Student loan refinancing has become a popular option for students looking to save money by swapping their federal student loan for a new, low-interest loan option. Though the concept is simple enough, there are a number of details students (and graduates) should look into before making the decision to refinance their loans.
Below, we explore some of the most common questions students have about student loan refinancing.
What is student loan refinancing?
Student loan refinancing is a process students go through in an effort to obtain a new loan with an entirely new set of terms, rates, and fine print. Students can sometimes refinance both their federal and private student loans at the same time, hopefully for a much lower interest rate.
What is the difference between refinancing and consolidation?
Student loan refinancing is a way that students can voluntarily lower their interest rates, and thus, their monthly student loan payments, if the requirements are met.
When you make the decision to refinance, a private lender will pay off the current student loans you’ve chosen to refinance, issuing you a new loan at a lower interest rate. Lenders typically look to see that you have a good credit history and a steady income, and some will have financial and educational requirements that must be met.
Consolidation, on the other hand, is meant to help prevent students from defaulting on their loans, or to simply combine several loans into one.
Federal consolidation is required for some borrowers to qualify for a number of federal loan repayment options. Those who have borrowed from the Federal Family Education Loan Program, as an example, are required to consolidate their loans into a federal Direct Consolidation Loan in order to qualify for some income-driven repayment plans, or for Public Student Loan Forgiveness. With federal loan consolidation, your new interest rate is determined based on the average of all of the loans that are being consolidated.
Sometimes consolidation and refinancing happen at the same time, however. When undergoing a student loan refinance and borrowing from a new, private lender, the debt is consolidated to allow you to make one easy payment each month. Similarly, if you consolidate private loans, a new interest rate is given based on your most recent credit score.
When should I consider student loan refinancing?
Refinancing your student loans can impart a number of financial benefits and can especially benefit those who are trying to:
- Pay off their student loans in a more timely manner
- Save money by lowering their interest rate
- Lower their monthly payment
- Wish to release a co-signer from fiscal responsibility for their student loans
For those who are in good fiscal standing, have a steady income and career opportunities, and a high credit score, refinancing is an attractive option for reducing debt and paying off student loans more quickly. To find out how student loan refinance will impact your student loan payments, use our customizable student loan refinancing calculator.
Is student loan refinancing right for me?
Like all major financial decisions, refinancing student loan debt is highly dependent on your own individual finances and career opportunities. Still, there are some things to consider before choosing whether or not student loan refinancing is right for you.
For students who don’t plan on taking advantage of a federal forgiveness program or an income-driven repayment plan, refinancing can allow them to take advantage of a consolidated loan that has a lower interest rate. Refinancing options typically require the borrower to have a strong credit score and steady income in order to qualify.
Students should be aware, however, that when choosing whether or not to refinance, they may be giving up some potential perks associated with federal student loans.
Federal student loans come with a few relief options, should your financial situation change at any point while paying back your student loans. Income-based repayment options, deferment and forbearance, and federal student loan forgiveness are three such benefits.
Student loan refinancing is an attractive option for many students who are hoping to pay off their debts in a timely manner, save money, and reduce their interest rates. For individuals who work in fields with a secure job, are amicably employed and have a good credit history, debt refinancing may not only help save money, but help continue your path of financial security.