Table Of Contents
- The goal of refinancing is to save money on interest, while consolidation can help make payments more manageable.
- You should consider refinancing if your credit score has improved, if the savings will be worth it, or if the rate environment is strong.
- You should not refinance if your credit score is poor, you don’t qualify for a stronger offer, or you plan to pursue federal loan forgiveness.
- There are a variety of lenders, like College Ave, that offer student loan refinancing.
- You can refinance as many times as you’d like.
Understand Student Loan Refinancing
Student loan refinancing is the process of borrowing a new loan to pay off an existing loan. The new loan typically has a lower interest rate or better terms, saving you money on interest or lowering your monthly payment.
Refinancing is available for both federal and private student loans. Borrowers should be aware, however, that refinancing federal student loans will result in loss of borrower benefits — like student loan forgiveness.
Refinancing Vs. Consolidation
The goal of refinancing is to secure a lower interest rate, reduce monthly payments, or change the loan terms to better fit your financial situation. It is typically a one-for-one swap — you borrow one new loan to pay off one other loan.
Consolidation, on the other hand, involves combining multiple loans into a single loan. The goal is often to simplify payments, with securing a lower interest rate as an added bonus.
Decide If Refinancing Is Right For You
Before refinancing, consider whether it’s an optimal time to do so.
When To Consider Refinancing
Unfortunately, not everyone can qualify to refinance their student loans. You’ll typically need to have graduated and have a solid income and credit score. However, if you meet those criteria, consider refinancing if:
Your credit score has improved since you borrowed the loan. The purpose of refinancing is to score a better interest rate or terms, ultimately saving you money. If your credit score hasn’t improved since you borrowed the initial loan, you might not qualify for a better loan.
The savings will be substantial. Refinancing can save you thousands in interest costs, depending on the size and interest rate of your current loan. Use a student loan calculator to see how much you’ll save by refinancing. If the difference is substantial, refinance.
The rate environment is strong. Student loan interest rates are impacted by market conditions. When the economy is improving, rates will rise, and vice versa. If you suspect a hike in interest rates, refinancing to a fixed-rate loan is wise.
When You Shouldn’t Refinance
You should hold off on refinancing if:
Your credit score hasn’t improved since you borrowed the loan. If your credit score hasn’t improved since you borrowed the loan, you may not qualify for better terms. This could result in an unnecessary hard inquiry on your credit file which can affect your ability to take out loans or credit in the future.
You plan to pursue federal student loan forgiveness. Refinancing federal student loans will make you ineligible for forgiveness. If you plan to pursue a federal student loan forgiveness program like PSLF, do not refinance your federal student loans.
You can’t qualify for a lower interest rate. If, after obtaining prequalification offers, you don’t qualify for anything better than what you currently have, it doesn’t make sense to refinance.
Look For A Refinance Lender
There are a variety of lenders that offer student loan refinancing, and they each offer something slightly different. Decide what is important to you, then tailor your lender search to match your preferences.
If you’re not sure what to look for, explore options with College Ave. They are a reputable student loan company with a variety of flexible refinancing options.
Always Get Multiple Rate Offers
Even if the first loan offer you receive is great, obtain offers from several lenders before choosing one to move forward with. You may find that one lender offers a significantly lower rate than the other, which will make it a better offer for you to select.
Pick The Loan Terms That Work Best For You
Once you receive a loan offer, decide whether the terms work for you. Consider both the rate type and repayment term before submitting a formal application.
Rate Types
There are two types of interest rates — fixed and variable. Fixed interest rates remain the same throughout the life of the loan, while variable interest rates change based on economic factors.
While variable interest rates tend to be lower, they will fluctuate, which can be bothersome to some borrowers. If you’re able to secure a low fixed interest rate, it may be worthwhile to lock it in.
Repayment Terms
The shorter the repayment term, the less time interest will have to accrue. However, shorter repayment periods also come with higher monthly payments.
If you can afford the payments, opt for the shortest repayment plan available. If you can’t, use a student loan term comparison calculator to determine which loan term makes sense for your budget.
Frequently Asked Questions (FAQs)
How Much Can You Save If You Refinance?
It depends on your loan size, interest rate, and repayment terms. Here’s a couple of examples to illustrate the potential savings:
For a loan balance of $12,000 with an initial interest rate of 8% and a repayment term of 10 years, a borrower could secure a new interest rate of 7%, but they would only save $751 over the course of the loan.
With a loan balance of $50,000 and an initial interest rate of 9%, the borrower originally had a repayment term of 15 years. However, they managed to negotiate a new interest rate of 6.25% while keeping the repayment term unchanged at 15 years. This led to savings of $14,115.
When Is The Best Time To Refinance Student Loans?
There is no single best time to refinance. However, here are a few indicators that now may be a good time to do so:
• There’s a strong rate environment.
• You’ve qualified for a lower interest rate or better terms.
• You’re prepared and able to make consistent, on-time loan payments.
How Often Can You Refinance Student Loans?
You can refinance student loans as often as you’d like. If you’ve already refinanced, but your financial situation has improved, refinancing again may be advantageous.
Is It Worth It To Refinance Student Loans?
It depends. If refinancing gives you substantial savings or a more manageable repayment process, it likely makes sense. If you’re unable to secure a lower interest rate or better terms, consider refinancing at a later date.
