Student loan refinancing is a hot topic these days. Many of the specialty finance companies that have emerged in the last five years, including SoFi, Earnest, and CommonBond, are rapidly becoming mainstream. If you’re one of the recent graduates carrying an average of $33,000 in student debt, chances are you’re looking for a way to lower your monthly payments and interest rates.
Because student loan refinancing is a fairly new concept, many borrowers are suspicious that it’s another student loan trap. Having helped thousands of borrowers manage and refinance their student loans, I’ve fielded hundreds of questions about consolidating and refinancing loans. Here are a few we’ve been asked over and over again:
1. How does student loan refinancing and consolidation work?
The process is pretty simple: borrowers begin by applying with a lender who determines their eligibility. Most applications are short and take just a few minutes to complete.
If you’re approved, lenders will notify the buyer with what interest rate they’re being offered, as well as the terms and monthly payment amounts. If the borrower chooses to accept these terms, the lender pays off the borrowers’ old loans, and the borrower then makes payments directly to the new lender in place of those loans.
2. Why should I refinance my loans?
There are many different reasons to refinance student loans. Here are the biggest ones:
- Lowering monthly payments so they’re more manageable
- Saving money by lowering interest rates
- Consolidating multiple student loans into one loan
Lower monthly payments is usually the primary goal of refinancing student loans. Borrowers typically have the option to determine their monthly payment based on the term (length of the loan in years) that they select.
Something to keep in mind: the lower the monthly payments, the more you’ll pay for your loans because of accruing interest. It’s typically in your best interest to pay as much as you can afford each month for your student loans rather than trying to minimize monthly payments.
Some additional reasons you may want to refinance student loans include removing a cosigner from a loan and switching to a lender that offers better customer service.
3. How much money can I save by refinancing?
The amount of money saved varies greatly depending on the borrower, but it’s not unusual for the savings to be in thousands or even tens of thousands of dollars over the entire term of the loan.
For example, one of our lending partners, SoFi, states on their website that the average borrower who refinances his or her loans will save $11,000 over the lifetime of the loan. One of our users who posted on reddit said he saved about $30,000 by refinancing his loans with SoFi. Of course, the actual savings will vary for each person who refinances.
4. What are the main requirements for private consolidation?
Nearly all banks that refinance student loans require at least a bachelor’s degree from a Title IV school. Some further restrict candidates by school or the type of degree earned. Other requirements typically include a steady income, along with a good credit score.
Since there are many variables that go into lending decisions, it’s difficult to pinpoint exactly what level of income or credit score each person needs. We generally recommend that if you’re interested in refinancing, you should apply. Several of our lending partners will let you know if you qualify with a soft credit check that won’t hurt your credit report. If you’re denied, the lender is required by law to indicate why you were not granted a loan.
5. Do I have to refinance all my loans?
No. You can pick and choose which loans you want to refinance. We typically recommend borrowers refinance their loans that have higher interest rates.
Federal loans with low interest rates are usually not good candidates for refinancing–the savings might be so small that it’s not worth it. In addition, federal loans come with protections and repayment options (more on that below) that borrowers might not want to give up.
6. Should I refinance my federal student loans?
We advise borrowers who want to refinance their federal student loans to proceed with caution. Federal student loans have several flexible repayment options (like Pay As You Earn, Income-Based Repayment and deferment/forbearance) that aren’t typically offered by private lenders. When borrowers refinance federal student loans, they lose these options.
7. Can I consolidate federal and private loans together?
Yes, some banks will allow you to consolidate your federal and private loans together into one new, private loan.
8. What’s the difference between Federal Direct Loan Consolidation and consolidation with a private lender?
A Federal Direct Loan Consolidation can only be used to consolidate federal student loans – not private loans – creating one new loan with an interest rate that’s a weighted average of your old loans. Consolidating your federal loans usually won’t save you any money, but it will make your monthly payments more convenient.
Although any borrower with federal loans is eligible for Federal Direct Loan Consolidation, you must apply and meet certain requirements to be approved for a consolidation loan with a private lender.
About the Author
Andrew Josuweit, CEO of Student Loan Hero, graduated with 16 loans and $104,000 in debt. After 3 years of dealing with unhelpful servicers, debt collectors, and banks, Andy decided to take matters into his own hands, but creating Student Loan Hero, a website that helps student loan borrowers manage and repay their student loans