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Refinance Student Loans

How to refinance student loans to the best interest rate possible and faster repayment.

Can you refinance student loans?
Refinancing student loans doesn’t exactly work in the same way that refinancing other types of debt works. With other types of debt, you can refinance when you have a better credit score. Refinancing lowers your interest rate, speeds up debt repayment and may also reduce your monthly payments. But it’s not so straightforward with student loans.

How are student loans different?

Student loan interest rates don’t apply in the same way as interest rates on other loans. That’s because student loan borrowing works differently. Most borrowers are young, so they don’t have established credit scores. That means borrowing would be difficult, since rates and terms are subject to adjustment based on your credit score. Most students wouldn’t be able to qualify.

So, both private lenders and the federal government don’t take credit score into account during underwriting. You can have bad credit or no credit and still qualify for a student loan.

  • Interest rates on federal student loans are set based on the 10-year Treasury note index. Basically, as the Federal Reserve raises interest rates, the rates on student loans increase, too. The federal interest rate on the student loans is set each year on June 1. So, the rate you receive depends on the economy when you borrowed.
  • Lending standards on private student loans are more relaxed, too. So, even though the lender sets the rate, your creditworthiness has less of an impact. You can have a weak credit profile and still get a good rate on a student loan. That’s true even if you wouldn’t qualify for good rates on other types of loans from the same lender.

Since rates are not set according to credit score when you take out a student loan, it makes refinancing different, too.

Can you refinance student loans?

Yes.  However, if you want a lower interest rate, then you must go through a private lender when refinancing your student loan. Any federal relief option won’t guarantee a better rate. That’s because both direct consolidation and federal repayment plans both take a weighted average of your existing rates.

Essentially, the rate on federally consolidated debt depends on the rates of your original federal loans. Rates on big loans will count more in the weighted average that rates on smaller loan amounts. So, your new rate will fall somewhere in between the rate ranges on your existing loans.

This means that federal student debt relief options don’t really provide the benefit you typically want from refinancing. If you want to refinance for a lower interest rate, then you need to look to private lenders. Just be aware than if you refinance federal student loans with a private loan, it converts it. In other words, the debt is no longer eligible for federal relief programs, including any student loan forgiveness program!

Should you refinance student loans? Take a self-assessment test!

Wondering, “Should I refinance student loans?”

Debt.com makes it easy to decide with a simple 3-question assessment refinancing assessment test. Answer the three questions below. If you answer “yes” to all three, then refinancing is probably a good idea for you.

Question 1

Are most of your student loans private?

a) Yes

b) No

Reveal Answer

If most of your student loans are private, you are a good candidate to refinance.

Return to question

Question 2

Has your credit score improved since you took your loans out?

a) Yes

b) No

Reveal Answer

A better score means there’s a good chance that refinancing will get you a lower interest rate.

Return to question

Question 3

Are you financially stable enough to be confident you won’t need federal relief options for any federal student loans you hold?

a) Yes

b) No

Reveal Answer

If there’s any chance that you may experience financial hardship, refinancing may be risky.

Return to question

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How to refinance student loans at a lower interest rate

These steps should get you the best student loan refinance rate.

  1. First you should look for quotes on student loan refinancing OR student debt consolidation loans.
    1. You can go through a private lender, such as a bank, credit union or online lender.
    2. Or you can use online lending comparison tool to receive multiple quotes at once
  2. They will ask for the amount you wish to refinance and your total monthly payments, along with basic personal information.
  3. They may also ask if you want a fixed or adjustable interest rate.
  4. Then you will receive a quote with:
    1. An estimated interest rate
    2. The term of the loan they’re offering
    3. The new monthly student loan payments you can expect to pay
  5. Make sure to check fees with each lender:
    1. Avoid loan origination fees, since many lenders waive them
    2. Also avoid loans with prepayment penalties
  6. You usually have 30 days from the time you receive a quote to make a decision; otherwise the rates are subject to change.
  7. After you find a quote you like, you must go through a normal loan application process with that lender.
    1. Note that this includes authorization for a credit check, which creates a hard credit inquiry on your credit report
    2. This is why you only want to apply for one loan, so you don’t create multiple inquiries that damage your credit score.
  8. Also check with the lender to see if they offer other ways to reduce your rate further.
    1. For example, you may get lower APR with AutoPay if you sign up for ACH withdrawal; this by usually decrease teh rate by 0.25%
  9. Once you’re approved, the lender disburses the money to your existing lenders
    1. This pays off your original loans, consolidates the debt and refinances it at a lower interest rate

Eligibility requirements for refinancing student loans

Keep in mind that certain lenders may have specialized eligibility requirements for refinancing student loans. This table provides a list of requirements that generally apply to all lenders, as well as requirements you see from some lenders.

Required for all lenders
You must be a U.S. citizen OR permanent resident of the U.S. to refinance on your own.
If you are a resident alien, then you must have a cosigner who is a citizen or permanent resident.
Your loans must be in repayment – i.e. you can’t refinance while you’re still attending school.
Required for some lenders
Some lenders require a minimum amount of debt, usually $10,000 or more.
Other lenders (not all) require you to earn a degree to refinance with them; they will require proof you graduated. In some cases, they may waive this requirement if you’ve been making payments on time for a certain amount of time.
Some lenders also won’t take loans that are enrolled in a hardship-based repayment plan, such as Pay as You Earn.

Consolidate vs. refinance student loans

Student loan consolidation versus refinancingIf you notice above, applying to refinance student loans through a private lender is the same process as applying to consolidate student loan debt. In truth, these two processes are often used interchangeably. At the very least, you usually do them at the same time. So, you typically consolidate and refinance student loans in tandem.

In a technical sense:

  • Refinancing refers to taking out a new loan at a lower interest rate to pay off an existing debt. For example, when you refinance a mortgage, you take out a new mortgage at a lower rate and pay off the old one.
  • Consolidating refers to taking out a new loan at a lower interest rate to pay off multiple existing debts. It’s basically the same thing, but it covers multiple debts instead of just one. So, when you consolidate, you usually refinance at the same time.

Not surprisingly, the exception to this rule comes with Federal Direct Consolidation Loans for student debt. This is a consolidation loan that you take out through the government’s Direct lending program. The goal of these consolidation loan is to make more of your debts eligible for federal relief options. We explain more about this below.

How can I refinance my federal student loans?

Student loan refinance rates on federal relief options

When you have multiple federal student loans to repay, you usually want to enroll in a federal repayment plan. These are various plans that the federal government set up with loan servicers to make repayment easier. Two of them focus on speeding up repayment so you can get out of debt fast. The others are known as “hardship-based” repayment plans, because they’re designed to lower your monthly payments. Enrolling in a hardship based repayment plan is also required if you want to sign up for Public Service Loan Forgiveness.

Not all federal loans qualify for these repayment plans easily. For instance, you can’t put Perkins loans into a repayment plan. But you can use a Federal Direct Consolidation Loan to consolidate all your federal loans together. That way, more of your debt is eligible for federal relief. You must have at least one Direct loan to use this option. There’s a separate FFEL Consolidation Loan if you have at least one loan from the old Federal Family Education Loan (FFEL) program.

But whether you use a federal consolidation loan, a repayment plan or a combination of both, don’t expect a lower interest rate! Again, federal refinancing involves taking a weighted average of the loans you already have. The rate you’ll pay on the consolidated debt will be somewhere in the middle of the rate ranges for your original loans.

Why it’s risky to refinance federal student loans through a private lender

Total education loan indebtedness includes all financial aidEligibility for federal relief is a big deal if you’re struggling to repay student loans. A government study found that 50% of student loan borrowers may be overpaying. What’s more, the same investigation offered case studies that showed just how much borrowers could save through these programs

The difference in repayment cost can be great, particularly if your job qualifies you for Public Service Loan Forgiveness. If you’re a public service professional, like a teacher or nurse, you can qualify for this option. It will discharge your remaining debt without any penalties after 120 qualified payments on a repayment plan. The case studies found average borrowers who qualified paid off their loans for less than they’d borrowed!

So, while refinancing privately may lower your rate, the total cost might be lower with a federal repayment plan paired with forgiveness. This means public servants need to think very carefully before using private student loan refinance options. If you’re in doubt, consult with a student loan repayment specialist to weigh your choices.

There are also other ways for student to qualify for loan forgiveness. For instance, if you serve in the Peace Corps for two years, you can qualify for up to 70% loan cancellation on Perkins loans. Serving in AmeriCorps for 12 months forgives up to $4,725 in federal loans. But again, these type of options only apply to federal loans!

Even if qualifying for loan forgiveness isn’t an option, there’s still some risk in converting federal loans to private. If you have a steady job with good income, you may think you don’t need federal relief. But what happens if your situation changes? What if you lose your job or get injured or sick and can’t work? It’s a calculated risk that you must take if you use private refinancing.

Refinance Student Loans FAQ

Q: Are there any advantages to private student loan refinancing for public servants?

A: Federal relief programs can be beneficial, but they also come with a lot of hoops to jump through. Enrolling in a hardship based repayment plan requires certification of your income and family size. You must recertify every year. At the same time, you must certify you work in a qualified public service profession. You should reapply for that certification annually AND anytime you change jobs.

It’s a lot of work to get the remaining balances on your loans forgiven, and it’s not guaranteed that it will work. The Department of Education can change their standards for what jobs qualify for forgiveness. The Trump Administration has already placed additional limits on certification. As a result, people who thought they would qualify for forgiveness don’t under the new rules.

Private student loan refinancing is straightforward and simple by comparison. So, you may decide it’s easier to go the private route to save yourself the hassle.

Q: Can you refinance student loans after consolidation?

A: Yes. If you improve your credit profile after you consolidate, you can refinance to get a lower interest rate. This logic specifically applies when you consolidate through a private lender. You’ll get an interest rate that’s at least partially based on your credit score when you consolidate the debt. Then if your score improves, you can refinance to lower the rate even more.

You can also choose to refinance student loan after consolidation if you used a federal consolidation loan. You may decide that the interest rate reduction and cost savings are worth the risk of losing eligibility.

We recommend watching your mail. Lenders look at credit reports to screen for pre-approved offers. If they see you have student loans and can give you a better rate, they’ll definitely try to contact you. There’s nothing wrong with at least talking to them to get a quote. If it sounds like it’s worth your time, you can proceed with the loan application.

Q: Can you refinance student loans with bad credit?

A: Yes. Remember, lending requirements for student loans are nowhere near as strict as other types of loans. There are several online lenders that specialize in helping borrowers with bad credit get lower student loan interest rates.

Just be aware that you won’t get as low of a rate as you would with good or excellent credit. So, while you may qualify for a rate reduction, it won’t be the best possible rate until you improve your credit.

If you refinance with bad credit, then consider refinancing again once you improve your credit score. Again, keep an eye out for refinancing offers in the mail to see if a bank or lender wants to offer you a better rate.

Q: Can you refinance student loans without a degree?

A: You can absolutely refinance student loans with no degree. Although some lenders require you to provide proof of a degree, many do not. Simply check with lenders that offer you quotes to make sure they are willing to work with you.

In order to refinance, your loans must be in repayment. Repayment periods start within 6-9 months of when you dropped out or dropped below half-time enrollment. If you plan to go back before the clock starts, then stop the repayment clock countdown. But if you don’t, then repayment is imminent.

The problem with repaying student loans with no degree is that you may not have the income you need. You took out loans to get a better career. Without that better career, you may find yourself stuck. This happens to a lot of borrowers. In fact, people who have student loans but didn’t graduate are the most likely to face problems with student debt.

But when it comes to refinancing, most lenders don’t care if you graduated or not. They just want to make sure you can afford the payments. If you can, they don’t care what job you have. You can refinance just like anyone else.

Q: How do I decide when to refinance student loans?

A: Refinancing debt is all about timing. You want to apply when Federal Reserve rates are low and your credit score is high. That combination gets you the lowest rate possible on your refi.

If you’re thinking of refinancing, we recommend doing it sooner, rather than later. In 2017, the Federal Reserve started to raise the prime interest rate. When the Fed raises their rates, so do lenders. Rates were near zero following the Great Recession, which made borrowing very beneficial. Now that rates are rising, loans are less and less affordable.

So, if you have decent credit, don’t wait! The Federal Reserve has hinted heavily that they will continue to raise rates throughout 2018. Experts predict it could happen more than once. Rates usually increase by 0.25%. So, the longer you wait, the higher rates will get.

Of course, you also want to refinance if you significantly improve your credit. If your credit is fair now, take 6 months to build credit. Then look ask for student loan refi quotes to see what you can get. If the quotes look good, it’s the right time to refinance.

Q: How do you find the best student loan refinance companies?

A: Low fees and flexible terms are key. You want to look for a company that offers the best rate at the time when you’re looking for loan offers. However, fees can quickly increase your cost. Avoid companies that charge a loan origination fee, since many reputable student loan servicers don’t charge them.

Also look for no prepayment penalties or early repayment fees. These mean that you pay a penalty fee if you if you try to pay off your loan faster with extra payments or larger payments. You basically must stick to the term of the loan exactly, which means more years in debt. If you can pay off your loans early, you should. So, you want the flexibility to do so.

You should also check reviews, Better Business Bureau ratings and consumer reports. Some student lenders are well-reviewed and known for great customer service. Others are not. The good news is that private lenders are more likely to offer good customer service. Federal loan servicers like Navient are notorious for customer complaints.

Q: How many times can you refinance student loans?

A: There is no set limit to how many times you can refinance. Even if you use federal repayment plans, you can switch them as often as you need to. As your situation changes, you can switch between plans.

Of course, when it comes to refinancing through a private lender, you need to be careful with your credit score. Each refinance application will create a hard credit inquiry on your credit report. Too many hard inquiries within 6 months will hurt your credit score. So, at the very least, you should spread refinancing out. Otherwise, you’ll hurt your score and won’t qualify for as good of a rate.

Q: What does it mean to have an adjustable rate when you refinance?

A: Adjustable rate loans can be extremely tricky to manage. When you have a fixed rate loan, the rate you get when you apply is the rate you pay through the life of the loan. That also means the payments stay the same over the life of the loan, too. You know what to expect, so your debt is fairly easy to manage.
By contrast, adjustable rate loans have interest rates that change periodically. The timeframe for the adjustments depends on which rate index the lender uses. For example, SoFi uses the 1-month LIBOR (London Interbank Offered Rate) index. As the name suggests, LIBOR rates change every month. So, your student loan refinance interest rate can change every month, too.
That also means that your monthly payment requirement may change, too. That’s a lot of uncertainty for your budget! Your rates can basically change all the time without notice. Unlike credit card issuers, adjustable rate lenders are required to inform you if your rate changes.
Unless you have a lot of flexibility in your budget, stay away from adjustable rate loans! They offer lower rates than fixed rate loans at the same credit score. However, the volatility can be too much for many borrowers to handle. Adjustable rate loans are easier to miss payments on and slip into default. So, don’t use this option unless you have the means to cover those constant fluctuations!

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Article last modified on March 9, 2018. Published by Debt.com, LLC . Mobile users may also access the AMP Version: Refinance Student Loans - AMP.