In this article:
Student loan refinancing can provide many benefits. But what are the chances that you'll actually be able to qualify and take advantage of those perks?
While credit score requirements are typically reasonable, it can be challenging to maximize the value of the process unless your financial situation and credit file are impeccable.
What Is Student Loan Refinancing?
Student loan refinancing is the process of replacing one or more existing student loans with a new one through a private lender. You can refinance federal loans, private loans or even both at the same time.
There are several reasons to consider refinancing your student loans, but there are also potential drawbacks that could make it less than appealing.
Pros of Refinancing Student Loans
There are a handful of reasons people consider refinancing their student loans. Here are the most prominent:
- Save on interest: The primary reason many people choose to refinance their student loans is to score a lower interest rate. If you can manage to get even a slightly lower rate, it could save you hundreds or even thousands of dollars in interest.
- Get more flexibility with repayment: Student loan refinance companies offer shorter repayment terms than the federal government. So if your plan is to pay off your debt ahead of schedule, refinancing with a shorter repayment period could make it easier to achieve that goal. On the flip side, if you want a lower monthly payment, private lenders can offer terms as long as 20 years.
- Pick your lender: Refinancing also gives you the chance to choose your lender based on customer satisfaction and other features that are important to you. With federal loans, you don't get to pick your servicer unless you consolidate through the direct loan consolidation program. However, that process will result in a slightly higher interest rate than what you're paying now.
- Transfer debt to a child: If you're a parent who borrowed money to help your child get through school, some lenders will allow you to refinance the debt in their name once they graduate. Of course, both parties will need to agree to the transfer, and your child will need to meet the criteria to refinance on their own.
Cons of Refinancing Student Loans
Although refinancing can be appealing for some, there are some significant drawbacks that could impact your financial situation in the future:
- You'll lose federal benefits. If you refinance federal loans with a private lender, you'll lose access to student loan forgiveness programs and income-driven repayment plans. Also, the U.S. Department of Education typically has more generous terms for deferment and forbearance than private lenders.
- You may not qualify. Unlike the federal government with most federal loans, private lenders require a credit check when you apply, and your terms will depend on your credit and financial situation. In general, the minimum credit score is in the mid-600s, so if your score is lower than that, you'll have a hard time getting approved unless you apply with a creditworthy cosigner.
- You can't go back. Once you've refinanced federal loans with a private lender, you can't change your mind. In contrast, if you decide to consolidate your loans through the Department of Education, you'll still have the option to keep your debt with the federal government or refinance it with a private lender.
How Easy Is It to Refinance Student Loans?
Minimum credit score and income requirements for student loan refinancing are relatively reasonable. But the goal of refinancing isn't to simply shift your loans to another lender—it's to get better terms than what you already have.
As a result, it doesn't make sense to refinance unless the benefits outweigh the drawbacks. This might be why most people don't refinance until later in life when their credit scores and income may be in stellar shape.
According to Purefy, a student loan refinancing marketplace, the average age of people who refinance is 35. Their average credit score is 774 and their average annual income is $98,156.
That's not to say you can't refinance if you're not at this level financially, but a high credit score and salary are crucial if you want to get good enough terms to make refinancing worth your while.
One possible solution is to get a cosigner who meets those criteria. But because the loan will also show up on their credit reports, and they'll be responsible for paying the debt if you can't, it can be challenging to persuade someone to take that risk.
Think Twice About Refinancing Federal Student Loans in 2021
Even if your credit and income are in good enough shape to qualify for favorable terms on a student loan refinance, it may still not be the best idea if you have federal student loans, at least not in the short term.
This is because the student loan provisions of the CARES Act have been extended through September 30, 2021. Until then, eligible federal borrowers don't have to make any payments, and interest won't accrue on their loans. The federal government has also stopped all collection attempts on defaulted loans.
What's more, President Biden has shown support for sweeping student loan forgiveness to the tune of $10,000 for all borrowers whose loans are held by the federal government. While it remains unclear if and when this might happen, it may be worth it to keep your loans where they are to avoid missing out.
Improve Your Chances of Getting the Best Terms
If you've decided that student loan refinancing is right for you, it's important to take steps in advance to maximize your savings. Check your credit score to get an idea of where you stand, and also review your credit report to see whether you need to address potential issues.
This may include paying down credit card balances, getting caught up on late payments or simply being patient as your good credit habits increase your score over time.
You may also consider getting a cosigner, but make sure they're aware of their responsibilities in the arrangement and how it can impact their credit.
Also, if you're thinking about getting a cosigner, consider refinancing with a lender that offers a cosigner release program. This feature allows you to remove a cosigner after you've paid on time for a predetermined period of time and you can meet the lender's eligibility requirements to qualify for the loan on your own.
Before you make the decision to move forward, though, carefully consider what you'd be giving up if you have federal loans. While it can be tempting to get better terms right now, you may end up regretting it if you need those federal benefits in the future.