What is refinancing?
Refinancing is not the same as federal loan consolidation—these processes are often confused. Refinancing is when you borrow a completely new private loan to pay off your existing private or federal student loan(s) with the goal of a lower interest rate and/or monthly payment. If you are refinancing a federal loan into a private loan, PLEASE NOTE that you will lose any federal protections such as deferment, forbearance, repayment plans, cancellations, forgiveness, etc. Many borrowers focus on their private education loan debt when considering refinance options and keep their federal loans as is. Once an education loan borrower decides that refinancing is the right choice, they often wonder when is the best time to tackle this and how does the process work?
Refinancing can occur during periods of grace or repayment. A borrower typically cannot refinance a loan while they are still enrolled at least half-time, but each lender will set their own rules on this. The interest rate offered on a refinance loan will be based on the borrower and co-signer’s (if applicable) credit score and history, so the longer the borrower has to strengthen their credit history, employment history, and salary, the better the terms they will likely be offered. Many borrowers attempt to refinance on their own to relieve their co-signer of the burden. However, young borrowers who apply to refinance directly out of undergraduate school are often not offered favorable terms, especially without a co-signer added to the new loan.
How to Refinance
The trickiest part of refinancing is selecting a lender and completing the application. Sometimes the application process is manual and borrowers are required to hand enter the principal balance, interest accrued, interest rate, monthly payment, and servicer information of their current education loans. There are websites such as Magnify Money that help borrowers compare some of the lenders currently offering private loan refinance products.
The interest rate will not only be based on the borrower and co-signer’s (if applicable) credit score (usually 650+ is required and 700+ is preferred) and credit history, debt-to-income ratio (typically under 50% is required), employment history, and salary, but it will also be based on the terms the borrower selects. Many lenders will offer a borrower a variety of repayment terms including shorter and longer periods of repayment as well as fixed and variable rates. Each option will yield a different monthly payment and overall cost of the loan, which the lender will outline for you to help make the decision process easier.
Your servicer may be the lender that you chose to refinance with, or it may be a servicer that the lender contracts with. If you are unsure who your servicer is, contact the lender immediately upon refinancing your loans—you certainly do not want to miss your first payment.
Through the application process, you will likely be offered a couple of different repayment terms, e.g. 10 or 15 years. It is important to note that if you select a shorter repayment term than your current loan, your monthly payment may actually increase. If you can swing the new payment that is a good thing as you will get out of debt quicker and pay less interest over time. Because this is a private loan, there will likely be very limited, if any, options to change your repayment term or defer your loan. You may be able to refinance your loan with another lender later if you find you are unhappy with the option you selected. And do not forget, you can always make an additional payment to your loan servicer without a penalty.
BUT SHOULD I REFINANCE?
It depends! You may want to apply for a few refinance loans to shop around and see if you can get approved at a lower rate than your current loan. Be sure to submit all these applications within a 14-day timeframe to ensure all the applications only count as one inquiry on your credit score. If you find the interest rates to be too high, you can always cancel the loan applications, stick with what you have for now, work on your credit, and try again at a later date.