If you're one of the 44.2 million Americans with student loan debt, you've probably thought about how you can better manage the amount you owe or the payments you need to make. Student loan refinancing gives students the ultimate weight-off-your-shoulders by lowering your interest rate and/or reducing your monthly payments.
Guide to Student Loan Refinancing
Guide to Student Loan Refinancing
HOW DOES IT WORK?
When you refinance a student loan, a private lender takes your current loan amount, pays it off on your behalf, and then gives you a new loan with a lower interest rate.
Your credit score starts when a lender starts reporting your repayments to a credit bureau, so the first time you borrow money (whether it's a credit card or a loan), the interest rate and APR will be higher because you have no past history of on-time re payments.
After you've made on-time payments for a few years, however, your credit score will be better - and you're now able to borrow money at a lower interest rate because the lender knows you'll pay it back.
To put it simply, student loan refinancers recognize your change in credit history and match you up with loan terms that better reflect your new credit worthiness.
STUDENT LOAN REFINANCING VERSUS CONSOLIDATION
Federal consolidation is for people who are planning on applying for an Income-Driven Payment Request (requesting lower monthly repayment amounts) or for Studen Loan Forgiveness (requesting your remaining loan balance after making 120 qualified monthly payments). With Debt Consolidation, the government combines your current loans and gives you a new interest rate based on the average of the interest rates of the previous loans.
Student loan financing is performed by a non-government agency, and results in a lower interest rate for the borrower.
WILL I QUALIFY FOR STUDENT LOAN REFINANCING?
If you aren't going to apply for a forgiveness program or income-driven repayment plan, student loan refinancing is a great option for lowering the amount you pay for the money you borrow.
In order to receive a lower interest rate, you'll need to have a strong credit score. You'll also need to provide proof of income. Certain student loan refinancers only work with borrowers who are in a certain occupation, or who have a certain amount of debt-to-income ratio. It depends on the refinancer, but for the most part, you'll need to be in a steady, well-paying occupation, with a history of on-time payments and a credit score of at least 650.
Student loan refinancing is a great opportunity to reduce the amount you pay for your student debt over time -- but first things first: you need to know if you qualify. Check out this student loan refinancing infographic from Credible to quickly find out if refinancing is the right path to take.
It’s a good idea if you have private student loans or you have federal student loans and don’t plan on taking advantage of a federal forgiveness program or income-driven repayment plan. You also need strong credit and a steady income to qualify for refinancing.
Applying for student loan refinancing takes time, and any hard inquiry on your credit score might lower your score slightly. You should make sure going through the process will be worth it - so check out a refinancing calculator (NerdWallet and Student Loan Hero are both great options)
WHICH LENDER SHOULD I CHOSE FOR REFINANCING?
There are several big players in the student loan refinancing biz, and they all have their pros and cons.
When you're shopping around for the best refinancer to use, ask about payment postponement options. If there is a shift in your income or finances, some lenders will be more strict as to how long you can postpone payments for (a process known as forbearance).
Nerdwallet provides FAQs (APRs, interest rates, cosigner options) for the top seven student loan financing companies.
LendEDU quickly and easily provides a side-by-side comparison for federal and private loans, as well as credit cards.
HOW MUCH DOES REFINANCING COST?
There is no cost associated with refinancing student loans. As with other types of loans, lenders generate revenue by charging your interest.
Originally published August 28, 2017.