What You Need to Know About Student Loan Refinancing

Deciding if you should refinance your student loans can be intimidating and confusing—very confusing to be exact! 

In essence, refinancing is the process of obtaining a new loan with new terms and hopefully a lower interest rate in the process, and it can be a viable tactic for student loan debt repayment planning. Refinancing and Consolidation are different, and certain student loans are restricted to one or the other. The confusion stems because the terms are often used interchangeably.

What is the Difference Between Refinancing and Consolidation of Student Loans?

Refinancing a loan refers to a single loan.  A loan consolidation includes multiple loans that are bundled and then refinanced as one comprehensive loan. Both are voluntary steps taken by you to pay off the original lender(s) and to create a more favorable repayment schedule and terms.

Both involve selling the original loan(s) to an approved private lender who will then issue you a refinanced loan or a loan consolidation to include all your loans. It must be noted that unlike refinancing, consolidation does not offer any interest savings. We will explain how consolidated loans address the interest rate you pay further on in this article.

Generally, you select the repayment timeline based on several options. Wise financial planning is to select the shortest time frame manageable in order to pay off the loan and reap the biggest savings when it comes to the long term interest you will pay. 

Lenders look for good credit and steady income along with lender-specific financial and education requirements.

Why Should I Refinance My Student Loans?

Far and away, the greatest benefit of student loan refinancing is to receive a lower interest rate than you had previously. This saves you considerable money over time and frees up money in your budget for other expenses. To determine if the process is worth it, use a refinance calculator to see how much you could save by getting a lower rate.

• If the student loan you want to refinance is from a private (vs. government) source, it is eligible for refinancing. 
• If you have federal student loans but do not plan on taking advantage of a federal forgiveness program or income-driven repayment plan, then refinancing is worth checking into.
• If you have a combination of federal and private student loans.
• Remember, if you decide to refinance a federal loan, you automatically forfeit all federal protections offered to you with your federal student loans.
• Private loan holders are not eligible for federal loan consolidation.

Why Should I Consolidate My Student Loans?

Consolidation refers to taking out one Direct Consolidation Loan, thus combining all of your federal student loans into one loan with one interest rate. It is a necessary logistical move in order to qualify certain federal loans for repayment programs. 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. 

• Federal consolidation (vs loan refinancing) is required in order for some borrowers to take advantage of particular repayment options. 
• Certain federal loans can only be consolidated.
• Some loans, such as the Teacher Loan Forgiveness Program, must be consolidated to qualify for programs like Public Service Loan Forgiveness and some income-driven repayment plans.

Consolidation does not lower your interest rate, unlike refinancing. 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%.

If you are in financial difficulty and can’t afford your monthly payments for your student loans, a refinance is not the solution. Instead, you should look at options to avoid a default on student loan debt.

This is particularly important if you have federal loans.

Before Making a Move

Before deciding to apply for either loan refinancing or loan consolidation, do your homework! Check the ramifications of either option on your eligibility to apply for:

• Income-driven plans
• Loan forgiveness
• Deferment or forbearance

What You Must Have to Qualify for Loan Refinancing and/or Loan Consolidation

Student loan lenders are strict; the federal government a bit less so (Loan Consolidation through the U.S. Government). In order to get a loan, you must have: 

• A strong credit score, generally around 700.
• A solid history of prompt payments.  
• A documented steady income. 

There are four highly rated, especially for transparency, primary private lenders dealing with student refinancing loans. Check if you meet their qualifications. Most lenders do not have a fee for applying for student loan refinancing, so make use of this if you like a few lender’s terms.

For all your federal loans, check the federal loan repayment estimator to make sure you are fully aware of all the federal options you have right now.

What to Look For

• Application terms that fit your circumstance. Most refinancing companies offer repayment terms of 5, 10, 15, or 20 years. Aim for the shortest amount of time but be realistic. You want a loan that enables you to reach other financial goals even if you have student loan debt, such as buying a home and saving for retirement.
• Favorable interest rates and payment periods. Interest rates are still low; go for a fixed interest for the duration of your loan.

There are pluses and minuses to refinancing and/or loan consolidation. The most important thing to remember is that any step you take is ‘forever’ until the loan is paid in full. Be timely in your decision to refinance, especially if you're planning to buy a home while paying off student loans, and be sure to weigh all the options before moving forward with the process, as an overly hasty decision can take a long time to repair.