When (and How) Should You Refinance Your Student Loans?

If you went to college, there’s a good chance you have student loans. And they’re probably staggering. A whopping 44 million Americans owe $1.4 trillion in student debt—about $620 billion more than total outstanding U.S. credit card debt. The average borrower these days is graduating with more than $37,000 in student debt.

One option that may lessen your pain? Refinancing your student loans. Here’s what you need to know before you do.

1. Refinancing means working with a private lender.

You can’t refinance existing federal or private loans into a new federal loan—refinancing requires working with a private lender. That may mean sacrificing certain benefits and consumer protections associated with federal loans like death and disability discharge provisions and flexible repayment and  forgiveness plans, says student loan expert Heather Jarvis.

But while you may give up some benefits, there may be more to gain from refinancing—specifically, a lower interest rate and monthly payment that help you pay off your debt faster

Since refinancing has different implications for federal and private loans, though, be sure to round up all your debts as you're weighing the benefits. You can check the National Student Loan Data System for info about your federal loans, and check recent statements to see the interest your paying now and balance remaining on any private loans.

2. The best rates go to those with the best credit.

If you have upped your income and credit score since first borrowing, you’re likely to benefit most from refinancing because you may qualify for lower rates. If the opposite is true, however, you may want to focus on improving your stats before applying. A short or spotty credit history, or a credit score under 700, can keep you from qualifying for the best rates, Jarvis says. A credit score above 700 is considered good—750 and up is excellent.

(Read more on how to build your credit or improve your credit score.)

3. Not all private lenders are the same.

Once you’ve decided refinancing makes sense for you, start comparing offers from various lenders, such as SoFi, Earnest, CommonBond and LendKey, paying particular attention to:

Rates. The higher your current rate, the more you gain from refinancing to a lower one—so make sure to research multiple lenders. SoFi and Earnest, for example, have variable rates starting at 2.79 percent.

Fees. Next, confirm that you won’t be charged an application or origination fee. Fortunately, Jarvis says this has become increasingly less common, thanks to more competition.

Repayment Terms. Using online loan calculators can help you visualize the impact of a new loan payment term (usually five, seven, 10, 15 or 20 years). Keep in mind that a longer term may lower your payment, but you’ll end up paying more in interest overall.

Other Perks. Finally, compare consumer protections offered by different lenders. Jarvis says some of the newer companies are competing with big banks by offering “previously unheard-of provisions” for private loans, like flexibility in repayment if you become unemployed.

4. Refinancing shouldn’t hurt your credit score.

To truly compare apples to apples, you may want to actually apply for more than one loan before choosing one. Typically, applying for several loans or lines of credit can have a negative impact on your credit score. But FICO says it treats loans like these, which commonly involve rate-shopping, differently, treating inquiries that fall in a “typical shopping period” (think 30-45 days) as just one inquiry. So if you focus your efforts in a short period of time, the effect on your score can be minimal.

You may also see a small dip in your score when you actually refinance as opening a new account can also lower your average account age, which can shorten your overall credit history. But it should improve as you start making regular payments on your new loan.

Generally, if consolidating your loans with a better interest rate makes it easier to make on-time payments consistently, the effect on your score (not to mention your stress level) is really beneficial. Your payment history—e.g. your ability to make consistent timely payments—has the largest impact on your credit score, counting for 35 percent of it.

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