Refinancing Student Loans

With over 45 million borrowers owing $1.7 trillion in student loan debt in America, student loans are the second largest debt category behind mortgages. Approximately 35% of students graduating with bachelor’s degrees leave school with an average debt burden of $29,000. The repayment terms for these government and private student loans can last 10 to 30 years with interest rates ranging from 3% to 13% or higher.

This has left millions of borrowers making hefty monthly payments while trying to balance other financial goals like saving for retirement, buying a home, or starting a family. As a result, student loan refinancing has become an increasingly popular option to potentially reduce monthly payments, shorten repayment terms, and save thousands in interest costs over time.

This comprehensive guide will explain what student loan refinancing is, its pros and cons, eligibility requirements, how to apply, and tips for getting the best rates and terms to maximize your savings.

What is Student Loan Refinancing?

Student loan refinancing essentially means taking out a new private loan to pay off your existing federal and/or private student loans. The goal is to qualify for better interest rates or repayment term lengths with the new consolidated loan based on your current finances and credit profile.

For example, if you have $30,000 in student loans at an 8% interest rate originally, you may be able to refinance them into a new loan for the same balance but at just a 4% interest rate. This could lower your monthly payments and help you pay off the debt faster.

Refinancing replaces your existing loans, so you would make a single payment to the new private lender each month rather than multiple payments to previous lenders. It can simplify managing student debt while saving potentially thousands in interest.

Key benefits of student loan refinancing can include:

• Lower monthly payments
• Lower interest rates
• Shorter repayment terms
• Paying loans off faster
• Savings on total interest paid

Keep in mind there are also some risks and considerations, which will be covered in this guide. Overall, refinancing is about restructuring and optimizing repayment of your student debt.

Should You Refinance Student Loans? Pros and Cons

Refinancing student debt can offer big savings, but also comes with some caveats. Here are the key pros and cons to weigh when deciding if it is right for your situation:

Pros of Student Loan Refinancing

• Lower Interest Rates – The main benefit. Reducing your interest rate by even 1% can save thousands over a long repayment.
• Lower Monthly Payments – A lower rate means a lower monthly payment. This frees up cash flow each month in your budget.
• Shorter Repayment Term – Refinancing to a loan with a 10 or 15 year repayment vs. 25 years means you pay the debt off faster and pay less interest over time.
• Pay Off Loans Faster – The savings from lower rates and shorter repayment terms lets you pay down principal quicker.
• Simplify Repayment – You make one payment per month to one lender instead of multiple payments. Easier to track finances.
• Improve Credit Score – Refinancing at a lower rate helps credit utilization ratio. Paying off debt faster also builds your credit history.

Cons of Student Loan Refinancing

• Lose Federal Protections – Federal loans offer income-based repayment, forgiveness programs, and forbearance options you lose by going private.
• Fees and Prepayment Penalties – Some private lenders charge origination fees for refinancing and penalties for paying loans off early.
• Tax Implications – If your loan is forgiven later, it may be treated as taxable income. Federal loans have better tax treatment if forgiven.
• Miss Out on Future Relief Programs – Any future student loan forgiveness programs likely won’t apply to refinanced private loans.
• Need to Qualify – You must have strong credit and income to qualify for the best refinancing rates. Those who don’t can’t benefit as much.
• No Cosigner Release – Federal Parent PLUS loans can eventually qualify for cosigner release. Private loans never do.

The savings potential is clear, but loss of protections, fees, and qualification requirements mean refinancing has some financial risks as well. It is critical to factor your entire financial profile and possible future scenarios before making this decision.

Refinancing Eligibility Requirements

To qualify for student loan refinancing, private lenders evaluate borrowers based on their:

• Credit score and history – A FICO score of at least 680 or higher is ideal for the lowest rates, but those in the high 600s may still qualify. Deep credit history with healthy mix of accounts helps.
• Income level and stability – Enough income to comfortably afford the new monthly payment is required. Many lenders want to see at least $25,000-$50,000 in annual salary depending on debt load. Stable career trajectory is ideal.
• Debt-to-income ratio – Lenders look at your monthly debts divided by gross monthly income. Lower is better. 40% or under often required for approval.
• Employment status – A full-time permanent job is best. Those with very new jobs may face more scrutiny. Self-employed can qualify with good income docs.
• Education status – Most want borrowers to be finished with school. Refinancing while still enrolled can be difficult.
• Existing assets or cosigner – Those without strong salary or credit can sometimes still qualify by pledging assets like home equity or vehicles or adding a cosigner.

Minimum requirements vary by lender but most will want at least a 670 credit score and steady income enough to cover the new loan payment. Having other assets or a cosigner helps compensate for weaker areas when qualifying. The most favorable rates go to those with 700+ scores, higher incomes, and lower existing debts.

Federal borrowers should be aware you will need to meet these private loan qualifications your federal loans did not require. Those with fair credit or inconsistent income may struggle to qualify for worthwhile refinancing terms.

How to Apply for Student Loan Refinancing

Applying for student loan refinancing takes some preparation but is relatively straightforward:

1. Review your current loans – Log into your accounts and review your balances, interest rates, loan types, and servicers. This gives you the full picture before applying. Print or save your last statements.
2. Check your credit – Order a free credit report and check your FICO score. Identify any issues to improve your score before applying if possible.
3. Research lenders – Compare options like SoFi, Earnest, Laurel Road, Splash Financial and others. See what rates/terms they offer for your loan amount based on estimated credit score.
4. Compare offers – You can apply with multiple lenders to compare offers “rate shopping” within a 30 day period with only one credit hit. But start with your top pick.
5. Complete the application – You fill out personal info, income, debts, employment, and education background. Co-signers can apply here too.
6. Submit documentation – W-2s, paystubs, identification, and student loan details may be required to verify your information.
7. Accept loan offer – If approved, carefully review loan costs, terms, rates, and fine print before signing. Make sure savings outweigh any fees.
8. Finalize process – After acceptance, lender pays off your existing loans and becomes the servicer of your new consolidated loan. Update autopay.

Take your time submitting accurate details on income, debts, and credit profile. Providing documentation promptly can help speed approval. Be sure you are clear on all terms and feel the offer truly benefits your situation before moving forward.

Private Lenders to Consider for Refinancing

While federal loans all come directly from the government, private student loans and refinancing come from individual lenders. Here are some top rated private student loan refinancing companies to consider:

SoFi

• Over $45 billion in loans funded
• No fees or prepayment penalties
• Unemployment protection
• Rates as low as 1.8% fixed

Earnest

• $2 billion in funded loans
• Flexible terms and lender selection
• Easy to change payment date
• Rates starting at 1.99%

Laurel Road

• Focused on medical professions
• Up to $150,000 in loans
• No origination or prepay fees
• Rate discounts for medical residents

ELFI

• More lenient credit requirements
• Income-driven repayment options
• Loans up to $250,000
• Fixed rates as low as 1.24%

Splash Financial

• Expert guidance on best lenders
• Cosigner release option after 12 months
• Loans up to $100,000
• Rates from 1.74% fixed

Each lender has particular strengths like medical resident programs, cosigner options, or flexible terms. Comparing a few picks can help you find the right match for your financial situation. Pay close attention to not just rates but also fees, eligibility, and options that suit your needs.

Tips for Getting the Best Refinancing Rates and Terms

Here are some tips to ensure you get the lowest rates and most savings when refinancing your student loans:

• Aim for a credit score over 720 if possible. Improve your credit before applying by paying down debts and disputing errors.
• Calculate your ideal monthly payment amount based on budget. Then use loan calculators to back into loan amount and rate based on what payment fits your lifestyle.
• Apply with a trusted cosigner who has excellent credit, if needed. This can help you qualify and get better rates.
• Opt for shorter repayment terms like 10 or 15 years to pay loans off faster and save on interest rather than just reducing monthly payments.
• Pick fixed rates over variable rates to lock in low rates for the long haul rather than risk rates increasing over time.
• Don’t extend your repayment timeline longer than original loan unless essential to get approved or afford payments. This costs more total interest over time.
• Compare offers from multiple top lenders. Each will use different formulas, so you may get better terms with one over the others.
• Pay down credit card balances before applying to improve your debt-to-income ratio. Limit new credit inquiries.
• Add value by buying points to further reduce rates, but only if the upfront cost results in savings exceeding the fees over the full repayment.

With strong credit and smart shopping, it is possible to refinance from a 7% loan down to 3% or lower in some cases. Just a few percentage points in savings makes a big difference over a 10+ year repayment.

Refinancing Federal vs Private Student Loans

There are some key differences when it comes to refinancing federal student loans versus private loans:

Refinancing Federal Student Loans

• Loss of federal protections like income plans and forgiveness programs
• Rates may drop much more than private loans already at lower rates
• More flexible qualifying for those with higher debt and lower incomes
• No prepayment penalties but potential origination fees

Refinancing Private Student Loans

• Still lose any borrower protections offered by original lender
• Savings depends on spread between old and new rate which may be smaller
• Slightly stricter approval based on income and existing debt obligations
• Often no prepayment penalties or origination fees

For those with federal loans, the rate drop can be dramatic since federal rates are higher, but loss of federal options like IBR plans is a bigger issue to consider.

Those refinancing private loans may see a smaller rate discount, but have fewer borrower protections to lose and often no fees in the process.

Overall it requires weighing rate/term savings against value of origination protections for your specific loans and financial situation.

When to Refinance Student Loans

Trying to decide when is the right time to refinance your student loans? Here are some good times to consider refinancing:

• Interest rates drop so you can get a lower rate than your existing loans.
• You are employed full-time after graduation with reliable income.
• You have paid off credit card and other short term “bad” debt.
• Your credit score has improved significantly since taking original loans.
• You are currently locked into a variable rate that may climb higher.
• You can no longer afford monthly payments on current loans.
• You have built up savings to help cover origination fees and still have emergency fund.
• You originally took a longer repayment term but now want to pay loans off faster.

And here are scenarios where you may want to wait on refinancing or not pursue it:

• Interest rates are already low and you aren’t seeing significant savings.
• You are currently unemployed, starting a business, or have unsteady income flow.
• You plan to pursue Public Service Loan Forgiveness on federal loans.
• You will need flexible options like income-driven repayment plans.
• You have little savings and cannot afford origination fees or higher monthly payment if income drops.
• You realistically will still need full repayment term so no benefit shortening it.

Having stable employment, improved credit, and enough savings to cover fees can make it a good time to explore refinancing options. Just be sure the incentives line up to provide real savings given your loan types and financial trajectory.

Alternatives to Refinancing Student Loans

While you weigh if refinancing is the right move, here are a few alternatives to consider as well:

Income-driven repayment plans – For federal borrowers, IDR plans like Pay As You Earn cap monthly payments at 10% of discretionary income and forgive remaining balance after 20-25 years.

Deferment or forbearance – Federal loans offer deferment and forbearance options to temporarily pause monthly payments if you are facing financial hardship. You continue accruing interest.

Extended repayment plan – Federal borrowers can extend repayment terms from standard 10 years up to 25 years to lower monthly payments. But you pay more interest over time.

Pay off highest interest loans first – If you have multiple smaller loans at varying rates, targeting extra payments to highest interest loans first pays them off quicker.

Pay extra each month – Making even small extra payments applies more to principal each month. Doing so consistently can shave years off repayment of debt.

Lower expenses – Finding ways to cut costs in order to put an extra $100 or more per month can help pay down balances faster without refinancing.

Refinancing is not the only path to tackle student debt. In some cases, other repayment strategies may provide flexibility or even pay off loans faster without the need to take out new private loans.

Is Student Loan Refinancing Right for You?

To decide if refinancing student loans makes sense for your situation, consider these key questions:

• Are you able to qualify for substantially better rates than your current loans? If not, savings may be small.
• Do you rely on any federal repayment protections like income-driven plans or public service forgiveness? You lose these if you refinance.
• Will refinancing fees outweigh interest savings over the life of the loan? Crunch the numbers.
• Can you handle higher monthly payments if you shorten your repayment term to maximize savings?
• Are you financially stable? Those with very new jobs may want to wait until income is proven.
• Are interest rates still low? It is best to refinance when rates are down so you lock in savings.
• Do you have other short term debts? Pay off things like credit cards first before taking out new longer term debt.

If your goal is lowering monthly payments, federal options may be best for you. But if your goal is paying loans off faster while saving substantially on interest, and you won’t need federal protections, then refinancing can make sense.

Refinancing Student Loans: The Bottom Line

Refinancing student loans to lower your interest rate and optimize repayment terms can provide huge savings, allowing you to pay off debt faster and keep more money in your pocket each month. But it also carries risks like losing federal borrower protections and fees cutting into savings.

While not right for everyone, for borrowers with good credit and stable incomes looking to minimize interest costs over the long run, refinancing can be a smart financial move. Just be sure to weigh the pros and cons for your specific situation, shop rates from multiple top lenders, and finalize terms only if the savings are truly significant.

With the right research and planning, student loan refinancing can offer a path to managing debt more efficiently. But do so with eyes wide open so you don’t give up valuable options and protections without being sure the incentives fully align in your favor.