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What Is Student Loan Refinancing, Really?

July 3, 2019
Student Loans
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It’s understandable if your student loans are taking a backseat to other, more pressing matters, like finding a roommate, saving up for a car or meeting work deadlines.

But taking the time to refinance your student loans can potentially save you a bundle on interest over time. If you qualify, refinancing can be a safe and effective way to pay thousands of dollars less over the life of your loan. But it’s not the best option for everyone, so here’s what you need to know.

So how does student loan refinancing work?

In a nutshell, a lender pays off your existing loans and gives you a new loan at a lower interest rate. It costs nothing to apply, and you can save a lot on interest over time.

Let’s say you have $40,000 in private student loans with an 8% interest rate. That means you’re paying $485.31 every month for the next decade. But if you refinance and get a lower interest rate, say 5%, your $40,000 loan would result in monthly payments of $424.26.

This would ultimately save you a total of $7,326 in interest. Now imagine putting that money toward something you actually want, like a car.

Can anyone refinance?

No, not everyone can or should. Refinance companies use certain criteria to evaluate your eligibility. At a minimum, you need good credit (in the high 600s or above) and a stable income. If you’re lacking either, you’ll need a co-signer who qualifies.

Also, you shouldn’t pursue refinancing if it will end up increasing the length of time it will take to pay off your loans. If you’re already halfway into paying off a 10-year loan and refinancing would only add more time to your loan term, it’s less likely to benefit you in the long run even if your monthly payment is lower.

If you want to refinance your federal loans, there are drawbacks to consider. By refinancing, you lose repayment options, like income-driven repayment, and opportunities for loan forgiveness.

When is the best time to apply for refinancing?

If you’ve started working and have built up your credit, you can consider refinancing. Keep in mind that interest rates are predicted to rise through 2020, according to the Federal Reserve. You can also refinance again in the future to lock down an even lower rate.

» MORE: 4 myths about student loan refinancing debunked

Anything else I need to know?

Here are a few more things to keep in mind before you apply:

Compare offers from multiple lenders. Get interest rates from different companies to identify the lowest one. Generally speaking, the better your credit score, the better the rate will be.

There are a few caveats if you refinance federal (versus private) loans. For example, you’ll forgo borrower protections and flexible repayment options, including income-driven repayment plans. Weigh the pros and cons to see if it makes sense for your situation.

There’s no catch. Refinancing isn’t a scam; there are no hidden fees. We’ve even compiled the best student loan refinance companies across 10 categories, along with the pros and cons.

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