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Student Loan Refinancing: What It Is and How to Do It

When you refinance student loans, a lender pays off your previous loan (or loans) and issues you a new one. Ideally, you'll receive a lower interest rate than before, which will save you money over time. Qualifying for student loan refinancing is based on several factors, such as your credit score and income.

It's possible to refinance both federal and private loans. But refinancing a federal loan will turn it into a private one, which means losing access to worthwhile benefits like income-driven repayment and loan forgiveness for public service employees.

Here are the basics of student loan refinancing, including how to qualify and how to decide if it's right for you.

Can You Refinance Student Loans?

Student loan refinancing can be a good deal, but not everyone is eligible. Lenders prefer to work with borrowers who have good or excellent credit, a track record of on-time bill payments and reliable income. These characteristics help demonstrate to lenders that you're likely to repay the loan as agreed.

If you won't qualify on your own, however, you can apply with a cosigner who meets the credit and income requirements. That person will be responsible for repaying the loan if you can't. Make sure to have a candid conversation about this possibility, and how that could affect their own finances.

If you're ready to get started refinancing your student loans, follow these steps:

  • Check your credit score: Since your credit score is one of the most important eligibility factors, find out where you stand before you apply. A good FICO® Score* is 670 or higher, and a higher score betters your chances of qualifying and receiving a favorable interest rate.
  • Pay down debt: Another factor lenders look at closely is your debt-to-income ratio (DTI), which is the amount of debt you have compared with your gross income. To lower your DTI ratio, consider paying off debt before applying to refinance. Reducing credit card balances, for instance, could make you a more attractive potential refinance borrower.
  • Shop around: Compare multiple quotes from lenders before making your final refinancing decision. Many lenders offer the opportunity to check the interest rate you could qualify for without submitting a full application. In that case, the lender performs a soft inquiry, which won't affect your credit. Also, take a look at the repayment term, or how long you'll be required to repay the loan; fees you'll be charged; and, if you're using a cosigner, whether it's possible for him or her to be released from the loan after a certain number of payments.
  • Gather required documents: Once you've chosen a lender, organize the documents you'll need to submit. Typically, you'll need to provide a copy of your government-issued ID; a pay stub or proof of employment; a federal W-2 form for the most-recent tax year; your latest tax return if you're self-employed; and a payoff statement from your current lender, detailing how much of your loan balance is left to repay.

What Credit Score Do You Need to Refinance a Student Loan?

Like other private student loans, refinance loans require good or excellent credit to qualify.

While 670 is generally the base credit score you'll need to be eligible, a higher score is even better. That's because when refinancing student loans, your aim is to get a new loan at an interest rate that is meaningfully lower than your prior rates. The better your credit—and your overall financial profile—the lower the interest rate you'll likely receive.

If your FICO® Score is below 670, explore working with a cosigner or wait and apply after your credit improves. You can also consider other ways to pay off student loans faster on your own. You can send extra funds to the loans with the highest interest rates to get rid of them sooner, for instance, which will also save you money on interest over the long term.

How Refinancing Student Loans Is Different From Consolidation

The terms "refinance" and "consolidate" are sometimes used interchangeably when referring to student loans. But while it's possible to combine multiple loans into one through the process of refinancing, the term "student loan consolidation" is most often used to describe a specific strategy available through the federal government.

Federal student loan consolidation is when you join several federal loans together, leaving you with a single outstanding balance and monthly payment. It's different from refinancing, though, because you don't need good credit to qualify, and you also won't get a lower interest rate.

Instead, your new rate will be a weighted average of your previous loans' rates, rounded up to the next one-eighth of 1%. Your interest rate will also be fixed, while refinance lenders generally give you the option to choose between fixed and variable interest rates. Federal student loan consolidation is a good idea if you're having trouble keeping track of multiple loan bills, or if you need to consolidate to be eligible for certain repayment programs.

What Are the Advantages of Refinancing a Student Loan?

The most compelling reason to refinance a student loan is to get a lower interest rate, which could save you a significant amount over time.

For example, say you have $10,000 in student loans, with five years left to repay, at an average rate of 7%. If you refinance to a five-year loan term at 4% interest, you'd save more than $800 in interest by the time you pay it off. The higher your current rate, and the better your credit, the more you stand to save if you qualify.

Refinancing to a shorter loan term could increase your monthly payment, but it would mean saving even more in interest. You could also pay off your loan faster, which frees up more cash to save for a home, retirement, your child's college education or other goals.

Plus, combining loans with a range of due dates and terms into a single loan could help you keep track of your bills more closely and help you prevent late payments from affecting your credit scores.

What Are the Downsides of Refinancing a Student Loan?

The biggest downside to student loan refinancing is the loss of federal loan benefits. Federal student loans come with unique protections for borrowers, which can provide a safety net if you lose your job or face unexpected medical bills. Benefits you'd lose from refinancing a federal loan include:

  • Generous deferment and forbearance options: Federal student loans allow you to pause payments for up to three years in some circumstances, which is longer than what private loans typically allow. If you have subsidized federal loans, you won't be charged interest during a period of deferment, which prevents your balance from growing in that time.
  • Income-driven repayment: If your income dips, or you're unable to afford federal loan payments on a long-term basis, you can sign up for one of four repayment plans that calculate your monthly bill based on a percentage of your income. Private lenders generally do not offer this option. When you apply to refinance, lenders want to see that you have sufficient income to repay the loan in full.
    If there's a possibility you'll earn less, change careers or experience other life events that affect your ability to make full payments during your repayment term, it may be best to avoid refinancing federal loans. That way, you maintain access to income-driven repayment if you need it.
  • Forgiveness programs: Federal loans also offer unique forgiveness options to some borrowers. If you work full time for a government agency or qualifying nonprofit, you could have your federal loan balance forgiven after 120 payments through the Public Service Loan Forgiveness program. Some teachers can receive forgiveness over a five-year period through the Teacher Loan Forgiveness program.

Should You Refinance Your Student Loan?

When deciding whether to refinance a student loan, weigh the potential advantages and drawbacks—primarily whether it will save you enough money to make the process worthwhile. Ask yourself:

  • What interest rate can you qualify for, and is it lower than your current average rate?
  • Will you lose access to federal loan benefits you may need in the future? If so, consider refinancing private loans only, or just a portion of your federal loans.
  • Do you have the means to quickly pay off your loans? You'll save even more money from refinancing if you choose as short a loan term as you can manage. Otherwise, if you extend your loan term, you'll pay more in interest.

Weigh the Pros and Cons

Refinancing can mean big savings in certain circumstances. But it's important to make sure you meet the requirements, understand how refinancing will affect your loans and choose the terms that work best for your budget. While refinancing isn't for everyone, if you stand to benefit, the rewards can be substantial.

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