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How to Refinance Student Loans
By Stephanie Colestock MONEY RESEARCH COLLECTIVE
Loans are an unfortunate necessity for many students. They help pay for tuition and education-related costs. According to Federal Reserve data, more than four out of every 10 people who go to college will incur debt along the way to help them cover these expenses.
Of course, the loans you take out when you’re 18 or 20 years old might not come with the best possible repayment terms, due to your own limited credit history. But refinancing those loans after you graduate can help lower your loans’ interest rate and even adjust your monthly payments. Here’s a look at how to refinance student loans and what to expect along the way.
Table of contents
- When to refinance your student loans
- How does student loan refinancing work?
- 6 Steps to refinance your student loans
- Documents needed to refinance your student loans
- Can you refinance federal student loans?
- Student loan refinance pros and cons
When to refinance student loans
Student loan repayment is usually deferred while you’re still in school. While some lenders will want you to make small monthly installments or interest-only payments, most will let you put those payments off until six months or so after graduation.
So if you’re enrolled in school full-time, you probably aren’t even thinking about repaying your student loans yet. And even if you are, you’re probably not ready to think about refinancing them.
So, when should you refinance student loans? Well, there are a few situations when it can make a lot of sense:
- When your credit improves — One of the biggest impediments to refinancing your student loans will probably be your credit history. Young students usually haven’t had enough time to build their credit score, and don’t often have the income required to qualify for a refinance loan, either. Once you’ve had a few years to become creditworthy and begin earning money, though, refinancing might be within reach.
- When interest rates drop — Refinancing can be a great way to snag a lower interest rate than your loan(s) originally had. If market rates have dropped or you now qualify for better rates, consider refinancing.
- If you need to remove a co-signer — Some lenders will allow for cosigner release, where anyone who signed for your loans (such as a parent or grandparent) can be removed from them. However, this usually isn’t available until a certain number of consecutive, on-time payments have been made (often two to four years). If you need to remove your cosigner earlier, a refinance might be the only way.
- If you’re juggling too many loans — By the time you graduate, you will probably have taken out multiple loans. Even just one loan per semester can mean eight different accounts to manage… and that doesn’t count grad school! Refinancing enables you to consolidate multiple loans into one account, with one interest rate and one simple monthly payment.
- If you want to lower monthly payments — By refinancing your student loans, you can adjust your monthly payment requirement to match your budget needs. This can be accomplished by snagging a lower interest rate or extending your loan repayment term.
How does student loan refinancing work?
Refinancing student loans involves using a new private loan to pay off and replace one or more existing student loans. The new debt will pay off the current loan(s) and have its own loan terms, such as the monthly payment amount and interest rate.
Refinance loans can be used to consolidate multiple private and/or federal student loans, or simply replace one single loan. When refinancing, it’s important to note that any benefits, discounts, terms or advantages you had with the old loan will be lost.
6 steps to refinance your student loans
When the time comes to refinance your student loans, you may be surprised to find that the process is fairly simple. In some cases, it can even be completed online in just minutes.
1. Check your credit score
Before you apply for a refinance loan, it’s a smart idea to check your credit report. Most private refinance loan lenders will require borrowers to have good credit (usually a credit score of 600-640 or higher); if you aren’t yet there, you may want to hold off on your application.
There are many places to get your credit score, depending on whether you want to check your FICO score, VantageScore or just go with the score that may be offered by your bank or credit card issuer. Even if it’s not the same scoring formula that your potential lender will use, this will give you an idea of where your credit stands and whether you would qualify.
Your credit score will be affected by factors such as your previous payment history, debt-to-income ratio (DTI), how much you owe in total, what sort of accounts you hold and even the age of your accounts.
2. Get pre-qualified
To further this slow toe-in-the-water approach: many lenders will allow you to get pre-qualified for a refinance loan without affecting your credit.
Getting pre-qualified involves a soft credit check, also known as a soft inquiry. This will give the lender a general idea of your credit history, but won’t be reported as a hard pull (and therefore, won’t dock your score). From this, they can tell you whether you’re pre-qualified, how much you can borrow and even what rates you may be offered.
Pre-qualifications are helpful, but they aren’t 100% guaranteed. Once you decide to move forward with a loan, a hard pull will also be conducted. This added information will be used by the lender to verify your approval and loan terms.
3. Compare student loan lenders and rates
Before moving forward with a new lender, spend some time shopping around first. Look at banks and credit unions you might already do business with, as well as some of the more popular student loan lenders (like SoFi). Doing this lets you compare lenders against one another, seeing which offers the best rates and repayment plans.
Your rate is used to calculate the interest you will pay on your new loan. Interest is what you’ll pay to the lender, and represents the “cost” of your loan. It is expressed as an annual percentage rate or APR.
Keep in mind that many online student loan refinancing rates will include an autopay discount (usually around 0.25% APR). If you don’t plan to sign up for autopay, your rate will be higher. Some lenders will also offer variable rate loans as well as fixed-rate loans, so be sure to note which rate you’re being offered and whether or not it can change.
Get pre-qualified through multiple different private loan lenders, since it won’t affect your credit to do so. There are also aggregator websites, which give you loan rates and repayment options from various lenders in one place, without having to enter your information multiple times.
4. Fill out loan application
Once you’ve picked the best student loan lender for your situation, it’s time to fill out an application and formally apply for your new loan.
Private loan applications will involve much of the same information you needed for pre-approval: your name, date of birth, address, email, and Social Security number. You may also be asked for identity verification (like a government-issued ID) and proof of employment or income (in the form of pay stubs, W-2s, recent tax returns, and the like).
After submitting your loan application, the lender will run a hard pull of your credit to get a complete picture of your credit history.
5. When approved, read terms and conditions
Once approved for your new loan, it’s time to read the lender’s terms and conditions (carefully!). This document, which may be multiple pages long, explains the details of your loan, how you’re expected to repay the debt, what happens if you default and any applicable costs or fees that you could incur.
Potential costs that could be mentioned here include prepayment penalties, loan origination fees, late fees and even application fees.
Read this document slowly. Then read it again before moving forward. You’ll be bound to these terms for the life of the loan — or until you refinance again.
6. Sign your new loan agreement
If you agree to the loan servicer’s terms as well as the details of your new loan (including the interest rate, loan amount, repayment period and any fees), it’s time to sign your agreement, also known as a promissory note. Essentially, this is your promise to the lender to repay the loan as scheduled.
Signing this agreement can usually be done online with a digital signature.
Documents needed to refinance your student loans
In order to refinance your student loans, you’ll want to have a few important documents on-hand. These include your:
- Government-issued ID, such as a driver’s license
- Employment and/or income verification, like a recent pay stub or W-2/1099
- Information on the to-be-refinanced loan(s), such as the loan balance and current servicer
Expect to also provide other information, like your Social Security number, phone number, email address and date of birth.
Can you refinance federal student loans?
When borrowing money for school, students can choose between private student loans, which are offered by various financial institutions, or federal student loans, provided by the U.S. Department of Education. Either of these loan types can be refinanced and can even be consolidated into one new, private loan.
But be aware that if you have federal loans, these automatically include certain protections, such as loan forbearance and deferment if you experience financial hardship. Private lenders might not offer these features.
Depending on your career, you might also qualify to get your federal loan balances forgiven after a certain period of time. If you’re eligible for student loan forgiveness, the Public Service Loan Forgiveness (PSLF) program can forgive your remaining balance after you make at least 120 qualifying payments.
With that said, it’s important to think twice about refinancing federal student loans. While student loan refinance rates may be more competitive than your federal loans offer, losing those protections and benefits (if you ever needed to use them) could be detrimental.
Student loan refinance pros and cons
There are both advantages and disadvantages to refinancing student loans. That’s why it’s important to weigh all of your options before proceeding with a new refinance or student consolidation loan.
- Borrowers can lower their interest rate(s) or adjust their monthly payment according to their own budget.
- Cosigners may be released from their obligation to the original loan.
- Refinance loans can be used to consolidate multiple loans into one simplified account.
- By adding a new co-signer, borrowers can snag even lower rates and better repayment terms.
- In order to qualify, graduates will usually need to have a good credit score or higher.
- Refinancing federal loans means losing out on the protections and benefits that these loans offer.
Stephanie Colestock is a DC-based personal finance writer with nearly 11 years of freelance writing experience. She covers a wide range of finance-related topics and is currently working toward her CFP®️ certification. Her work appears on sites such as Business Insider, MSN, Fox Business, CNET, Investopedia, and more.