It's probably no surprise to any of you, but I get questions about how to refinance student loans at least once or twice a week from my readers. It's a hot-button topic for people our age, and for good reason! The average student loan borrower has over $30,000 in student loan debt.
Plenty of people I've talked to have MUCH more (think $100,000+). Personally, I had just under $40,000. I get how much they suck. A good refi at a low rate can save you up to $13,000 on average over the life of your student loans.
If you already know you would like to refinance your student loans and are in the research phase, my recommendation is that you check out Credible's services. If you want to know more about student loan refinancing, keep reading!
What you need to know about refinancing student loans:
If you hold Private Loans
If you have private student loans already, I would absolutely check into refinancing after finding a lower interest rate. While every loan provider handles the specifics of their loan agreements and loan terms differently, you are essentially shopping for a better rate.
If you hold Federal Loans
This is where things get more complex. When you refinance a federal loan (like a parent plus loan for example), your available benefits drastically change because you are turning your federal loan into a private loan:
- You will not be able to participate in government-sponsored student loan forgiveness programs.
- Programs designed to help borrowers during hard times like Income-Based Repayment (IBR), Pay As You Earn (PAYE), Income-Contingent Repayment (ICR), and Revised Pay As You Earn (REPAYE) plan will no longer be available to you.
- You lose federal loan forgiveness if you die. Private loans are not forgiven upon death (usually), but an inexpensive term life insurance policy can negate the need for loan forgiveness if you were to unexpectedly die.
Not everyone that has federal student loans qualifies for the above payment options and forgiveness programs. If you are going through a rough time financially or aren't in a steady career yet, these programs could be helpful if you qualify. In that scenario, you should keep your federal loans.
My advice is to delay refinancing federal student loans until you have a solid, decent-paying job and good financial footing. Also, if you have extremely high loan balances and are having trouble making monthly payments you will want to hold onto your federal loans for now.
If you hold both federal and private loans
Many major loan servicers will wrap both types of loans into one private loan.
Is consolidation the same as refinancing?
Nope. 🙂
A lot of times I get emails from readers that ask about consolidation when they really want refinancing information. Consolidation is the practice of combining multiple loans into one large loan with one payment, but the interest rate isn't necessarily lower.
Federal Consolidation
All of your federal loans are combined and the interest rate is a weighted average of all your loans' current interest rates. AKA: you don't actually save any money, it's just more organized.
Private consolidation
All your private loans are combined, and you will most likely be issued a new interest rate depending on your payback history, credit score, and other related financial factors. This is essentially a refinance.
Refinancing
This is where a completely new loan is issued and you use those funds to pay off your existing loans. The idea is that you get a lower interest rate in order to save money over the life of the loan and/or lower your monthly payment.
What is the best process for finding a lower interest rate?
The more rate options, the better in my opinion. There are a lot of student loan refinance companies out there, and it's hard to figure out which way to go when you can only see one or two rates and term lengths at a time.
When I get emails about refinancing, I send readers to Credible to check out the rates they qualify for. Credible uses a simple step-by-step process to help determine what kind of loan you have and what interest rates and terms are available to you.
I recommend Credible for four reasons:
- The application process is secure and your information is safe.
- They don't utilize a hard credit pull that would damage your credit score.
- You get to see interest rate offers from 12 different companies all at the same time.
- It's free and there isn't an obligation to purchase a product at the end of the questionnaire.
I take the fact that people trust me for this type of advice very seriously, so I'm careful about who I recommend for such an important decision.
If you're curious what kind of rates you qualify for, you can complete Credible's quick rate finding process here.
*Just as a side note for serious rate shoppers – make sure you put your information in correctly. From time to time I have a few readers get an error message at the end of the questionnaire due to a misspelling of name or address. If you are hoping to get rates with a fake name or address, it won't work, so don't waste your three minutes. Hope that helps!*
Final thoughts on refinancing your student loans
Before you make any final decisions on choosing a rate, sit down and go over your finances to see if a student loan refinance is the right option for you. With interest rates as low as they are right now, it can really make sense for people in a secure job with decent pay.
If you are still trying to get settled in after college, there is NOTHING wrong with waiting and doing your research.
RC says
Jul 20, 2016 at 9:54 amMy wife and I have just under $10K left on our Federal student loans. Since the interest rate is 5.2%, should I pay all of it off with my unsecured LOC @ 4.7%? Or does tax refund for the interest paid negate the effect?
The federal loan benefits aren’t of any value other than the tax refund on the interest paid.
We finally see the light at the end of the tunnel after years of paying off the student loan. We just want to get to the light a little quicker. 🙂
Millennial Money Man says
Jul 20, 2016 at 10:35 amWow that’s awesome that you are so close, congrats!!!!!! Based on what you just told me, I’d bet you’re going to come out at a wash from a numbers perspective honestly. The tax implications of using the LOC is the most intriguing part to me. I’m not sure if you could still claim the interest deduction if you used the LOC to pay off the federal loan, but you actually may be able to if you did a traditional refinance. Great question for my accountant next time I see her!
RC says
Jul 20, 2016 at 12:28 pmI doubt I will be able to claim the interest paid on the LOC for tax return if I went that route. Otherwise, it would make sense to go with the LOC option. I think I’ll just keep with status quo and pay it off in the next 15 months as per my schedule.
Millennial Money Man says
Jul 20, 2016 at 12:51 pmI doubt it too, but I am going to ask now because I’m curious 🙂 let me know when you get your loans paid off RC!!!!
Daniel says
Jul 20, 2016 at 10:29 amI feel like my Credit Score is not high enough (high being over 720) to get that great rate, so I have been building and waiting to refinance. I have been hearing that lenders such as SoFi don’t necessarily rely on credit scores. Therefore do you think I should go ahead and refinance now or wait?
Millennial Money Man says
Jul 20, 2016 at 10:42 amSoFi is tough to get approved with, but they have great rates. They look at work history and a bunch of other factors than just credit scores, and I believe a lot of lenders are starting to go that way as well.
I’ve had MANY readers get turned down by SoFi. They’re an awesome company, but they want a very specific customer. That’s why I recommend Credible to people as well – you can at least see a bunch of offers all at once and get a feel for where you are in terms of interest rates without getting a ding on your credit score (SoFi is one of the companies they work with just FYI).
I’d say at least check out the rates you might qualify for, it won’t hurt you from a credit standpoint in any way as long as you use something with a soft credit pull. If they are really similar to your current loans (I’m assuming federal), you may just want to wait a bit and keep doing what you’re doing to get that score up. If they are significantly lower, go ahead with the refi IF you have a solid job and everything else is stable.
Finance Solver says
Jul 21, 2016 at 9:26 pmI have $5,500 worth of subsidized federal loans. I pay no interest on it until December and will be using my cash balance to pay it off, no interest accrued. I’ve been blessed with scholarships paying my tuition and my parents paying for my living expenses, so no student loans to worry about but good tips for my friends who have a lot in student loans, thanks for the post.
Millennial Money Man says
Jul 21, 2016 at 10:10 pmMan that’s so awesome – (the scholarships, not the loans haha). Happy for you!
Millennial Moola says
Jul 24, 2016 at 12:25 amGirlfriend is currently in the process of refinancing with Sofi. She’s got the awesomely low 2.15% variable rate by having a large income relative to her debt (2 to 1 income to debt ratio). They really seem to like high income earners and people with long work histories when deciding who to give their best rates to
Millennial Money Man says
Jul 24, 2016 at 12:29 amThat’s it! Yes, they absolutely want high earners. Their target demo is actually doctors, lawyers, etc. Very cool company, but not always the easiest when it comes to getting approved for student loan refis.
However, I have had a teacher get refinanced through them, but she had great credit history. It all just boils down to applying and seeing what you can do!