The Comprehensive Guide to Refinancing Student Debt

By
Matt Valentine
,
October 16, 2018

When it comes to repaying your student loans, you have a lot of options.


However, very few—if any—of those options come with both the general accessibility and list of benefits that student loan refinancing offers.


For those who either can’t or have no desire to make use of federal programs such as income-based repayment and forgiveness, refinancing is arguably the single best option for getting rid of student loans.


However, refinancing is worth considering for anyone with student loan debt—federal and/or private—because it can save you thousands of dollars in interest and even lower your monthly payment.


Plus, refinancing consolidates all your loans into one tidy, convenient monthly payment.


But before we get into the pros and cons of refinancing—and how to put your best foot forward if and when you decide to refinance—we need to clear up a common question:

What is student loan refinancing and how does it differ from student loan consolidation?


Student loan refinancing and student loan consolidation are often confused because they’re so similar.


However, student loan refinancing has a few significant advantages when compared to consolidation. And it’s in the advantages that the two are truly set apart.


Direct student loan consolidation is a federal program which allows you to consolidate all your preexisting federal student loans into a single one, with an interest rate derived from the average of those of your existing loans. This will not save you any money. The program available only to federal student loan borrowers.


Student loan refinancing consolidates all your preexisting student loans—both federal and private—into a single loan with a new interest rate and/or loan term.

Student loan refinancing consolidates multiple student loans into one. However, you can consolidate your private loans as well, and you also get a new—and often much lower—interest rate.


You can also choose a more advantageous loan term based on your financial goals.


Think of student loan refinancing as the private lending version of federal loan consolidation. And, because private lenders don’t have to adhere to strict federal guidelines, they can offer you more advantageous options for repaying your student loans.


Ultimately, it all comes down to how you plan on repaying your student loans:

Method 1: Repaying your student loans on a tight budget


If you’re on a budget and you have a hard time making your monthly payment, federal programs such as income-based repayment (IBR) may be necessary to make your monthly payment more affordable.


Plus, with the federal student loan forgiveness programs available to all IBR plans, you’ll have a sure-fire way of getting rid of your student loans in a set period of time (even if you pay a lot more in interest).


If this sounds like you, student loan refinancing might not be a fit as you’ll lose access to federal programs after refinancing your federal loans.

Method 2: Repaying your student loans in the shortest amount of time while saving the most money possible


If you can make your current monthly payment, it’s almost always best to refinance so that you can cut your loan term down while saving loads on interest.


With the ability to save tens of thousands of dollars in interest over the life of a loan, along with the opportunity to set a shorter loan term, you won’t pay a cent more than you need to as you repay your loans faster.


If this sounds like your situation, refinancing is likely perfect as it will optimize your loan repayment process and speed up your payoff date while saving you the most money possible.


Repayment strategies are beyond the scope of this guide, and most borrowers will use student loan refinancing unless dependent on federal programs for reducing your monthly payment, so if you’d like more information on various methods for repaying your student loans, read our Comprehensive Guide to Getting Rid of Your Student Loans.

Student loan refinancing pros and cons


So far, we’ve touched on several benefits of student loan refinancing.


Below, we’ll dig a little deeper into the benefits of refinancing and why it’s a powerful tool for getting rid of your student loans fast and economically—or, alternately, why it might not be the right fit for you.

Pro: Consolidate both federal and private student loans into one convenient payment


If you have private student loans, you won’t be able to take advantage of the federal government’s Direct Consolidation Loan program.


However, with student loan refinancing, you can consolidate all your loans into one, whether you have all federal, all private, or both federal and private student loans. This will make it easier to keep track of your payments.

Pro: Save on interest


This is arguably the most significant benefit of student loan refinancing


As we touched on earlier you can save tens of thousands of dollars by refinancing to a lower interest rate. CommonBond and other private lenders offer interest rates lower than those of the federal government.

Pro: Reduce your payoff period


Student loan refinancing offers the option to take advantage of a shorter loan term than most federal student loan programs can provide.


Choosing a shorter loan term may increase your monthly payment, however, at the tradeoff of being able to bring forward your payoff date. That said, you’ll save money on interest overall.

Pro: Lower your monthly payments


Earlier, we talked about how using a federal extended loan program such as an income-based repayment plan can help lower your monthly payments.


However, many aren’t aware that the same can be done through refinancing, allowing you to lower your monthly payment and still save a lot on interest by refinancing at a lower interest rate.


It’s also possible to refinance to a longer loan term, making your monthly payment smaller (though you will end up paying more in interest over the long term).

Con: Lose federal benefits


Many borrowers never utilize their federal student loan benefits, especially if they’re trying to pay off their loans as soon as possible.


However, others find them invaluable for keeping up with their student loan payments, particularly if it’s hard for them to meet their monthly payments.


If your student loan payments are higher than you can manage, and refinancing won’t allow you to lower your monthly payments, then going with a more affordable repayment strategy by utilizing federal programs such as IBR plans and student loan forgiveness might be a better option.

Con: Income and credit requirements


Student loan refinancing works just like any private student loan: you must meet certain income and credit requirements.


These requirements are set by the lender, however, so they’ll vary widely. This means you’ll often be able to find one that’s able and willing to work with your situation.

Pro: You can refinance more than once


It’s important to mention that, while lenders do have certain criteria that must be met, you can refinance more than once.


In fact, you can refinance as many times as you’d like.


This is a big advantage because if you’re not where you want to be now in terms of your credit and/or income, a lender may be willing to work with you now based on your situation.


Then, later, you can refinance again and potentially get an even better interest rate and/or loan term, refinancing each time your situation improves until you’ve paid off your loan.

Should you refinance?


Now that we’ve talked about the difference between student loan refinancing and consolidation and broken down the pros and cons, it’s time to move on to the real question:


Should I refinance my student loans?


Whether you decide to refinance or not  is ultimately up to you and should be based primarily on what terms lenders will offer you in combination with your chosen repayment strategy.


However, there are several important signs to look out for when considering student loan refinancing—signs that point to student loan refinancing as being a worthwhile consideration.


Here are a few signs you should consider refinancing your student loans:

1. Your loans have a high interest rate


(*Note: Read our Comprehensive Guide to Student Loan Interest to find out if your interest rate is higher than average)


If the interest rate on one or more of your student loans is high, that’s one of the clearest signs that student loan refinancing can help you.


For example, if you have roughly $30,000 in combined student loans at 7 percent interest (standard 10-year payoff), refinancing down to an average 4 percent interest rate will save you more than $6,000.

2. You have private or private + federal student loans


Remember, federal loan programs such as IBR plans, forgiveness, and discharge likely won’t apply to any private loans you have (though individual lenders offer their own protections).


For that reason, if you have any private student loans, you’re likely to benefit from refinancing.

3. You don’t qualify for federal student loan programs


If you have federal loans and using an IBR plan doesn’t make financial sense for you, you may still want to look into public service loan forgiveness. As part of that program, people who work in public service jobs are eligible for loan forgiveness after 10 years of on-time payments.


That said, only a small percentage of people are eligible for public service loan forgiveness, and even of that group, only a fraction of those who apply are accepted.


If this sounds like your situation, student loan refinancing is likely the most ideal option for you. Whether you’re looking to save the most money, pay off your student loans as fast as possible, or lower your monthly payment, many lenders offer several flexible options based on your financial goals.

4. You have a strong credit history


A stellar credit history isn’t an absolute requirement for student loan refinancing.


However, if you have a good credit history right out of the gate, you have all the more reason to consider refinancing because you’re more likely to get a great offer.


Many lenders look for a credit score of 680 or higher—however, this isn’t a requirement and each lender is different. If you don’t have great credit but you have a cosigner who does, that’s also an advantage.   


In addition, a history of on-time payments is a big plus that lenders will look for as well.


It’s important to stress, though, that you can always start now and refinance again later as your situation improves if the offers you receive aren’t ideal.


Don’t let a less-than-amazing credit history keep you from taking advantage of the benefits of refinancing.

5. You want to pay off your student loans as quickly as possible


Perhaps the most important reason to consider refinancing: you want to save money and pay off your student loans quickly.


If you want to optimize your student loan repayment process, refinancing offers the best of both worlds in a lower interest rate and reduced loan term options.


If you want to pay off your student loan as quickly as possible, nothing will get you there faster than refinancing.

How to refinance your student loans


Now that we’ve identified the more obvious reasons to consider refinancing and you’ve had some time to consider the benefits and if it’s right for you, let’s talk about how to refinance your student loan.


Most lenders make the process quick and easy, allowing you to apply within minutes and without it affecting your credit score.


For instance, you can click here to learn more about refinancing with CommonBond and get a rate in just minutes.


However, there are some things you’ll want to review and have in order before applying, not only so that you can position yourself to receive the best offers possible from lenders, but to simplify the process at the same time.


Here’s how to optimize the process of applying for student loan refinancing:

1. Determine eligibility


First, you’ll want to get an idea of where you stand.


This shouldn’t take you any more than a couple of minutes. However, there are a few different pieces of information you should gather.


These include your:


  1. Credit history
  2. Income
  3. Debt-to-income ratio (DTI)
  4. Cosigner’s information (if applicable)



Keep in mind that these aren’t specific requirements, simply factors which lenders generally use to judge your ability to repay a loan.


By gathering this information ahead of time you’ll know where you stand before approaching lenders.


You could depend on their response when applying to know where you stand, but without knowing your own financials you’ll be lacking important information that will help you not only qualify now, but be able to refinance to an even better rate later.

Credit history


Your credit score, along with your credit history at large, is one of the most important factors lenders look at when qualifying you for refinancing.


As touched on earlier, many lenders require a 680 credit score or higher. However, there are no standard criteria, so it depends on the lender.


If you don’t have a current copy of your credit report, you can get one free report annually from annualcreditreport.com.

Income


When applying for refinancing, both income and employment status play an important part in qualifying you.


Sub-factors here may also include your major and what school you graduated from depending on the lender, all which affect your employment prospects.

Debt-to-income ratio (DTI)


Similar to income, debt-to-income ratio (DTI) is also important to lenders when qualifying you for refinancing.


DTI is a basic calculation of how much debt you have compared to your monthly income.


For example, if you make $6,000 monthly but have $2,400 in monthly debt payments (which can be from a variety of debt including car payments, student loans, and credit cards), your DTI would be 40 percent.


There is no universally agreed upon DTI, and most lenders don’t release DTI requirements, but most lenders require 40-45 percent or lower debt-to-income ratio.

Cosigner’s Information


With a good cosigner, you’ll have more leeway with your credit history, income, and DTI, especially if your cosigner have a great credit history. You should have all of their information handy when you look into refinancing.


Even if you do have a cosigner, it’s still important to have your own financials in order as they’ll also play a part in the qualification process.

2. Obtain your loan information


Now that you have a better idea of what lenders are looking for when approving you for refinancing, it’s time to get your own loan information together.


These are all necessary pieces of information you’ll need in order to submit your information for preapproval, something that most modern lenders offer.


This information includes:


  • You current student loan debt balance
  • What types of student loans you have
  • The interest rates on those loans


If you have this basic information together, you’ll be able to apply for preapproval with most lenders. That’s an important step, as you’ll want to see what you can be approved for before you commit.


In addition to this, you’ll want to gather certain identification documents to make sure the qualification process runs smoothly.


These documents include:


  • Photo ID: This includes your driver’s license or passport.
  • Proof of income: This includes your pay stubs.
  • Proof of citizenship: This includes your Social Security number or other applicable government ID.
  • Loan documents: You’ll want to have all documents pertaining to each student loan under your name.

3. Shop around and prequalify


Now that you’re fully prepared, all that’s left to do is pre-qualify to see where you stand.


Aside from your loan information and cash flow, you’ll just need your name, university, and some basic information to pre-qualify with most lenders.


You’ll likely receive slightly different offers from each lender you apply to, so carefully review your options and choose the terms and additional benefits that fit best with your financial goals.


If you’re not exactly sure what you should be looking for when reviewing your options, we’ll talk about that in the next section.

How to compare lenders to find the best refinancing options (Based on your ideal terms)


Now that you’ve gathered everything you’ll need and started pre-qualifying with lenders, it’s time to compare the offers you’re receiving to find the best refinancing options.


There are three primary factors you should be reviewing as you begin to compare lender offers and work to identify the most suitable offer for you:


  • Interest rate
  • Loan term
  • Additional benefits and flexibility


Let’s dive into each so you have a better idea of what you’ll be looking at and how to determine if a particular offer fits your ideal terms:

Interest rate


Most lenders will offer you one of two (or both) types of loan options:


  1. Fixed: One fixed rate which remains the same for the life of the loan.
  2. Variable: Typically lower initial rate compared to fixed, however, that rate can decrease and increase based on the market.  


However, there are exceptions. CommonBond offers an additional hybrid option in which the first five years of a 10-year loan have a fixed interest rate, and the next five years have a variable interest rate.


Which of these loan options works best for you mostly depends on how much longer you have to pay off your loan and how aggressively you’d like to pay it off.


If you have only a few years left to pay off your loan, you may be able to take advantage of the initially lower variable rate with all the benefit and little to no risk. If not, a fixed-rate may be the better option.

Loan term


Your loan term is another critical factor to consider when choosing a lender.


Most lenders offer a wide array of loan terms based on your goals. CommonBond offers 5-, 7-, 10-, 15-, and 20-year loan terms depending on your qualifications and interest rate type.


Again, it all comes down to your goals.


If you’re working to repay your student loans as quickly as possible and you have a healthy income, a 5- or 7-year loan term will often increase your monthly payment but allow you to repay your loan quickly while saving the maximum amount in interest.


However, if you’re on a budget, the monthly payment with a 10-, 15-, or 20-year term will probably be ideal.

Additional benefits and flexibility


Lastly, there are several additional benefits which lenders offer that are important to consider.


As with other factors we’ve discussed so far, what those benefits are will vary from lender to lender, but even more so here. So, take your time to consider what is most important to you before making your decision.


Here are a few additional benefits which lenders may offer:


  • Forbearance: A program offered with all federal student loans, forbearance allows you  to delay payments after a hardship. This is one of several protections lenders often provide in the event that you’re having trouble paying your loan.
  • Unemployment protection: In addition to forbearance, some lenders offer additional protections in case of unemployment.
  • Interest rate deduction: Some lenders offer an interest rate deduction for setting up auto-pay and other similar tasks.
  • Release of a cosigner: Some lenders also offer a cosigner to be released from a loan after a certain number of on-time payments.


Each of these additional benefits adds flexibility to your loan that could put one lender above another in your comparison.

Common questions about student loan refinancing


Throughout this guide, we covered what refinancing is, its benefits, signs to look for that make you an ideal fit for student loan refinancing, how to refinance your student loans, and how to compare lenders to find your ideal terms.


However, you might still have questions pertaining to student loan refinancing and how it works that weren’t answered above.


We’re here to help and it’s our goal with this guide to make sure that once you’re done reading you fully understand student loan refinancing and have been given all the information you need to decide if it’s a fit for you and your financial goals.


Here are a few common questions not touched on above related to student loan refinancing:

Are there any fees associated with refinancing?


The simple answer: some lenders have fees, others don’t.


CommonBond has no origination fee or other additional fees for student loan refinancing, however, some lenders do. Those fees can either be a set amount or a percentage of the total loan amount at disbursement.


For that reason, fees are important to keep track of when you start comparing lenders, so make sure to review with each lender what their fees are and how much those fees will cost you.

Will my credit score be affected?


Student loan refinancing applications are considered a hard inquiry on your credit, which typically impacts your credit no more than about 5 points.


However, pre-qualifying doesn’t usually include a credit check, so you can get a better idea of what each lender might offer you before having your credit run (but keep in mind that this isn’t an actual approval).


More important, though, is FICO’s special classification for student loan refinancing inquiries.


Once a hard inquiry is made to your credit for student loan refinancing, all other inquiries into your credit history within a 30-day period starting from the date of that first inquiry will only count as one total inquiry.


That’s great because it allows you to apply to many lenders at once with it minimally affecting your credit.

Should I use a cosigner?


Whether you use a cosigner or not is completely dependent upon whether you believe you’ll be approved without one.


If you have a healthy income and good credit history, you may be approved on your own without a cosigner.


If you’re not sure, or if you already weren’t approved without one, you might want to consider a cosigner.


However, if your credit or income isn’t enough to approve you, and you’d prefer to hold the loan yourself, make sure your chosen lender has a “release of cosigner” option. That way, you can release your cosigner from the loan after the specified number of on-time payments.

What if I’m not accepted?


If you applied for student loan refinancing in the past and weren’t accepted, there’s good news: you can apply again.


In fact, you can apply as many times as you’d like in the case of most lenders.


Here are a few ideas on how you can boost your chances of approval before reapplying:


  • Do you have enough credit?: Perhaps all you have are your loans on your credit history. If you don’t have enough, building new credit could be what you need.
  • Use a cosigner: This is one of the easiest and most universal ways to improve your chances of approval. If you have access to a good cosigner, they’ll solve most of your approval problems.
  • Lower your DTI: Sometimes, it’s your debt-to-income ratio that’s too high. Perhaps you can lower your car payment by finding a lower car insurance quote, or reduce some other part of your major monthly expenditures to lower your overall DTI.
  • Reapply when you have regular work: A lack of steady work can also be the reason for not being approved. If you hold off until you have regular work you may be more likely to be approved.
  • Clean up your credit report: Old items can often linger on your credit history long after they should have been removed. Check your credit report and see if there’s anything there that shouldn’t be. This will often give your score a good bump depending on the account.


Most importantly, pay attention to what your chosen lender says in response to your application.


A good lender will give you advice for increasing your approval chances moving forward, so use that to your advantage.

Discover the power of student loan refinancing


There are several options out there for helping you get rid of your student loans once and for all.


However, student loan refinancing is arguably one of the most powerful.


That’s especially true if your goal is to pay off your loan as fast as possible without any use of extended repayment plans or forgiveness, which often result in two to three times the typical 10-year student loan interest charges over time.


So, take the time to consider whether refinancing is right for you. And, if you find it’s a fit, follow these steps to make the most of refinancing your student loans:


  • Review basic eligibility factors such as your credit history and debt-to-income ratio (DTI) to know where you stand.
  • Pre-qualify with lenders to see what you’re approved for.
  • Decide what your ideal refinance terms are based on lender offers, from fixed vs. variable interest rates to payoff dates.


Refinancing your student loans may be just what you need to set you on a path toward a debt-free future.


So make the most of the knowledge available to you and take a step in the right direction—a step towards financial freedom.

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