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If you’re drowning in student loan payments every month, you’ve probably wondered “Should I refinance my student loans?” Refinancing can absolutely take some of the pressure off and it can save you a lot of money over time. But of course, it’s important to know what you’re getting into first.
Let’s dig into what student loan refinancing is, when you should (and shouldn’t) refinance your student loans, how to apply for refinancing and use a student loan refinancing calculator, and other things to consider for your debt payoff plan.
What does student loan refinancing mean?
In short, student loan refinancing means taking out a new loan to replace your existing student loan(s). People typically do this to lower their interest rates and get different repayment terms. This can save you a lot of interest over the term of the loan, give you a lower required monthly payment, and potentially allow you to pay your loans off faster.
You can refinance your student loans with the same lender you already have (if they offer you a better rate based on your new credit/income), or go to a different lender. It can't hurt to shop around to make sure you get the best deal! (You can read our articles on lenders like Nelnet and Navient as you make your decision).
Note that while you can refinance your existing private and federal loans, you can only get the new loan from a private lender. Since federal student loan rates are fixed by law, you can't refinance a loan from federal to federal. It can only go from federal to private or private to private.
This can make a difference in your final decision about refinancing, which we'll touch on in the next section: "Should I refinance my student loans?"
Student loan refinancing vs. consolidation
Consolidation is a type of refinancing where you combine multiple existing loans into one. With consolidation, the interest rate doesn't always change. It could be the same you had before, just in a different package that streamlines your repayment schedule.
For instance, you might have 10 separate student loans from different lenders, and you're hoping to group them all into just one loan with one monthly payment to worry about. If you consolidate your loan, you take out one big new loan and use it to pay off your 10 smaller loans.
Then, you're left with one payment on the new loan. This new payment is often lower than all your former payments totaled up.
One key difference from regular refinancing is that you can consolidate federal student loans if you have more than one. However, your overall interest rate will not change. When you consolidate federal student loans, your new loan will have a fixed interest rate calculated by averaging all the rates from your previous loans.
Thus, the main reason to choose consolidation is to make your life simpler by planning one payment to one loan.
Should I refinance my student loans?
Student loan refinancing isn't always a good fit for everyone. Even so, it usually can’t hurt to check what rate you could get with a free, no-commitment service. (I'll cover that and how to use a student loan refinance calculator next).
While individual situations vary, here are some scenarios where it might be a good—or bad—idea to refinance student loans.
When you should refinance your student loans
In these scenarios, it's absolutely worth exploring refinancing:
- You have loans with high interest: This is probably the biggest reason to refinance. Federal student loans ranged from 4.53% to 7.08% for the 2019-20 school year, while private loans had a more extreme range from 4.29% to 12.49% fixed interest.Refinancing can drop fixed loans as low as 3.22%. If your loans are on the higher side (even 6%+), you could save hundreds or thousands of dollars over the loan term by knocking off a few percentage points.
- You want to go from variable to fixed interest, or vice versa: With a variable interest rate, you tie your interest rate to general market interest rates. As the market changes, your rates do too, within a specified range. With a variable rate, you can pay lower interest than fixed-rate loans at the bottom of the range, but you also assume the risk of your interest rates increasing in the future (which can't happen with fixed rates).For instance, if you get a variable loan with a range of 1.5%-10%, you'll be happy with those cheap rates at the bottom, but less so if they creep up over time.
- You have a stable income and good credit: To qualify for the best refinancing rates, you'll need to prove that you're a low-risk borrower. Steady income and a strong credit score are the two main points that will work in your favor.
- You have multiple loans you want to combine: If you have a whole slew of loans, you can simplify your life by consolidating or refinancing some or all of them.
- It will accelerate your debt payoff plan: If you're motivated to knock out your student loans once and for all, getting a lower interest rate will free up more of your money to throw at the principal debt, compounding your savings even more.
When you shouldn’t refinance your student loans
- The new interest rate offer isn't much lower: It might not be worth the hassle of getting a whole new loan just to save a fraction of a percent in interest.
- Your loans are already close to paid off: Similarly, if you're in the home stretch and just have a small balance remaining, you might not even be paying much monthly interest anymore. It could be simpler just to stay the course where you are.
- You're currently using federal student loan programs (or want the option to): Since you can only refinance with private lenders, you'll be giving up federal benefits if you choose to refinance your federal loans.These could include income-based repayment, loan forgiveness for public servants, longer grace periods, and other federal loan advantages. If you have a mix of federal and private loans, you could refinance only the private loans (and/or consolidate the federal).
Applying for student loan refinancing
Unlike many types of debt renegotiation, student loan refinancing is free. That means if you have the time, it’s good to apply to as many lenders as possible. If you're worried about credit dings from multiple applications, it's usually treated as a single credit inquiry if you submit them all within a 30-day period.
Pro tip: Before you start this process, open a new email account dedicated to your loan search. This way you can see all your offers in one place and your normal inbox won’t get overwhelmed!
The first step is researching to find legitimate lenders with good reputations. There are plenty of resources online where you can compare the pros and cons of various student loan refinance companies. You can also use a third-party service that will compare various offers for you like Lendkey.
Before going through a full application, you can usually get a quote or "pre-qualified" rate from a lender. It would be based on your basic details like your school and degree, total debt, and income. This can help you decide if it's competitive enough to continue applying.
However, these are usually just estimates, and you won't get a final offer until you've submitted your specific information.
Once you've chosen lenders, go through their full application process. You'll usually need to upload documents to prove things like identity, income, and current loan information. As a result, it can take a little time.
After you've submitted your application, you may get an immediate offer or need to wait for it by mail or email. Full approval can take a few weeks, so be patient. Once the offers start rolling in, you'll be able to start sorting through them to find the best one to accept.
How to use a student loan refinance calculator
Speaking of finding the best deal, a student loan refinance calculator can help. Using a calculator like this one makes it easy to tell how much you’ll actually save with a certain offer.
To use it, simply input your current loan information (balance, interest rates, and term) and the new loan offer info. When you click to calculate, it will show results like how much money you’ll save and what your new monthly payment will be.
For instance, let's say you have a loan balance of $30,000. Your current loan (or average of loans) has 8% interest with a 10-year term, while the new offer is 4% for the same term.
The calculator shows that you'd save over $7,000 in interest with this scenario! And that doesn't even factor in the savings if you're able to pay it off faster.
Things to consider before refinancing your student loans
Short of an emergency, refinancing shouldn’t be used as a way to push back your debt payoff plan. If you refinance at a lower interest rate but extend your loan term and take longer to pay it off, you might not end up saving money in the long run.
While you’re thinking about these things, also consider other strategies for paying off your student loans faster. Visit our article on the best way to pay off student loans. If you are a current student, you can read our article on avoiding student loans in the first place.
Finally, you can check out the Clever Girls Know Podcast. You'll be inspired by stories from women who've been in your shoes and share their useful student loan payoff advice.