Student loan refinancing is a way to save money by swapping your current student loans for a new, lower-interest-rate loan. It’s a simple concept, but there are lots of details to dig into. We tackle the most common refinance questions here.
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What’s the difference between refinancing and consolidation?
Student loan refinancing is a voluntary way to lower your interest rate, and perhaps your student loan payments, if you meet the requirements. Consolidation is a necessary logistical move in order to qualify certain federal loans for repayment programs.
When you refinance, a private lender will pay off the current student loans you choose to refinance and issue you a new loan at a lower interest rate. You can generally choose your repayment timeline from several options, but you should pick the shortest time frame you can manage to get the biggest savings. Lenders look for good credit and steady income, in addition to financial and education requirements specific to the lender.
Federal consolidation, on the other hand, is required in order for some borrowers to take advantage of particular repayment options. Those with loans from the Federal Family Education Loan Program, for instance, must consolidate them into a federal Direct Consolidation Loan in order to qualify for programs like Public Service Loan Forgiveness and some income-driven repayment plans. You won’t receive a lower interest rate based on your credit. The government will give you a new interest rate that is a weighted average of your prior loans’ rates, rounded up to the next one-eighth of 1%. Find out if you need to consolidate your loans before signing up for income-driven repayment or Public Service Loan Forgiveness at studentloans.gov/repay. Apply for consolidation online at studentloans.gov.
When you refinance multiple loans into a single new loan owned by a private lender, by definition you are consolidating them into one loan, which is why you may see these two terms used interchangeably.
Is student loan refinancing right for me?
It’s a good idea if you have private student loans or you have federal student loans and don’t plan on taking advantage of a federal forgiveness program or income-driven repayment plan. You also need strong credit and a steady income to qualify for refinancing.
The biggest benefit of student loan refinancing is receiving a lower interest rate than your previous loans carried, which will save you money over time. To make sure the process is worth it, use a refinance calculator to see how much you could save by getting a lower rate.
Are my student loans federal or private?
There are two ways to confirm whether your student loans are federal. You’ll be able to view them on the government’s online Federal Student Aid portal or on the National Student Loan Data System. Any student loans that don’t appear in these two places are private. They will be listed on your credit report.
To see your federal loans on the Federal Student Aid website, create a Federal Student Aid ID, known as an FSA ID, if you don’t have one already. Use it to sign in to studentloans.gov. On the bottom right side of your home page, click “Go to the Repayment Estimator,” then “View or Add Your Loans.”
To see your federal student loans on the National Student Loan Data System, navigate to nslds.ed.gov. Click on “MyStudentData Download” at the bottom of the home page and log in using your FSA ID.
To see your private student loans, retrieve a copy of your credit report. You’re entitled to one free annual report from each of the three major credit bureaus at annualcreditreport.com. Many online services, including NerdWallet, also provide free credit scores and/or reports at no charge. You’ll see your student loan balance and payment status — whether it’s current or past due — listed alongside the name of your lender, like Discover, Wells Fargo or Sallie Mae. Your federal loans will appear here, too.
Am I likely to qualify for refinancing?
Most lenders look for a credit score in at least the mid-600s, a low debt-to-income ratio and a steady income. It can also help if you work in a field like medicine or law, which traditionally leads to job stability and high earnings. Learn more about careers that typically qualify for student loan refinancing here.
Once I refinance, can I postpone payments if I go back to school or lose my job?
In many cases, yes. But unlike the federal government, private lenders are not required to offer such protections, so each lender has slightly different payment postponement policies. You may have to show proof of lost income or unemployment. Some lenders, like College Ave Student Loans and Purefy, offer forbearance only on a case-by-case basis. Others offer a total of 12 months of forbearance (Citizens One and SoFi) or 24 months (iHelp and CommonBond), often in two- or three-month increments. Ask your lender about its policies for borrowers who return to school after refinancing.
Which is the best lender to refinance with?
That depends on your priorities. If you want the lowest interest rate possible, apply to lenders widely.
In general, refinancing is best for borrowers who do not foresee a major change to their income over the course of the repayment period. But some borrowers may look for flexibility in case they unexpectedly lose their job, go back to school or have trouble repaying the loan. If that sounds like you, choose a lender that provides generous payment postponement options or income-based repayment.
It’s a good idea to compare refinance rates across multiple lenders before choosing one. Some lenders may perform a hard credit inquiry when you apply, but the credit bureaus will consider applying for multiple loans within a single 14- to 45-day window “rate shopping.”
Learn more about how to choose the best student loan refinancing offer for you.
What will refinancing cost me?
Unlike refinancing a mortgage, refinancing student loans doesn’t cost money. Plus, there usually aren’t any fees associated with it. And, according to the Higher Education Opportunity Act of 2008, private lenders cannot charge prepayment penalties on education loans. That includes refinanced loans. But it’s still best to contact the lender to make sure that you fully understand your loan agreement before signing.
Federal consolidation, which is sometimes confused with refinancing, is also free. However, some so-called debt relief companies charge fees to consolidate your loans on your behalf, but it’s never necessary to pay for this service.
Can my kid refinance my parent PLUS loans?
Yes. Some lenders allow former students to refinance PLUS loans made to their parents, transferring responsibility for the loan from parent to child in the process. As of January 2017, CommonBond, Darien Rowayton Bank, Purefy and SoFi give parents the option to transfer PLUS loans to their children. Both the parent and child must meet the lender’s eligibility criteria. Parents may co-sign the child’s new refinance loan to help the child qualify or get a lower interest rate. In that case, though, the parent must repay the loan if the child can’t.
I heard the Federal Reserve is raising interest rates. Should this affect my decision to refinance?
It depends. If you’re worried about getting the lowest interest rate and you were planning on refinancing anyway, it may be a good time to apply — especially if you have variable rates, which tend to rise with the Fed rate.
Learn more about the Fed rate hike and student loans here.
Why was I rejected for refinancing? What should I do now?
If, for any reason, a lender believes that you may not be able to repay the loan, that’s grounds for rejection. And since each lender has its own formula for determining which applications to accept, it can be hard to pinpoint a reason. Usually, it comes down to these key factors:
- Credit score (typically at least mid-600s is required)
- Debt-to-income ratio (your debt shouldn’t exceed 50% of your income)
- Income (stability is key, so freelancers or contracted workers are a harder sell)
It’s also possible that the lender had additional requirements you weren’t aware of when you applied. For example, some lenders accept only applicants who graduated or who took out loans for accredited schools. Contact the lender to find out why your application was rejected, then take steps to meet that requirement, if possible. That may mean building your credit score or paying off one of your student loans to lower your debt-to-income ratio.
If refinancing isn’t an option and you’re having trouble making ends meet, look into alternatives like federal income-driven repayment plans or, if necessary, opting for deferment to stay out of default.
Can I refinance if I didn’t go to a federally accredited school?
It depends. Many lenders require that you have loans from attending a school that is accredited to participate in the Title IV federal student aid programs. You can search this list to see if your school qualifies.
Can I refinance if I didn’t graduate?
Yes, if you choose a lender that offers this option. Many lenders require that you have graduated, but some — including Citizens One, RISLA and Massachusetts Educational Financing Authority, or MEFA — will let you refinance even if you don’t have a diploma. Earnest allows you to refinance before graduating as long as you’re going to be graduating that semester.
Can I refinance if I’ve filed for bankruptcy?
Yes, but you may have to wait a few years. Many lenders require that a certain amount of time has passed since your bankruptcy; the length of time varies by lender.
For example, Citizens One will let you refinance if at least four years have passed. To refinance with iHelp, MEFA and most lenders on LendKey’s marketplace, you must wait at least five years. College Ave Student Loans and Earnest will not let you refinance until the bankruptcy is wiped from your credit score, which takes seven or 10 years, depending on the type of bankruptcy you filed for. RISLA requires that at least 10 years have passed. At SoFi, you can refinance after a recent bankruptcy if you have “several years of strong financial track record thereafter” and pass all of the lender’s other underwriting requirements, says Amanda Wood, product marketing director for student loan refinancing.
Finally, CommonBond will let you refinance after a recent bankruptcy if you have a co-signer, says Radhika Duggal, vice president of marketing. Otherwise, you have to wait at least seven years to qualify on your own.
Can I refinance if I’m a co-signer?
It depends on the lender.
Some lenders — including Citizens One, College Ave Student Loans, CommonBond, MEFA and RISLA — allow co-signers to refinance. However, if you do, you’ll become the primary borrower. Other lenders, including Earnest and SoFi, don’t allow co-signers to refinance. And LendKey doesn’t allow it unless the primary borrower dies or transfers the loan to the co-signer’s name.
Devon Delfino, Brianna McGurran and Teddy Nykiel are staff writers at NerdWallet, a personal finance website. Email: firstname.lastname@example.org or email@example.com or firstname.lastname@example.org. Twitter: @devondelfino or @briannamcscribe or @teddynykiel.