It’s true that managing student loans can be a source of significant stress, but refinancing offers a potential pathway to simplify your financial life. Here are three compelling reasons why refinancing might be a beneficial choice for you:
- Potential for Reduced Overall Costs: Refinancing can lead to a lower interest rate on your loan, which directly translates to a decrease in the total amount of money you pay over the loan’s lifetime.
- More Manageable Monthly Payments: By opting for a new loan with a longer repayment term, you can significantly lower your monthly payment. This can free up cash flow, providing relief for other debt obligations or general living expenses.
- Streamlined Repayment: Refinancing allows you to consolidate all your student loans into a single new loan. This means you’ll only have one student loan payment to remember each month, simplifying your financial management.
However, before making such a significant financial move, it’s essential to consider various factors. This guide aims to help you determine if refinancing is the right option for your circumstances.
How Student Loan Refinancing Works
Student loan refinancing enables you to combine some or all of your existing loans into a single new loan. Often, this comes with a lower interest rate, potentially reducing your total repayment amount over time, or a longer repayment term, which can decrease your monthly payments. This is an excellent option for individuals with multiple student loans, but it’s also viable if you only have one loan.
Refinancing vs. Consolidation: Understanding the Distinction
While the terms are frequently used interchangeably, there’s a key difference:
- Student loan consolidation primarily refers to the federal program.
- Student loan refinancing typically refers to options provided by private lenders.
What is Student Loan Consolidation?
Consolidation generally involves merging your federal student loans into one new federal loan with a revised term. It does not inherently guarantee a lower interest rate, as your new rate will be the weighted average of the interest rates from the loans being consolidated. Consequently, federal student loan consolidation is not usually considered a money-saving strategy. However, a consolidation loan can make you eligible for different income-driven repayment plans and certain loan forgiveness programs, provided Parent PLUS loans are not included in the consolidation.
How is Student Loan Refinancing Different?
Refinancing is offered by various private entities, including banks, credit unions, and specialized student loan lenders. This type of loan allows you to combine both federal and/or private loans for a new interest rate and repayment term. A primary benefit of refinancing is the opportunity to secure a lower interest rate, thereby reducing your overall costs. The rates you’re offered are generally determined by your current financial strength. For instance, co-signers can be instrumental in helping recent graduates with limited credit history qualify for a loan or secure more favorable rates.
Federal Direct Consolidation vs. Private Student Refinance Loan: A Quick Comparison
| Feature | Federal Direct Consolidation Loan | Private Student Refinance Loan |
| Eligible Loan Types? | Federal | Federal and private |
| Credit Criteria Required? | No | Yes |
| Simplifies Repayment? | Yes | Yes |
| Reduces Interest Rate? | No; you get the weighted average. | Possibly; depends on existing loans & credit score. |
Defining Your Student Loan Refinancing Goals
While many consider refinancing solely for a lower interest rate, it’s not the only compelling reason. When contemplating a refinance loan, it’s crucial to identify your specific financial objectives.
Do You Aim to Reduce Overall Costs?
Refinancing to achieve a lower interest rate is indeed the most common motivation. If this is your goal and you qualify for a loan with a reduced rate, refinancing can certainly help you save money over time. However, it’s vital to ensure the new loan term is comparable to the remaining terms on your existing loans. If you secure a lower interest rate but choose a significantly longer repayment term, you may end up paying more over the life of the loan due to extended interest accrual.
Example: Refinance Loan with a Lower Interest Rate
| Aspect | Original Loan | Refinanced Loan with Lower Rate |
| Amount | £25,000 | £25,000 |
| Repayment Term | 10 years | 10 years |
| Interest Rate | 7.00% | 5.25% |
| Approx. Monthly Payment | £290 | £268 |
| Approx. Total Interest | £9,832 | £7,188 |
| Result: | Monthly payment reduced by about £22 | Total interest reduced by about £2,644 |
You can also opt for a shorter repayment term to reduce your overall cost, although this often results in higher monthly payments.
Example: Refinance Loan with a Shorter Repayment Term
| Aspect | Original Loan | Refinanced Loan with Shorter Term |
| Amount | £25,000 | £25,000 |
| Repayment Term | 10 years | 5 years |
| Interest Rate | 7.00% | 7.00% |
| Approx. Monthly Payment | £290 | £495 |
| Approx. Total Interest | £9,832 | £4,702 |
| Result: | Monthly payment increased by about £205 | Total interest reduced by about £5,130 |
For the most significant cost reduction over the loan’s lifetime, assuming you can comfortably manage higher monthly payments, the optimal strategy is to refinance to a loan with both a lower interest rate and a shorter repayment term.
Example: Refinance Loan with Lower Interest Rate and Shorter Repayment Term
| Aspect | Original Loan | Refinanced Loan with Lower Rate & Shorter Term |
| Amount | £25,000 | £25,000 |
| Repayment Term | 10 years | 5 years |
| Interest Rate | 7.00% | 5.25% |
| Approx. Monthly Payment | £290 | £475 |
| Approx. Total Interest | £9,832 | £3,479 |
| Result: | Monthly payment increased by about £185 | Total interest reduced by about £6,353 |
Are You Looking to Lower Your Monthly Payment?
If your current student loan payment feels burdensome, or if you’re struggling to make timely payments while covering living expenses, opting for a new refinance loan with a longer repayment term is a viable solution. Be aware, however, that this strategy will likely lead to paying more over time, as interest accumulates daily. The longer you’re repaying a loan, the more interest will accrue. A smart approach if you need lower payments now is to commit to making extra payments as your budget allows in the future. This can help you pay off the loan sooner and minimize the total interest paid.
Example: Refinance Loan with a Longer Repayment Term
| Aspect | Original Loan | Refinanced Loan with Longer Term |
| Amount | £25,000 | £25,000 |
| Repayment Term | 10 years | 15 years |
| Interest Rate | 7.00% | 7.00% |
| Approx. Monthly Payment | £290 | £225 |
| Approx. Total Interest | £9,832 | £15,448 |
| Result: | Monthly payment reduced by about £66 | Total interest increased by about £5,616 |
Would You Prefer a Single Monthly Payment?
Another common motivation for considering refinancing is to simplify your repayment process by eliminating multiple payments to various lenders each month. If you refinance all your loans into one new loan, you’ll benefit from having just one monthly payment, making it easier to keep track and avoid missed deadlines.
Potential Drawbacks of Student Loan Refinancing
While refinancing can offer significant benefits, there are crucial aspects to consider before proceeding. Not all student loans are identical, and it’s important to research the benefits and repayment options offered by different refinance lenders.
Federal student loans come with unique benefits and repayment options that are unavailable for private student loans. If you choose to refinance federal loans into a private student loan, you will permanently lose these federal loan benefits. Most federal student loans include various repayment options, such as income-driven repayment plans, as well as more generous deferment and forbearance options, and loan forgiveness programs for specific borrowers. These vary based on the type of federal loan (e.g., Federal Parent PLUS loans do not carry the same benefits as federal loans made directly to students).
If you are confident in your ability to consistently make minimum payments and do not plan to pursue a federal loan forgiveness program, then refinancing federal loans into a new private refinance loan might be a viable option for you.
Private student loans vary considerably by lender. It’s wise to investigate your current lender’s repayment plans and any options they provide for postponing payments during short periods of financial hardship, as these benefits could be lost if you refinance. A new refinance lender may offer different, or similar, benefits and assistance options. Always inquire about these specifics.
Will Applying to Refinance Your Student Loans Affect Your Credit Score?
Refinancing student loans doesn’t typically cause a significant, long-term impact on credit scores.
When exploring your options, look for lenders that offer a pre-qualification feature. This allows you to see the rates and terms you might be eligible for before you commit to a full application. Crucially, this step usually does not affect your credit at all because it only involves a “soft” credit inquiry.
Once you submit a full application and authorize a “hard” credit inquiry, your credit score might see a slight, temporary dip, typically by only a few points. However, if you apply for loans with numerous lenders over an extended period, the cumulative effect on your credit score could be more pronounced.
What Lenders Look For When You Apply to Refinance
When you apply to refinance, lenders primarily review your credit history to assess your ability to repay the new loan. As with most loan applications, they consider your credit score, payment history, income, and existing debt levels.
Before refinancing, it can be beneficial to know your current credit score to gauge your eligibility for better rates. Bear in mind that credit scores can vary depending on the consumer reporting agency and the calculation method used, so the score you see from one source might not exactly match what a lender uses.
Steps to Take When Refinancing Your Student Loans
If you believe refinancing is a good option for you, follow these steps:
- Define your student loan goals:
- Are you primarily looking to lower your interest rate?
- Do you want to reduce your monthly payment amount?
- Is simplifying repayment to a single monthly payment your priority?
- Do you hope refinancing will offer a combination of these benefits?
- Review your current student loan status:
- Do you have federal, private, or a mix of both types of student loans?
- Who is your current loan servicer(s)?
- Are your current interest rates fixed or variable? What are the current rates?
- How many years remain until your current loans are fully repaid, and what are your current monthly payment amounts?
- Seek the best lender for your financial needs:
- Does the lender provide direct customer service for its own loans, or will your loan be transferred to another company for servicing?
- Does the lender have a strong reputation for customer service?
- Is the lender exclusively focused on student loans, or do they offer other products they might try to sell you?
- What types of repayment plans, hardship assistance options, and other benefits does the lender provide?
- See if you can pre-qualify or get a rate quote before completing a full application. This allows you to assess potential new interest rates and repayment term options without affecting your credit score, helping you determine if refinancing is the right choice.
- (Example: You can pre-qualify for our Reset Refinance Loan without impacting your credit score.)
- (Example: Not ready to pre-qualify? Use our student loan refinance calculator to see what different Reset Loan terms and rates would mean for you financially.)
- If you decide to proceed, submit a full application for refinancing approval.
Feeling good about refinancing?
Complete our pre-qualification process to discover the rates you could receive. There’s no credit impact, and a few quick questions could be all it takes to reset your student loans and reduce your stress!