Explore the benefits of refinancing your student loans with this in-depth guide to learn if you could save with student loan refinancing.
Student loan refinancing can be a way for borrowers to save money on interest, manage payments, or change loan servicers.
This guide covers the essentials of refinancing student loans. Let’s take an in-depth look at student loan refinancing, and the ways in which you may be able to save money.
With student loan refinancing, a new lender pays off your existing loans and gives you a new loan with different repayment terms. This may mean lower payments, having a single loan instead of several, a lower interest rate, or a different loan term. Refinancing could allow you to save money over time with a lower interest rate, a shorter term, or a lower monthly payment.
What does the refinancing process look like for borrowers? You start by applying with a private lender that offers student loan refinancing, typically through an online application. After applying, you find out if you’ve been approved or not, and what the interest rate is. If you decide to move forward with refinancing, the lender then pays off your existing loans and you begin making monthly payments to your new lender.
Unlike refinancing a mortgage, refinancing student loans costs nothing and does not include any closing fees. Applying may require a hard credit inquiry and may cause your credit score to dip a few points temporarily.
Refinancing your student loans to a lower rate could save you thousands over the life of the loan.1 Ideally, you’ll be able to take advantage of lower interest rates and reduce the total amount owed over the life of the loan.
In addition to potentially saving money, refinancing also allows borrowers to change the terms of their loan, shortening or extending it, and creating a plan that fits their circumstances. Refinancing can consolidate several loans into a single loan, simplifying payments. Borrowers may also choose to switch from a variable rate to a fixed rate.
Here’s an in-depth look at the reasons to refinance:
Reducing your interest by refinancing to a shorter loan term and paying more towards your principal could result in paying off your loans faster, but your monthly payments may be higher overall. If it works with your budget, you may be able to pay off your loans even faster by making higher payments or extra payments when you refinance.
If interest rates have fallen since you took out your loans, refinancing could lower your monthly payments. To qualify for a lower rate through refinancing, factors such as a low debt-to-income ratio (DTI), a relatively stable income, and a strong credit score are important. For most lenders, with a strong credit history you could be eligible for the best possible rates through student loan refinancing.
By refinancing to reduce your term length, you could pay more per month in exchange for paying off your student loans sooner, potentially saving on interest throughout the lifetime of the loan. If you have more income coming in and anticipate further income increases as your career progresses, a shorter loan term could be a good option if it works with your budget.
If you have multiple student loans in repayment, keeping track of different monthly payment amounts to different lenders can be a challenge. Through refinancing, you pay off your existing loans and combine the debt into one new loan with a preferable interest rate and term, giving you just one student loan payment to manage each month, which can help you avoid late payment fees.
If interest rates are expected to rise, refinancing your variable rate student loans could help you lock in a lower rate before that happens. If your credit score or income has recently increased, you may be eligible for a lower interest rate. If you believe you could benefit from lower interest rates or improvements in your credit score or debt-to-income ratio (DTI), refinancing to a fixed rate could help you save more towards your goals.
A key benefit of refinancing is the potential to save thousands of dollars in interest over the life of the loan.1 These savings can be used toward paying down the principal balance, investing, or starting an emergency savings fund. For example, if you were to qualify for a lower interest rate by 2% on $170,000 in student loans, you could potentially see savings like:
| Federal Direct PLUS loan with a 10-year standard repayment | Sample refinancing option: Laurel Road’s refinanced 10-year loan | |
|---|---|---|
| Interest Rate | 7.6% fixed | 5.6% fixed |
| Monthly Payment | $2,027 | $1,853 |
| Yearly Payment | $24,324 | $22,236 |
| Total Paid | $243,218 | $222,406 |
Each lender has its own criteria for determining eligibility and rates. All consider credit history, total monthly debt payments, and income. Applicants who are in good financial standing, demonstrate a strong career trajectory, have good credit scores, and have shown they are responsible with debts and monthly budgeting are more likely to be approved. In general, the better your financial history, the better terms you will likely receive. This is because you present a lower risk to lenders.
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