to pay off debt more quickly and reduce the total amount of interest paid, or a longer one with lower payments to boost your available cash flow.
Refinancing can be a great choice for working graduates who have higher-interest Direct Unsubsidized Loans, graduate PLUS loans, and/or private loans.
Refinance Private Student Loans with SoFi
If you can refinance student loans with better terms than your existing loans and you won’t need access to federal benefits for any federal loans, refinancing might be a good option for you.
SoFi refinances student loans without any fees, and offers fixed and variable rates.
Why do people refinance their student loans?
The primary benefits of refinancing are to secure more favorable terms than your existing loans — for example, refinancing at a lower interest rate can save you money over the life of the loan. You’ll have a new loan with new terms to replace your existing private and/or federal loans. Refinancing makes sense if you qualify for a lower rate and you don’t plan to use federal repayment programs or protections.
Why should you avoid refinancing student loans?
If you’re currently taking advantage of federal loans and protections — such as deferment, forbearance, forgiveness, or income-driven repayment — or plan to in the future, then refinancing may not make sense for you. Once you refinance a federal student loan, you’ll no longer have access to these federal programs.
Why should private student loan borrowers refinance right now?
Refinancing can be a good option for borrowers with private student loans if you can qualify for a lower interest rate than your current student loans. Refinancing can also give you the opportunity to change the terms of your existing loan to remove a cosigner and simplify your repayment process by replacing multiple loans with a single loan.
SoFi Student Loan Refinance
If you are looking to refinance federal student loans, please be aware that the White House has announced up to $20,000 of student loan forgiveness for Pell Grant recipients and $10,000 for qualifying borrowers whose student loans are federally held. Additionally, the federal student loan payment pause and interest holiday has been extended beyond December 31, 2022. Please carefully consider these changes before refinancing federally held loans with SoFi, since the amount or portion of your federal student debt that you refinance will no longer qualify for the federal loan payment suspension, interest waiver, or any other current or future benefits applicable to federal loans. If you qualify for federal student loan forgiveness and still wish to refinance, leave unrefinanced the amount you expect to be forgiven to receive your federal benefit.
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Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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