If you’re going to college today, student loans are an all-too familiar story. Although a university education is important and required for many career paths, the cost of school has increased exponentially since our parents were students. Student loans are a great way to pay for your education, but they do come with a long-term financial commitment, and in some cases can also come with less-than-favorable terms for young adults with little credit history or financial knowledge.
Student Loan Refinance Rates January 2020
Should I refinance student loans?
Student loan refinancing lets you take existing debt and renegotiate the terms and interest based on your current financial situation.
Unlike federal direct loan consolidation, which is exclusively used for federal debt that is being bundled into a single payment, refinancing lets you get better rates for both private and federal loans.
Most importantly, refinancing your student loans is a great way to get back your financial autonomy and power. For most students, getting a student loan requires having a cosigner with good credit--usually a family member or trusted friend. While it is a great deed from a loved one, it’s also a financial burden. Refinancing lets you choose a new lender, find a better interest rate, and most importantly, it releases your cosigner from repayment responsibilities.
When you refinance your loan, the lender you’re working with will pay off your existing loan and give you a new one at lower interest rates, or with reduced monthly payments. In many cases, you can find significantly better student loan refinance interest rates, and save hundreds and even thousands of dollars over the lifetime of your loan.
Additionally, you can often choose between variable and fixed rates, delivering the option for obtaining lower interest. Finally, refinancing grants you the opportunity to set a repayment term that works with your personal timeline. Instead of a fixed term, many lenders let you choose repayment periods that range from 5 to 20 years when you refinance private student loans and federal aid. Keep in mind, though, that if you refinance your federal student loans, you’ll lose the opportunity to apply for public service loan forgiveness and other federal income-driven repayment options.
How Do I qualify for Student Loan Refinancing?
It’s worth noting that while refinancing is a great way to improve the terms of your student loan, it also requires some effort and financial responsibility on your part. Refinancing, much like other loans, are a financial risk for lenders, so they do have some stringent standards to qualify.
Even so, there are some steps you can take to improve your odds of being approved:
- Build a strong credit score: This is perhaps the most important aspect of your refinancing, and it can be the difference between a high interest rate or better terms. The goal is to have at least 600, but preferably a much higher score.
- Have a stable budget: While lenders won’t look at your monthly spending, they will see how responsible you are at paying off your monthly obligations such as utilities and existing debt. A history of steady repayments is a big plus for lenders.
- Make sure your debt-to-income ratio is right: This measure of how much debt you’re repaying monthly against your income is an important consideration for lenders. Having a low debt-to-income ratio means that you can safely repay more without putting a strain on your finances.
- Have a steady job: Most importantly, lenders want to know that you can reliably afford to pay your debt down every month over a long period. Having a stable job or even a written job offer can significantly improve the likelihood that you’ll get approved at favorable terms.
Private Refinancing vs Bank Refinancing?
The lending industry has changed significantly over the past decade, and as banks continue to favor the status quo, new private lenders that specialize in student loans while offering better service and rates have emerged. Even so, banks remain relevant today for a reason, and they deserve a closer look.
One of the most important trust factors a lender can give its customers is the financial institution that backs it. For many private lenders, this will vary between banks and other private capital. For bank underwriters, however, the backing is always clear, and offers the stability of a highly regulated financial institution.
This comes with its own benefits and convenience. For instance, if you have a bank account with the same bank, you can automate your payments and often get small interest rate discounts. Nevertheless, banks tend to have less flexibility when it comes to repayment terms, have steeper borrower requirements to be eligible, and have higher interest rates.
On the other hand, private lenders provide services that are designed to help borrowers refinance private student loans and federal aid. These include everything from community outreach and online forums to educational resources and budgeting apps. Moreover, they can offer lower rates in some cases, leading to better refinancing opportunities in general.
When Is Best to Refinance Your Student Loans?
While it may be tempting to dive into refinancing your loan immediately when you can start paying it, you should take some time to consider if it’s really the best call. There are arguments to be made for waiting and doing it as soon as possible, but they largely depend on your specific circumstances.
These are some good reasons why you should refinance:
- There are favorable economic conditions
For example, the US Federal reserve is currently maintaining historically low interest rates. Refinancing right now could lock you in at a much more favorable interest rate.
- Your finances significantly improved
Refinancing only makes sense if you can guarantee better terms for your repayment. If you have a better job or your credit score has improved, you may be able to refinance at much lower interest rates.
- You have high variable rates
If you choose variable rates, they may experience sharp increases over time. To avoid paying more, it may be better to simply refinance at a fixed interest rate that locks in for the rest of your repayments.
On the other hand, you should reconsider refinancing in the following cases:
- Your finances haven’t improved
If you haven’t managed to boost your income or improve your credit, your refinancing terms may not provide much of a benefit. They may even give your worse terms.
- Your debt-to-income is too high
If you’re paying off large chunks of debt every month, even a high income may not be enough. Lenders worry when your debt repayments are already a significant portion of your paycheck.
- You may qualify for federal student loan forgiveness
Better rates are great, but if you have federal student loans, you may qualify to have some of your debt forgiven for a variety of reasons. If you refinance, you’ll lose any access to these programs.
What To Consider Before Refinancing Your Loan
When it comes to student loan refinancing, there are some great benefits that accompany a few downsides. You should consider your long-term options before refinancing, as choosing to go that route may close off avenues like loan forgiveness and deferment options that federal loans provide (though private student loans don’t). Even the best student loan refinance deal can limit your options in the future if you’re in financial trouble. Before refinancing your loan, think about if you need any of the following:
- Income-Driven Repayment
For most federal student loans, the ability to choose a repayment term that is proportional to your earnings is a big bonus. IDR caps the maximum amount you’ll pay monthly at 10% to 20% of your discretionary income and gives you the opportunity to have your debt forgiven.
- Loan Forgiveness
Many federal loan programs let you earn forgiveness for some of your outstanding debt if you pay responsibly for a consecutive period of time. This ranges from 10 to 20 years, but at the end, whatever amount is left on your loan may be completely erased.
- Deferment and Forbearance
If you’re in financial hardship, federal loans let you enter deferment or forbearance. These programs let you halt your monthly loan payments or reduce them for a set period (although you still accrue interest during forbearance).
How to Choose the Best Student Loan Lender for Refinancing?
Once you’re ready to refinance, you’ll have to choose a lender to work with. Keep in mind that since you’ll likely be paying your loan for several years, it’s important to find one that is trustworthy and scores well on customer support. Additionally, you’ll want to choose a lender that can meet your requirements and preferences in a few categories:
- Fixed or Variable Rates - Depending on your desired loan term, you may prefer to have either fixed or variable rates. Fixed rates let you lock in your rate for the lifetime of your loan, but have a higher initial floor. Variable rates start lower, but may swing higher depending on external factors. Check out our variable rate student loan calculator to see how you would do with refinancing.
- Interest Rates - The most important part of refinancing is to get better terms. Finding a lender that offers better rates than the one you currently have is a top priority. Additionally, it’s important to find one that fits your credit profile.
- Loan Term - Loans usually go from 10 to 20 years. Shorter terms are better if you can afford higher repayments, as they help you exit debt quicker and generally offer better interest rates. Longer terms are ideal if you prefer a less stressful repayment, though you’ll pay more interest overall.
- Fees - Depending on your loan and lender, you may have to pay some fees for origination, disbursement, and even if you repay your loan before your term ends. It’s important to understand how fees affect the total value of your loan.
- Lending Amount - Most lenders require you to borrow a minimum of $1,000. However, there is less of a hard limit on maximum amounts, with many offering between $70,000 and $350,000, and some lenders even offering no maximum limits.
- Credit Score Requirement - Many lenders have a minimum credit score they’ll accept for loan refinancing. Make sure your chosen lender fits your current credit score, or attempt to improve it for better options.
- Income Requirement - Lenders also have requirements for how much you must report in income to be eligible. This is an important consideration in your ability to repay your loans.
- Cosigner Release - Being able to thank your cosigner with a release is a great thing, and many lenders let you let them off the hook. Cosigner releases are valuable if you’ve improved your financial standing.
- Perks and benefits - Sometimes, life gets in the way of your plans. Financial, emotional, or physical hardships affect your ability to repay your loan, and many lenders understand that. Look for options that give you deferment and forbearance, and even more specific hardship options to help you plan for the best while preparing for the worst.
Choosing the Best Terms For your Student Loan Refinancing
While you’re scanning the different available student loan refinance companies, you should always think about what terms are best for you. Depending on your financial situation and ability to pay, you may benefit from some student loan debt consolidation with higher payments over a shorter time. Here are some factors to consider before you refinance private student loans and federal student aid:
- Fixed vs. Variable Interest rates – While fixed rates tend to have a slightly higher floor, they come with the benefit of being locked in for the duration of your loan. Variable rates are generally lower, but they are also riskier since they can change from year to year depending on the economy. Over a long-term loan, variable rates may be a bad call, but if you plan on paying your debt off quickly, you may benefit from lower rates.
- Repayment term – How long you want to pay your loan will also help determine how much you pay every month. Shorter repayment terms (5 years, for instance) likely mean higher payments, but you’ll accrue less interest and be debt-free sooner. On the other hand, longer repayment terms give you some flexibility, but accrue more interest over their lifetime.
Is Private Debt Refinancing better than Federal Debt Consolidation?
Another important question you should ask yourself is if you prefer to consolidate or refinance your student loan. Debt consolidation loan programs let you bundle your existing federal student debt into a single monthly payment. In this case, you’re not necessarily looking for a better interest rate, but rather to simplify your payments and even in some cases avoid going into default from too many payments. Consolidation doesn’t preclude you from being eligible for IDR or loan forgiveness.
It’s important to remember that while you can only consolidate your federal student loans, you can definitely refinance both your private and federal student loans into a single repayment. However, you should keep in mind that once you refinance your federal loans, you lose access to the benefits and protections they offer.
Compare Options: Is refinancing student loans better than consolidation?
|Private Student Loan Refinancing||Federal Consolidation Loan|
|Easier monthly payments||Yes||Yes|
|Change of interest rate||Yes||No|
|Usage of Federal repayment plan||No||Yes|
|Eligible for forgiveness programs||No||Yes|
Can I Refinance My Student Loans More Than Once?
There’s no restriction on how many times you can refinance your student loans. Private lenders are happy to offer you better terms and interest rates if you qualify, and in some cases, it may be beneficial to refinance more than once. Indeed, if the financial outlook improves, your income suddenly jumps, or even if you improve your credit score, refinancing multiple times can help you chip off money from the total sum you’ll pay when considering interest.
When it comes to refinancing your loans, the answer should always revolve around what saves you the most money. Student loans are expensive, and if you’re paying an unfavorable interest rate, you may be shortchanging yourself for years. If you’re able to, considering student loan refinancing may give you peace of mind over the long term, and help you build a more stable and responsible financial future. More importantly, it’ll let you set the terms for repaying your loan, instead of relying upon others. Regardless, before taking the plunge, consider your options carefully to determine which refinancing option suits your situation best.