Should I refinance my student loans?

Ines Gaiech
February 14, 2020

“I have over $50,000 in student loans and I can’t afford my monthly payment. I have tried everything and don't see a way out. Should I refinance?”

We know that paying off your student loan isn’t fun and not very easy to do. You may even have already considered refinancing your loans, because your interest rates are rising and your required monthly payments are out of your budget.

But is it really the best thing for you to do? Continue reading to find out all that you need to know before making a decision.

You may have come across the fact that refinancing your loans could mean:

  • Lowering your interest rates
  • Lowering your monthly payment amount
  • Lowering the total amount of money spent towards paying off your debt
  • Getting a faster repayment time
  • Saving thousand of dollars in interest rates 

Looks appealing right? The thing is, not everyone should refinance, and not everyone can refinance.

In this article, we’re gonna talk about whether or not refinancing is the best option for you by listing everything you need to consider before taking the leap. 

What is refinancing? 

Refinancing means taking out a new student loan that will replace your existing one. The goal here is to get better terms, meaning a lower interest rate and a lower monthly payment amount, usually with a longer repayment period. 

Refinancing applies to both federal and private student loans, unlike consolidation which only applies to federal loans. Some people confuse refinancing and consolidation. While both will turn your multiple loans into a single one, you won't get interest savings with consolidation.

The main benefit of refinancing is that you can end up saving thousands of dollars by getting lower interest rates. Currently (for the 2019-2020 school year), federal student loan interest rates are at 4.53 for undergraduate loans, 6.08% for unsubsidised graduate loans and 7.08% for direct PLUS loans. With refinancing, you could be eligible to get way lower rates and end up saving money over the life of your loan. 

Here is when you should avoid refinancing

If you want to be able to qualify for federal forgiveness of your loans

If you decide to refinance your loans, which means that you will take a new loan through a private lender to pay off your current loans, then you won’t be eligible for federal loan forgiveness.

The Public Service Loan Forgiveness Program (PSLF) cancels out the remaining balance of your debt if you meet all the following requirements:

  • You are employed by a U.S federal state, local government or not for profit organisation
  • You work full time 
  • You have Direct Loans (some federal loans don’t qualify for PSLF)
  • You are on an income-driven repayment plan
  • You have made at least 120 payments towards repaying your loans  

So this means that if you have a job in the public service sector, if you are a teacher, doctor or were in the military, you might be better off not refinancing your loans.

You can click here to learn more about federal loan forgiveness and see if you would be eligible. 

If you want to be able to qualify for deferment or forbearance

You may be eligible for pausing or postponing your payments if you are experiencing financial hardship and get approved for deferment or forbearance. This may be a better option than applying for refinancing. Keep in mind however that during the time in which your loans are in deferment or forbearance your interest will accrue, which means that your balance will end up increasing too. 

But know that if you decide to refinance, you will lose your eligibility for deferment and forbearance. 

You can click here to learn more about deferment and forbearance. 

If you want to get on an income-based repayment plan 

Same thing here, if you decide to refinance your loans with a private lender, you will lose your eligibility for repayment plans based on your income.

Those plans are especially interesting if your income is low, because they allow you to have very low payments and even allow you to postpone them until your financial situation is more stable. 

You can click here to learn more about income-driven repayment plans. 

You have poor credit 

To qualify for refinancing, you need an average credit score of at least 650-680. Refinancing means taking out a new loan which requires a good enough credit score, so you may not even have the possibility to refinance because of your credit. 

An alternative way to qualify for refinancing if your credit score is too low would be to find a co-signer, but this person would have to commit to paying thousands of dollars of debt if you are not able to, which would be pretty hard to find. 

However, you could still be approved for refinancing with a low credit score if you are able to show to refinancing companies that you have been making payments when required and that you have been doing so regularly. 

Here is when you should refinance

A lot of times, refinancing is a no brainer and could end up saving you thousands of dollars. 

If your loans have high interest rates or increasing variable interest rates

The main reason why people decide to refinance their loans is to get lower interest rates. Who wouldn’t want that? And by getting lower interest rates early, you’ll end up saving thousands of dollars. 

As soon as you have a stable financial situation and good credit 

Keep in mind that not everyone is eligible for refinancing, and you need to have a good enough financial situation for your application to go through.

You want to pay off your student debt quicker 

Again, the sooner you do it, the more you’ll end up saving and the faster you’ll be able to pay off your debt. The better your credit score, the lower your interest rate will be. 

However, don’t rush to refinancing as soon as you’re out of college. At that stage of your life, your professional situation is still unstable and your pay is most likely one of entry level jobs so you’d be better off being on an income based repayment plan. 

If you have several thousands of dollars of debt

When you owe a lot of money, refinancers will offer you plans that are longer (20 to 30 years). You’ll end up paying off your debt for a longer time but you’ll save in interest and will have lower monthly payments. 

So to sum-up, you should really consider refinancing if

  • Your credit score is in good standing (at least 650)
  • You have a stable income 
  • You want lower interest rates and lower monthly payment amount

Here is what to do if you decide to refinance

First, as we previously mentioned, there are a few requirement that you need to meet in order to get approved for refinancing. You will need:

  • A steady income: you will have to report both yours and your co-signer's (if you have one)
  • A loan balance of at least $20,000 
  • A good enough credit score, in the high 600s
  • A good payment history

You can use this website here to see how I compared your refinancing options according to your loan balance and income. 

You have the option to choose between different refinancers, which:

  • Offer different interest rates
  • Offer different term lengths
  • Have different requirements

Following is a list of different refinancing lenders:

  1. Commonbond
  2. Earnest
  3. SoFi
  4. U-fi
  5. Education Loan Finance 
  6. LendKey
  7. Laurel Road
  8. Citizens one

You should visit each website and get an official rate and start the application process. You are going to get rate estimates for each of them by providing accurate numbers about your situation:

  • Loan balance
  • Annual income
  • Current interest rate
  • Credit score

Tip: You should apply to all of these within the same period of a few days, because then the credit bureaus will count your application as one “inquiry” and it won’t affect your credit score too much. Let us know if you need help applying.

The servicer who approved you for refinancing will pay-off your existing loans and will replace it with a new one. Keep in mind that the amount you owe will stay the same, however your repayment terms will change. 

You can also use Credible to compare different refinancing lenders, after you provide information they will give you different rates for you to compare. This would help you save time on researching all options available.

Here is the documentation you usually need to provide to submit an application to refinance your loans: 

  1. Loan or payoff verification statements
  2. Proof of employment (W-2 form, recent pay stubs, tax returns)
  3. Proof of residency
  4. Proof of graduation
  5. Government-issued ID

Finally, you can use the simulator here to have an idea of what would happen if you end up refinancing.

See an example below of someone who has $100,000 in student debt with an interest rate of 10% over a repayment period of 10 years. If this person is approved for refinancing and gets a new loan with a 7% interest rate, here's how much they could end up saving:

Everyone should have control over their student debt. To deliver on this promise, we’re a free platform that helps everybody pay down their debt. From graduation to payoff, we’re by your side to help at every decision point.

Stay tuned for more, and never hesitate to reach out to with questions about your debt.

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