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Refinancing your student loans is a financial strategy that can save you money in the long term. The sooner you refinance, the better!
Student loan refinancing allows you to take out a new loan to pay off your other student loans with the purpose of paying less in interest or decreasing your monthly payments. This is a popular method for not only student loans but other loan types, like mortgages, auto loans, and personal loans.
If your credit score and financial history are in good shape and you want to save money on your student loans, student loan refinancing is for you. For everyone else, it may not be worth it. Keep reading to learn why.
Does Student Loan Refinancing Cost Money?
The great thing about refinancing student loans is that it generally doesn’t cost any money, unlike other types of refinancing, which come with various fees. When you refinance student loans, there are no origination, prepayment, or application fees.
With that said, always read the fine print when comparing lenders to ensure there are no hidden costs.
Will Refinancing Student Loans Hurt Credit?
Refinancing student loans can have short-term and long-term effects on your credit score, but it doesn't necessarily hurt your credit in the long run. Here's how it can impact your credit:
- Credit Inquiry: When you apply to refinance your student loans, lenders will perform a hard credit inquiry to assess your creditworthiness. This can cause a small and temporary dip in your credit score.
- Closing Old Accounts: Refinancing involves paying off your old student loans and opening a new loan account. Closing these old accounts can affect your credit history's length, potentially lowering your score slightly.
- New Credit Account: Opening a new credit account (the refinanced loan) can also temporarily lower your credit score due to the decrease in the average age of your credit accounts.
- Debt-to-Income Ratio: If refinancing reduces your monthly payments, it can improve your debt-to-income ratio, positively impacting your credit score over time.
- Payment History: Consistently making on-time payments on your refinanced loan can positively impact your credit score, as payment history is a significant factor in credit scoring models.
- Credit Mix: If refinancing is part of a broader financial strategy that includes a variety of credit types, it can positively affect your credit mix, potentially benefiting your credit score.
What to consider before refinancing your loans
Some factors to consider when considering student loan refinancing:
- Is your income stable? When applying for a loan, lenders want to see that you’re employed and have steady income. This assures them that you’ll make your payments on time.
- Do you have good credit? While not all lenders will have a minimum credit score requirement, it might not be worth it to apply for student loan refinancing if you don’t have good credit. Your chances of getting a better interest rate than what you already have will be greater if your credit score is 600 or higher.
- Is the school you attend eligible? Most lenders will require your school to be eligible for federal aid dollars when refinancing your student loans.
Shop Around For the Best Rates
Remember when we said that submitting applications for a loan will hurt your credit score? You can still compare rates from various lenders without affecting your credit score. This is known as a soft credit check.
Many—but not all— lenders, including banks, credit unions, and online lending institutions will only run a soft credit check when pre-approving you for a loan. You can compare and check with several lenders to find the best interest rates.
Preliminary Application
To get pre-approved for student loan refinancing, most lenders will allow you first to submit a preliminary application to see what kind of rates you qualify for.
This application (depending on the lender) will often only take a few minutes to fill out, is completely online, and will get you rates immediately.
Here is some basic information you may be asked in your preliminary application:
- Citizenship status
- Date of birth
- Contact information, like home address and phone number
- Living arrangement (renting or homeowner)
- Highest degree completed
- Employment status
- Income
- How much you’d like to borrow
- Social Security number
Once you move forward with your application, you’ll need additional information and documents with your application, like a pay stub, tax form, and official statements for your private or federal student loans.
How Much You Can Save By Refinancing Student Loans
Refinancing student loans can lead to significant savings, primarily through lower interest rates. Let's explore two hypothetical examples to illustrate potential savings:
Example 1: High-Interest Federal Student Loans
Original Loan Details:
- Total Loan Amount: $50,000
- Interest Rate: 6.8%
- Loan Term: 10 years
- Original Monthly Payment: Approximately $575.40
Refinanced Loan Details:
- New Interest Rate: 4.5%
- Loan Term: 10 years
- New Monthly Payment: Approximately $518.19
Result:
Total Paid on Original Loan: $69,048
Total Paid on Refinanced Loan: $62,182.80
Total Savings: $6,865.20
Example 2: Private Student Loans with Variable Rate
Original Loan Details:
- Total Loan Amount: $30,000
- Interest Rate: Variable, starting at 8%
- Loan Term: 10 years
- Original Monthly Payment: Approximately $363.99
Refinanced Loan Details:
- New Interest Rate: Fixed 5%
- Loan Term: 10 years
- New Monthly Payment: Approximately $318.20
Result:
Total Paid on Original Loan: $43,678.80
Total Paid on Refinanced Loan: $38,184
Total Savings: At least $5,494.80
Risks To Be Aware of When Refinancing Student Loans
As stated earlier, you always want to make sure your lender isn’t charging you any fees to refinance your student loans. Unlike mortgages and personal loans, student loan refinancing shouldn’t cost anything.
Another risk to be aware of when refinancing is what you’ll lose. If you decide to refinance your federal student loans with a private lender, know that you’re giving up some government-backed benefits, including the following:
- Income-based repayment plans — A few repayment plans are available to you based on your income. So, if you’re having difficulty paying off your federal student loans, you can see which one you qualify for.
- Forgiveness options — Federal student loans can be forgiven with a few different options if you qualify, unlike loans from a private lender, which typically don’t offer forgiveness.
Some other benefits you could stand to lose are deferment, forbearance, and death and disability discharge. Some lenders offer these, so if it’s important to have these options, do your research and pick the best lender.
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Final Thoughts
It’s no wonder why student loan refinancing has become such a popular financial strategy. If you have good credit (or a cosigner with good credit), you can qualify for low interest rates on your student loans, saving you thousands.
If your primary goal is to decrease your monthly payments, refinancing can score you longer loan terms so you aren’t struggling to make your monthly payments.
Now that you’ve learned more about the process, the next step is to shop for the best lender to find rates that will save you the most money.
- Filing for bankruptcy shall not exempt from the obligation to repay the loan.
- You may be eligible to specific educational loan benefits from your educational institution or may be qualified for Federal student financial assistance you may receive additional information with your institution of higher education or at the website of the U.S. Department of Education.
Article Topics
Student Loans
Jessica Cotzin is a writer and the Lendstart authority on small businesses and personal loans. She has been writing about personal finance and the loans industry for a number of years, and holds a bachelor’s degree in journalism from Florida Atlantic University.
