Here's What to Consider When Refinancing Your Private Student Loans
May 4, 2021
If you're thinking about refinancing your private student loans, you're not alone. Many borrowers choose to refinance to save money and make things simpler. Before you start shopping for private student loan refinancing options, ask yourself:
Why would you refinance your private student loans?
Everyone has different reasons for refinancing. Maybe you want to save a little cash each month, or perhaps you want to put your loans together and make one monthly payment rather than multiple payments. The most common reasons people choose to refinance their private student loans are:
Lower their interest rates.
Change repayment terms, such monthly payment amounts.
Choose a different lender.
Simplify the repayment process by consolidating loans.
Adding (or removing) a co-signer.
Here's a closer look at each.
Refinancing private student loans to lower your interest rate
A lower interest rate can lower your monthly payments and overall debt. Over the past few years, interest rates on private student loans have fluctuated a lot; they've been as low as 2 percent and as high as 12 percent. If you're currently dealing with a loan you're paying close to 12 percent interest on, it's probably a good idea to explore your refinancing options – a bit of work now can save you thousands over time.
Pay attention to variable interest rates vs fixed interest rates. It may be a better option to choose a fixed interest rate over a variable interest rate even though it's likely higher to ensure that you will maintain the low-interest rate throughout the life of the new loan.
The catch: To qualify for a lower interest rate, your credit score needs to be excellent. You’ll also need to meet any other criteria for the lender you want to use. That means, for instance, you may need to have a minimum income and debt-to-income ratio to ensure you can make the new monthly payment.
Photo by Christine von Raesfeld
Lower your monthly payments
You may also be able to lower your monthly payments by negotiating a longer term. For example, if you currently have six years to pay off the balance of your student loans and you're paying $400 per month, you may be able to pay less by changing the final payment date. Remember, though, you'll accrue more interest by lengthening your loan term, so while this option can save you money today, it may cost you more in the long run. Still, if you're having trouble meeting that high monthly payment every month, it could be worthwhile. Just make sure you can make additional payments without penalty.
Get a new lender
In some cases, people aren't happy with their current loan providers. Sometimes the customer service isn't that great. Or maybe your lender wasn't willing to work with you when you needed a helping hand. It might be simply that you aren't comfortable with the way your lender communicates. Regardless of the reason, you may want to change lenders. When you refinance, you have that option. The new lender will pay off the old lender, which closes out your original loan – and you never have to deal with the original lender again.
Consolidating multiple loans to simplify the monthly payment process
When your student loans come from multiple sources (and have multiple due dates), your payment arrangements can get confusing. A lot of people choose to refinance private student loans so they can consolidate and make things simpler. You borrow a lump sum from one lender and use it to pay off multiple loans, which means you'll only have one monthly payment. Another upside to taking this route is that you can often refinance at a lower interest rate which can reduce your total monthly payment.
Add (or remove) a co-signer
If your credit score has improved significantly and you want to remove your co-signer from your original private student loans, you can use refinancing to do so.On the other hand, refinancing gives you the opportunity to add a co-signer. Let's say there’s been no change in your credit score, but you want to change your payment terms or try for a lower interest rate. Check with lenders to see if you can meet their loan requirements by adding a co-signer.
Photo by Andreas Klassen
When you shouldn't refinance private student loans
Sometimes refinancing private student loans just doesn't make sense (or you can’t even do it). Here are some examples:
You owe less than $5,000. Generally, when you owe less than $5,000, you won’t even qualify to refinance. Lenders usually have a minimum amount requirement, so check first. If they give you the go-ahead, make sure there are no fees and that the term isn’t made longer, both of which could offset any benefit of a lower interest rate.
You already have a decent interest rate. If you're currently paying 3.5% interest, refinancing to get a 3.4% interest rate won't save you much. In fact, you could even end up paying more if your refinance lengthens your loan's lifespan significantly. That said, if it’s free to do and the term is the same (or shorter), you may wish to proceed. You’ll save a little plus maybe your new lender offers perks you don’t currently have.
You don't have sufficient income to qualify. You always have to meet a lender's criteria to qualify for a loan. If you aren't making enough money to handle the new monthly payment and you don't have a co-signer, you should stick with what you have. You can always look into refinancing later on when your financial situation improves.
Remember that lenders do a hard credit check before approving any new loan application. This can temporarily lower your credit score. You can get around this by getting prequalified with lenders before you choose which one to go with.Refinancing your private student loans may be the best choice – but it's an individual decision. Weigh your reasons for wanting to refinance, and see what types of refinancing options are available to you. To make the right choice, you'll want to see a reduced interest rate and the same (or shorter) term. Remember to make sure there are no origination fees and also confirm that there are no prepayment penalties.