Refinance Student Loans: Your Guide to Private Student Loan ConsolidationEmail This Article
Offered by banks, credit unions, and other financial institutions, a private refinance loan can reduce the pressure on your budget, making it easier to manage your education debt. You’ll hear different naming conventions, but a “student loan refinance” and “private student loan consolidation” are the same thing.
Refinancing allows you to:
- Combine your federal loans with your private loans
- Refinance only a single loan (or only one loan type)
- Potentially reduce your interest rate
- Extend your repayment term
- Remove a cosigner
- Any combination of these.
When you refinance your student loans or parent loans, your current loans are paid off and replaced by one, new loan. Your eligibility for a private student loan refinance will be based on the merits of your credit profile, employment history, and debt-to-income ratio.
When to Refinance Student Loans
- When you want to reduce your monthly payments.
A private student loan refinance may offer you an opportunity to choose a longer repayment term. A longer repayment term may help you reduce your monthly payments, but will result an increase in the total you will need to repay your loan.
- When you want a lower interest rate. Private student loan interest rates are based on the strength of your credit, and the current marketplace. If you have a federal student loan, the only way to reduce your interest rate would be to include your federal student loan in a private student loan refinance.
Note: If you include a federal student loan in a private student loan refinance, you will the lose benefits offered through the federal student loan program.
- When determining an effective repayment strategy. After you have completed your educational studies and exhausted your grace period, your loan will enter repayment. It is encouraged that student loan borrowers develop an effective student loan repayment strategy.
Keep in mind, lenders will look for at least 2 years of employment history. If you are unable to qualify on your own, you will have the opportunity to apply with a cosigner.
- When you’ve determined you do not qualify for—or choose not to pursue—any federal loan forgiveness programs.
- When you confirm you have a strong enough credit score (typically at least 660), or have a creditworthy cosigner.
- Once you decide it’s time to release the cosigner from your current loan(s). We bet your mom/dad cosigner would be grateful for this gesture.
Note: If you need, or want to, you can add a cosigner to the new refinance loan, and it doesn’t have to be the cosigner you used before.
- When you’re tired of juggling multiple payments and dealing with multiple student loan companies.
You have the option to include or exclude any loans you want. Some borrowers will only choose to refinance their private student loans and exclude their federal student loans.
Why Refinance Student Loans
One of the key benefits of refinancing your student loans is payment relief. When you combine all of your student or parent loans, your lender may extend your repayment term, which usually reduces your monthly payment. (Note that increasing the repayment term may increase the total interest paid over the life of the loan.)
With a lower monthly payment, you’ll have more money available to cover living expenses, put money into long term savings or an emergency savings plan, and even pay off higher interest rate debt. When it becomes more affordable, you can make larger payments to pay off your refinance loan faster and save money on interest. After all, there are no prepayment penalties.
Other reasons to refinance:
- Transfer parent loan debt to the student (upon qualifying on the basis of the student’s creditworthiness and proof of income)
- Get better customer service: If you aren’t happy with your current lender, you can refinance your student loan with a different lender
Does it Make Sense to Refinance Student Loans?
It could very well be a smart move for you! This table shows the monthly payment reduction resulting from refinancing federal and/or private student loans into a 5% fixed rate refinance loan.
|Loan Amount||Monthly Payment Before Refinancing||Monthly Payment After Refinancing
|Monthly Payment Reduction||Increase in Total Payments|
Impact of Lower Interest Rate
This table shows the monthly payment reduction resulting from refinancing a 6.84% Federal Parent PLUS loan into a 5% fixed-rate private refinance loan.
|Loan Amount||Monthly Payment Before Refinancing (Parent PLUS Loan, 6.84%, 10-Year term)||Monthly Payment After Refinancing
(Private Refinance Loan, 5%, 10-Year Term))
|Monthly Payment Reduction||Amount You Save Over the Life of the Loan|
More Information About Private Student Loan Refinance
To learn more about private refinance loans, review answers to frequently asked questions about private student loan refinancing.