How to Refinance Your Student Loans, A Beginner's Guide

Refinancing could ease some of the burden that comes with repaying student loans. Here are three explanations for why refinancing can be a smart move for you.

Refinancing could result in a cheaper interest rate, which would help you spend less overall.

Your monthly payment may be reduced by a new loan with a longer duration, which can help with other debt commitments or living expenditures.

By consolidating all of your student loans into one, you may streamline repayment by having only one monthly payment to make.

But before you refinance, there are a lot of things to think about. To decide if it is a good option for you, use this guide.

How does refinancing for student loans operate?

The ability to consolidate all or a portion of your student loans into one new loan, frequently at a lower interest rate that may help you pay less over time or give you a longer repayment period that would lower your monthly payment, is known as refinancing. If you have several student loans, this is a terrific choice, but you also have the option of refinancing if you only have one loan.

Is there a distinction between consolidating and refinancing student loans?

However, the two phrases are frequently used interchangeably. Consolidating student loans most frequently refers to the federal program. Refinancing student loans often refers to initiatives provided by private lenders.

What is consolidation of student loans?

Typically, consolidation means combining all of your federal student loans into a single new loan with a new term. As your new rate will be the weighted average of the interest rates on the loans being consolidated, it does not always result in a reduced interest rate. Consolidating student loans is not typically thought of as a cost-saving measure. However, if you use a consolidation loan and leave out parent PLUS loans from the consolidation, you can be qualified for a variety of income-driven repayment plans and loan forgiveness programs.

How is refinancing student loans different?

Some banks, credit unions, and other specialized student loan lenders provide refinancing. You can combine federal and/or private loans under this form of loan to get a new rate and duration. One of the key advantages of refinancing is the ability to repay with a reduced interest rate, so reducing your overall costs. Rates are often set according on how strong your finances are right now. If you're just out of college and don't yet have much credit history, cosigners can help you qualify and get better terms.

What are your objectives for refinancing student loans?

The majority of consumers often only consider refinancing if they anticipate receiving a cheaper interest rate, although this is not the sole justification. It's crucial to get a refinance loan that would enable you to achieve your objectives if you're thinking about doing so.

Do you desire to pay less in total?

The most frequent justification for refinancing debts is to repay them at a cheaper interest rate. Refinancing might undoubtedly help you pay less in total if that is your objective and you are eligible for a loan with a reduced interest rate. Make sure the terms of the new loan are comparable to those of the remaining terms on your previous loans. You probably won't pay less over the course of a loan if you are eligible for a lower interest rate but pick a longer repayment term than your present debts.

To lower your overall cost, you can also select a shorter repayment period, albeit this frequently results in higher monthly payment amounts.

If you can afford the higher monthly payments, refinancing to a loan with a lower interest rate and a shorter payback term is the best approach to cut costs throughout the course of the loan.

Are you attempting to cut your monthly payment?

Refinancing to a new loan with a longer repayment period is a possibility if your current monthly student loan payment is too expensive or you're having trouble making payments on time and still having money left over for living costs. Due to the daily interest accrual on student loans, you will probably end up paying more over time. This implies that you will pay more interest the longer you take to repay a debt. Consider paying more as your budget changes in the future if you require lower payments now but choose to refinance to a longer repayment period. In this manner, you can pay off your debt faster and accrue less interest.

Would you prefer to pay just one bill each month?

Refinancing is frequently thought of as a way to cease making several payments to various lenders each month. You will only need to remember to make one payment each month if you consolidate all of your loans into one new loan as opposed to remembering to pay each lender on a regular basis.

Does refinancing student debt have any cons?

While refinancing could result in cost savings and make student loan payments easier, there are a few factors to take into account first. You should learn about the advantages and repayment options that various refinance lenders provide because not all student loans are created equal.

Benefits and repayment alternatives for federal student loans are not available for private student loans. You will forfeit the perks associated with federal loans if you decide to convert them into a private student loan. The majority of federal student loans offer a variety of repayment alternatives, including income-driven repayment plans. There are also additional deferment and forbearance options, as well as loan forgiveness programs for some borrowers. These differ depending on the federal loan kind. Federal parent PLUS loans are not as advantageous as federal loans for students.

Federally owned debt repayment aid under COVID-19 is currently accessible. This includes deferring payments on government guaranteed student loans and waiving interest. If you decide to refinance any federal loans that qualify, you will not be qualified for this benefit.

Refinancing federal debts into a new private loan may be a possibility for you if you do not anticipate having any trouble making your minimum payments and do not plan to apply for a federal loan forgiveness program.

By lender, private student loans can differ. If you refinance, you can lose the benefits provided by your existing lender's repayment schedules and possibilities for deferring payments should you encounter a brief time of financial difficulty. Similar or different perks and opportunities for assistance might be provided by a new lender for refinancing.

Will submitting a refinancing application impact your credit score?

Refinancing student loans often has minimal effects on credit scores.

Before choosing to apply, verify whether the lender has a pre-qualification option that informs you of the rates and terms you are qualified for. This will help you weigh your options. Since this process only necessitates a light credit inquiry, it typically has no effect on your credit at all.

Your credit score might be slightly affected once you submit an application and consent to a full credit inquiry, although normally only a few points. However, your credit score can be more negatively impacted if you submit many loan applications over a period of time to various lenders.

When you apply for a refinance, what do lenders consider?

When you seek to refinance, lenders look at a few key aspects of your credit history to determine whether you will be able to repay your new loan. They take into account your income and debt levels, as well as your credit score and payment history, as they do with most loans.

You might wish to check your credit score before refinancing to determine whether you qualify for cheaper rates. The credit score you receive from one source could not match the one the lender uses, so it's vital to understand that credit scores vary depending on the consumer reporting agency and the calculation employed.

How should you proceed with a student loan refinance?

Follow these procedures to refinance your student loans if you believe it is a good option for you.

1. Establish your financial goals for student loans.

Do you want your interest rate to go down? Would you like to make smaller monthly payments? Is it crucial to consolidate student loan repayment into a single monthly payment? Do you anticipate a combination of the aforementioned outcomes from refinancing?

2. Examine the status of your present student loans.

Do you have student loans from the federal government as well as private lenders? Who manages your loans? Are the interest rates you're charging now fixed or variable?

What are the interest rates at the moment? What are your current monthly payments and how long do they take to pay off your current debt?

3. Find the most suitable lender for your financial requirements.

Does the lender offer support for its own loans? Or will another company be tasked with servicing your loan? Is the lender known for providing excellent customer service? Is the lender only interested in providing student loans? Or does it wish to sell you further goods? What choices for hardship assistance, repayment plans, and benefits does the lender provide?

4. Before submitting an application, check to see if you can pre-qualify or get a pricing quote. This will enable you to evaluate the new interest rates and repayment terms available to you and decide whether refinancing is the best choice for you.

Without affecting your credit score, you can apply for pre-qualification for our Reset Refinance Loan. Not yet prepared to prequalify? To determine the financial impact of various Reset Loan terms and rates, use our student loan refinance calculator.

5. Submit an application to be accepted for a refinancing if you chose to move forward.

This article was contributed on Jul 31 2022