Borrowing

What it means to refinance your student loans⁠ — and when it makes sense

Twenty/20

College graduates who are figuring out how to best manage student debt may be weighing the costs of refinancing their loans, and with good reason.

Refinancing lets you combine some or all of your existing federal or private student loans into one new, private loan — ideally one with a lower interest rate, helping you reduce your monthly payment. And now that the Federal Reserve has cut interest rates three times in 2019, most recently in October, rates on many private student loans are lower, too. Refinancing could result in substantial savings.

If you're considering refinancing your student loans, here's more information about how the process works, as well as some pros and cons.

How refinancing works

If you have multiple student loans, refinancing allows you to replace one or more of your federal and/or private loans into a single new private loan with one set of terms. This could mean a lower interest rate and a shorter repayment period ⁠— which will usually save you money over time.

Banks and credit unions may offer refinancing options, as do online lenders like SoFi, CommonBond, and Sallie Mae. New loans may have a fixed rate or one that's variable. It's smart to shop around and see what rates and terms you may be eligible for, and how much you could save.

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Say you owe $30,000 in student loan debt. The average fixed interest rate on private student loans is about 9.94%, based on a recent survey from Debt.org. At that rate you would pay almost $17,500 in interest over the course of a standard 10-year repayment period, with a monthly payment of $395.

Some of the best rates on a private loan are currently about 5.22%. Refinancing to a loan at that low rate would decrease your monthly payment to $321 and save you roughly $8,900 over life of the loan.

Refinancing makes more sense for private student loans

The higher your current interest rates, the more you stand to save from refinancing. Borrowers with private loans are more likely to fit the bill. Generally, average interest rates for federal loans range from 4% to 7%, whereas interests rates for private loans can climb as high as almost 15%, according to Debt.org.

Be aware, though, that refinancing can strip federal student loan borrowers of protections and benefits, including forbearance, deferment, income-driven repayment plans, and public loan service forgiveness plans.

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Betsy Mayotte, president and founder of The Institute of Student Loan Advisors, generally recommends staying away from refinancing federal student loans: She says it isn't worth losing those critical protections. If you can't afford federal loan payments, which offer a wider array of low payment plans than private loans, she points out, you might still struggle to make a payment if you refinance.

"I can probably count on one hand the number of [federal student loan] borrowers where I thought it might be a good idea for them to refinance," says Mayotte.

You may need to meet specific requirements to qualify

When evaluating your application, lenders try to determine how likely you are to pay your loan back. For example, Earnest, a common lender, requires a minimum credit score of 650, and looks at other factors like your debt-to-income ratio. This can be especially tricky for new grads who have less of an established credit history, which could mean that you would need a cosigner.

"Lenders are looking for the cream of the crop, people who have very high credit scores, in the 700s for sure, as well as people who have a couple of years of on-time payment history under their belt," says Mayotte.

I can probably count on one hand the number of [federal student loan] borrowers where I thought it might be a good idea for them to refinance.
Betsy Mayotte
President and founder, The Institute of Student Loan Advisors

She also mentions that lenders may look at where you went to school, whether or not you graduated, and what you received your degree in.

"I think more people will look into refinancing as interest rates continue to fall and it causes a wider gap between what the federal loan interest rates are and what private interest rates are," says Mayotte. "Hopefully they'll also consider whether it makes sense to do it for their particular situation."

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