Will Refinancing My Undergraduate Student Loans Save Me Money?

Student Loans
Want to Save $1,000 or More? Consider Student Loan Refinancing

The numbers are big. The nation’s outstanding student loan debt is a whopping $1.2 trillion. Of 2013 graduates, 69% took out loans at an average of $28,400 for each borrower, according to the Institute for College Access & Success.

For a select group of people, there’s a way to introduce big savings: refinancing.

What is refinancing?

Refinancing your student loan is a way to change the terms of the loan to take advantage of a lower interest rate. For example, if you took out a direct subsidized loan from the federal government in January 2008, you would pay an interest rate of 6.8% for as long as it takes to pay off the loan.

But after you’ve graduated, snagged a solid job and built up a credit score of 680 or higher, you may want to consider refinancing. This allows you to replace your separate federal and private loans with a single, new private loan, often with a lower interest rate, which results in lower monthly payments and overall savings.

How much could I save?

NerdWallet crunched the data to see which states’ residents would have the most to gain from refinancing their student loans. By using the profile of a 2011 graduate, we looked at how much residents of each state took out in undergraduate federal and private loans. We assumed the interest rates were 6.8% and 9.6%, respectively, and that it must be paid down in 10 years. Next, we calculated the savings of refinancing after four years at an interest rate of 5.3%.

Our findings show that the average borrower could save $1,145. Here are some key takeaways from around the nation:

New Hampshire borrowers on average have the most to gain from refinancing undergraduate loans: $1,872 or 63% more than the average American undergraduate who refinances.

Utah borrowers have the least to save from refinancing — only $669 — but they also have the distinction of having the least amount of debt at $17,227.

The places that have the most to gain from refinancing also have the highest private debt burden. Residents of Washington, D.C., take out the most in private loans — $10,870 — and will see the second-biggest savings when it comes to refinancing.

Not sure if you should refinance your student loans? Use the graphic below to help guide your decision:


 

Is refinancing for me?

While refinancing could save you money, be sure to weigh your options carefully. Taking your federal loans private means giving up certain benefits that come with a federal student loan — such as flexible repayment plans, loan deferment if you go back to school or lose your job and student loan forgiveness if you work in public service for 10 years.

If you have a stable job and healthy credit score, but want to take advantage of federal student loan protections, consider refinancing only your outstanding private loans. While they’re not required to, many private lenders offer their own protections if you lose your job or experience financial hardship. Just make sure you understand the terms of your new private loan before refinancing.

Keep in mind that refinancing is for more than just undergraduate loans. A substantial amount of that $1.2 trillion in total student debt is for higher degrees. The average 2012 law school graduate owes $140,616. Medical school graduates owe $161,772 and business school grads owe $42,000, according to a review by the New America Foundation.

While this cohort’s debt may be staggering, they are typically positioned to secure a well-paying job and refinance their loans at a better interest rate. Since the majority of those loans are private, bringing down the interest rate can lead to some eye-popping savings.

The average approved customer at the student loan refinancing marketplace Credible, which works with graduate and undergraduate debt, reaps savings of $11,668 on outstanding student debt of $45,000 to $75,000. In some cases, borrowers have refinanced with debts as low as $10,000, and others have sought new terms on several hundreds of thousands of dollars. Borrowers will find help at NerdWallet when exploring possible savings with refinancing.

Student loan refinancing savings by state

State Average federal student loan debt Average private student loan debt Total average student loan debt Average savings from refinancing
Alabama $21,759 $3,704 $25,463 $1,134
Arizona $16,739 $3,207 $19,946 $910
Arkansas $21,514 $1,534 $23,048 $894
California $17,447 $1,420 $18,867 $744
Colorado $19,242 $3,041 $22,283 $978
Connecticut $20,797 $7,636 $28,433 $1,521
District of Columbia $17,371 $10,870 $28,241 $1,749
Florida $20,379 $2,675 $23,054 $977
Georgia $19,704 $2,740 $22,444 $961
Idaho $23,526 $608 $24,134 $864
Illinois $21,766 $4,704 $26,470 $1,241
Indiana $21,562 $5,938 $27,500 $1,366
Iowa $22,367 $6,291 $28,658 $1,431
Kansas $20,615 $2,706 $23,321 $989
Kentucky $19,853 $2,434 $22,287 $934
Louisiana $20,882 $1,815 $22,697 $903
Maine $20,601 $5,445 $26,046 $1,280
Maryland $18,630 $5,372 $24,002 $1,206
Massachusetts $20,497 $6,684 $27,181 $1,409
Michigan $22,579 $4,857 $27,436 $1,285
Minnesota $21,206 $8,894 $30,100 $1,669
Mississippi $22,628 $1,069 $23,697 $882
Missouri $20,118 $3,111 $23,229 $1,015
Montana $22,852 $1,261 $24,113 $910
Nebraska $21,681 $2,606 $24,287 $1,014
Nevada $18,527 $1,427 $19,954 $781
New Hampshire $21,851 $10,589 $32,440 $1,872
New Jersey $21,048 $6,562 $27,610 $1,415
New York $20,994 $4,770 $25,764 $1,222
North Carolina $18,535 $2,230 $20,765 $867
North Dakota $21,026 $6,554 $27,580 $1,413
Ohio $21,828 $6,631 $28,459 $1,449
Oklahoma $19,765 $1,425 $21,190 $823
Oregon $21,689 $3,808 $25,497 $1,143
Pennsylvania $22,303 $7,722 $30,025 $1,581
Rhode Island $20,544 $8,553 $29,097 $1,610
South Carolina $21,024 $4,634 $25,658 $1,208
South Dakota $22,872 $1,360 $24,232 $922
Tennessee $18,042 $2,293 $20,335 $857
Texas $20,314 $2,209 $22,523 $925
Utah $16,066 $1,161 $17,227 $669
Vermont $20,628 $7,645 $28,273 $1,516
Virginia $21,049 $3,794 $24,843 $1,119
Washington $20,113 $2,107 $22,220 $908
West Virginia $21,862 $4,396 $26,258 $1,211
Wisconsin $22,857 $3,381 $26,238 $1,137
Wyoming $21,706 $1,635 $23,341 $911

Alaska, Delaware, Hawaii and New Mexico are missing from the analysis due to data constraints.

Methodology

NerdWallet calculated the savings of refinancing a 10-year student loan if the hypothetical consumer — a 2011 graduate — qualified for refinancing after four years of making regular loan payments.

Sources

Data on average federal and private debt by state are from the Institute of College Access & Success.

Historical federal interest rate data are from studentaid.ed.gov.

Historical private interest rate data are from consumerfinance.org.

Refinanced interest rate is from data provided by Credible.


Infographic by Brian Yee.

Image via iStock.