Refinancing your student loans is a great opportunity to save thousands or even potentially tens of thousands of dollars over the long run throughout the life of your student loan.
Refinancing typically offers a lower interest rate, lower monthly payments, and generally more favorable loan terms overall, and gives you confidence that your financial future has a more optimistic outlook than before.
When you refinance your student loans, you may now have an opportunity to put money back in your pocket and use it for other purposes, like financing a new mortgage or a car, a dream wedding, or even paying down your student loan debt faster through a lump sum payment.
Refinancing student loans isn't a simple decision that you can make in an hour, and would usually take several days or so in order for you to understand whether or not you would be a good candidate, and if you should end up refinancing your student loans as well, since it doesn't make sense for everyone.
So if the question of whether or not you should refinance your student loans pops up, go through our solid key questions checklist to better understand your current financial situation and how you can improve your financial future by choosing the right lender to maximize your savings.
1. Do I have a federal student loan?
If you have federal student loans, you could lose protections and certain benefits by refinancing. This is mostly due to the fact that federal student loans provide borrowers with loan forgiveness programs and various income-driven repayment plans.
Refinancing with a private loan refinance lender wouldn't allow you access to these benefits, since most lenders don't usually offer protection in these areas.
Some lenders do offer certain protections, however, so it's important you do your due diligence to understand if something goes wrong, what your worst-case scenario could look like. Remember, the refinance lenders are here to help you, since if you can't pay your loan, that doesn't help them and makes everything more difficult.
2. What type of interest rates could I obtain after refinancing my student loan?
One of the biggest factors that can affect your decision to refinance your student loans is how much lower can the interest rate of your new student loan be compared to the rate you are currently paying. A lower interest rate can typically reduce the total interest paid on the life of the loan (provided the loan term is also favorable), since the new loan is usually better than the old student loan.
Interest rates on federal student loans have typically been lower than those of private loans, with federal student loan rates ranging from around 3.5% to 8% and private student loan rates ranging from 4% to as high as 15%.
If your current rate is near the upper end of any of those ranges, and you have solid credit, refinancing could be a good idea, and if your new rate is near the midpoint or lower end of those ranges, you've saved a good chunk on interest!
3. Is the interest rate on my new loan going to be fixed or variable?
If your new loan agreement is structured with a fixed interest rate, and if interest rates rise, you're not exposed to the risk that you could be paying a higher interest rate later on. However, if interest rates decline and you are paying a variable interest rate, your rate on your loan will also be reduced. There are pros and cons with each rate type, so it's important to understand how the rate environment can affect your financial situation in the future.
At the end of the day, you should decide on the rate type for the new student loan based on your previous experience, what risks you are comfortable with, and potentially where you think interest rates can be headed in the future.
4. How much of a monthly payment can I afford to pay for my new student loans?
Once you have your eyes fixed on a particular new loan agreement, you can calculate the value of your monthly payments. If you feel like you are struggling with your recent payments, make sure your new loan terms offer a lower monthly payment.
On the other hand, if you feel that you have a lot of breathing room and are paying your student loans just fine and on time, you could refinance your student loans to not only reduce your interest rate but the loan term as well, which would help you pay down your student loans faster.
Depending on your situation, you could go for a longer loan term, which would reduce your monthly loan payments, if your living costs are higher than you would like, or if your income isn't where you want it to be right now.
A shorter loan term would be ideal for those with not that many living expenses or for those with more leftover income than they need.
5. Is my personal credit good enough to refinance my student loans?
Most student loan lending and refinancing institutions have credit cutoffs for new refinancing applicants, and your credit history and profile will be one of the main factors that will determine whether or not you can refinance.
Typically, a credit score above 650 is the minimum for most lenders. Most refinancing institutions also provide soft credit checks when you apply to get a free quote, so you could go directly on their site and apply to see for which rates you can qualify for.
You can also check your credit score at Credit Karma, Equifax, or Credit Sesame.
6. Do I need a co-signer for my refinancing application?
Sometimes, your personal income may be too low to refinance as an individual signer or your credit score might not be good enough to qualify, even if you feel comfortable with the monthly payments under the new terms.
In this case, you could add a co-signer who better understands your spending habits and who also has a strong credit history. This would substantially increase your chances of being approved for a refinancing.
Make sure that the person you use as a co-signer knows you well personally, and that you show them respect and appreciation since they are taking on a risk. A great co-signer candidate can help you get an even lower interest rate if you are approved.
Even in situations where you don't need a co-signer and can fully manage the new debt load after refinancing, adding a co-signer with a strong credit score and low enough debt-to-income ratio can help reduce your new interest rate even more, thus saving you more in interest over the term of the new loan.
7. Do I have any minimum income requirements?
Usually, most refinance lenders will want to see that you have a solid and steady source of income, which will help you support monthly payments in order to repay your student loans and to not fall behind your repayment schedule.
Even though many lenders have certain income requirements, they don't make them publicly available off the bat. The median household income in the US is around $57,652 (in 2017 dollars), so if you are earning more than that, that should increase your chances of being approved to refinance your student loans.
8. Is co-signer release an option under my new refinancing term?
Certain student loan refinancing institutions and lenders may also offer you the opportunity to remove your co-signer completely from the loan, especially after you have made a certain number of consecutive payments towards the principal of the loan.
Getting your co-signer removed is typically not that easy, and usually anywhere between 8% to 12% of individuals who apply for co-signer release are approved, so to increase your chances of getting your co-signer removed from your loan, try improving your credit score, increasing your gross annual income and paying down other sources of debt in order to reduce your credit risk in the eyes of the lender you are working with.
9. Is there an origination fee for my new student loan?
Make sure you do a deep dive on the fee structure of the lender you may be using to refinance your student loan. There's a wide variety of fees such as early repayment fees and origination fees, so understand which fees the lender may charge and when. You typically should not see an application fee and origination fees aren't as common, either. Most high-quality lenders don't charge these types of fees so you shouldn't have to pay for them, or they should be fairly minimal.
10. Is my school or degree eligible for me to refinance my current student loan?
Certain banks and refinance lenders have requirements and restrictions on which type of degrees and even which schools are eligible for student loans. Most refinance lenders require that the applicant already have earned a bachelor's degree or higher from an accredited institution or from a list of approved universities or colleges.
11. Is there a maximum or a bare minimum as to how much I can refinance?
For some lenders and refinance institutions, borrowers must have a minimum loan balance (usually $5,000) in student loan debt in order to be eligible for refinancing.
Additionally, some lenders could enforce maximum refinancing levels at their own discretion, and these maximum limits are essentially determined by the student loan borrower's debt-to-income ratio, credit score, and education level. Each lender will be different with their minimum and maximum allowances.
12. What is my current debt-to-income ratio?
Most lenders will be interested in knowing how much you earn, but also what your total debt each month looks like relative to your salary, which is measured via the debt-to-income (DTI) ratio.
Many lenders will typically look for a debt-to-income ratio (DTI) of less than 30%, and the lower your DTI score, the better the odds that you can refinance your student loans.
Use our DTI calculator to get a sense as to whether or not your DTI will decrease after you refinance your student loans and to also better understand what other sources of debt you have before you submit a refinancing application.
13. Does the refinancing bank offer any other discounts?
Certain lenders can offer additional discounts on your new loan's interest rate if you are a current customer or if you even set up automatic payments on your account.
Ask around if you can get a lower interest rate (usually 0.25% or as much as half a percentage point) if you have a co-signer who has a current qualifying account with the bank or if you are a current customer.
14. Are there any early repayment fees for my new student loan?
There should not be any penalties for prepaying your federal student loans or your current or refinanced private student loans.
Lenders are not allowed to charge the student loan borrower any additional fees for when the borrower makes extra lump-sum payments on their student loan balance or even when he or she pays off the student loan balance earlier than the originally scheduled maturity date.
Make sure you double-check repayment fees with your new refinance lender since it will put you in a better spot down the road if your DTI begins to improve and you want to start making lump-sum extra payments.
In the case where you make extra lump-sum payments, it's a good idea to apply the payments to the current principal balance of the student loan that has the highest interest rate.
15. Have I shopped around at multiple lenders to compare other offers?
There is really no limit on the number of lenders to which you can apply to in order to refinance your student loans, so you should do your due diligence on multiple potential lenders and apply to many quality refinancing institutions in order to maximize your chances of getting approved, especially for a new student loan with favorable terms.
16. Do I have an opportunity to pay off any credit card debt before I refinance?
Paying off credit card debt that's been recurring over the past several months and even that has been building up can be a great way to reduce your debt-to-income ratio and increase your chances of getting approved to refinance.
The lower your DTI, the lower your interest rate will typically be for the new student loan. It's usually a good idea to cut back on spending 3-6 months before you are planning on applying to refinance a student loan and to only purchase things that you need in order to build a more stable and responsible spending history.
17. What should my new loan term be?
New refinance lenders usually offer repayment terms with various types of maturities, typically ranging from from 5 years to 15 years or even 20 years. It's important to understand that if you borrow under a longer loan term agreement, your monthly payments will be smaller but the interest will usually be higher.
On the other hand, a lower monthly loan term will require you to pay a higher monthly payment but you'll end up paying less interest over the term of the loan.
It's prudent to break down all other expenses and sources of debt you have each month and ask yourself if you can handle a higher monthly payment to pay down the loan faster.
18. Does my potential lender or refinancing institution have solid reviews from other past borrowers?
Since student loan refinancing is still a relatively new market, it's important to make sure that you've done your due diligence and other lenders who have used a certain bank to refinance their student loans have had good experiences doing so before.
A bank with a large number or a high proportion of customers who have filed complaints is probably not a good sign and the last thing you want to be dealing with as a borrower with a full-time job and student loans to pay is bad customer service from a bank that should treat you with professionalism as a loyal customer, but doesn't.
Reviews from the Better Business Bureau or general customer reviews from even high-traffic subthreads from discussion platforms like Reddit or Quora could prove useful. Keep in mind, however, that some customers could file bad reviews just because they don't want to abide by the rules and requirements lenders set, not because the lenders are doing a bad job or treating them unfairly.
What Next?
Refinancing student loans could be a good option for certain individuals, and could help save you money from interest and aid in paying down your student loan debt faster, but it could come with certain caveats or precautions.
Make sure you do your due diligence and that you take the time to shop around with multiple lenders in order to find the best loan terms and interest rates, along with the best customer support you can get. This won't be an overnight process but should pay off in the long run if done right.
