More and more families are burdened with paying off student loans: if you are among them, you will certainly know that the costs are substantial, and probably you have more than one loan to deal with. At some point, it becomes difficult to keep pace with all those payments, and your budget might be in trouble. Fortunately, there is a solution, and that is called “refinancing”: you may already hear speaking of it, but unsure it can be the right option for you. Purposely, we will address the subject with the most important things to know, and lastly, we advise you on one of the best places to go for refinancing your student loans.

Quick facts

Lots of Americans today are refinancing their student loans: according to the most recent statistic from Educationdata.org, it takes about 20 years as average for graduates to pay off their student loans, with an estimated debt of $32,731 per loan. According to the general guidelines by financial experts, the ideal timeline for payoff should be of 10 years, and that aligns with the Standard Repayment Plan proposed by federal loans. Previous research made in 2016 from Citizens Financial Group (https://investor.citizensbank.com/) found that 60 percent of a big sample of graduated aged 35 and under expected to be paying off student loans into their 40s.

All these facts suggest that the ability to pay crucial things such as rentals or mortgages is affected, and to have such an extended duration on a student loan will prove to be expensive since the interest rates accrue over more years. This is especially true when multiple student loans are carried: refinancing can be a life-saver because it allows to shorten the duration of the loans and to save big bucks in the long run.

Embarking on a single loan with a shortened term can be a wise decision if your priority is to get rid of the debt faster.

What is refinancing anyway?

The essence and purpose of refinancing student loans are to obtain a unique loan with a single monthly payment schedule, possibly a reduced interest rate, ideally a term that should you eliminate your debt sooner.

Whenever you refinance an obvious goal is to save money, especially in the case you are substituting multiple student loans with each one carrying their own interest rate: having a single rate will be convenient, provided it is significantly lower than the current ones you have.

Saving can be obtained either in the short term or through a cumulative effect over the years: when you decide to take a loan of a shorter duration you will have, of course, higher monthly payments, almost certainly despite the reduction in the interest rate, but the difference should be slight, let’s say under $100, in order to reap the benefit. On the other hand, choosing to delay the loan repayments deadline will lower the monthly installments, but the interest will accrue over more years, adding up to the cost of the loan.

Should you refinance or consolidate student loans?

Before diving into the specifics or refinancing, let’s examine the difference with consolidating. Consolidation of student loans means you are merging more of them into a single loan carrying a modified rate, and this is where the analogy with refinancing ends.

You can consolidate federal student loans only through a specific federal program, but if you also have private student loans they won’t be considered for that program. In this case, a crucial difference is that the rate you will get with a new consolidated loan is the weighed average of the rates you were carrying from the previous loans, so there won’t be necessarily a saving. The edge is just making a unique payment instead of having to deal with multiple accounts with interest on each; besides, there surely won’t be extra fees when you consolidate student loans through a government-backed plan.

Private companies can consolidate both federal and private student loans: they will give you a rate that is advantageous compared to at least most of the ones you have with your current loans (instead of the average). Some lenders may charge the transition to a new loan with fees. Consolidating under these circumstances is actually refinancing.

So, to recap:

• If you have only federal student loans pending and need to consolidate them, it can be done through the Direct Consolidation Loan offered by the government. You will get an averaged rate inferred from the rates applied to every current loan you have, but no fees will be charged.
• If you have a combination of both federal and private student loans or just the latter, you should apply for refinancing, and this can be only done through private student loan lenders, including online providers, also banks, and credit unions. 
• You should get a lower rate than the current ones, but this will depend on your credit score, as will be discussed later. Some lenders may charge an origination fee for refinancing.

Is refinancing a good move?

Many times this question arises: there is no absolute answer since it depends on your financial situation and preferences. If you need to refinance, it is likely that you either want the comfort of a unique monthly payment, while possibly saving, or you seek to get out of debt sooner.

Basically, you have to figure out if refinancing will make you save: not always is possible to save substantially, because the offered rate may be higher than one of the student loans you are trying to refinance. Are you willing to sacrifice it for the sake of simplifying your paying schedule? As mentioned, you might find lenders applying fees for refinancing, which make it expensive in the short term: can you afford those costs, and are they worth in proportion to the benefits? Doing the math is crucial in these cases, and a student loan calculator will do the trick: comparing two student loans and accounting for the fees, you will discover how the monthly payments differ, and this will be of help for your choice.

In another instance, you want to narrow down the term of your student loans: this is a viable route only if you can actually afford the increased monthly payments, without having to compromise too much your budget. A reduced rate on your refinanced loan will partially compensate that increase, so again, it is a mathematical matter.

Some people strive to keep up with the volatility of interest because they chose variable rates for the loans which they currently have: refinancing with a fixed rate will just simplify their life, because they can predict their payments and create a budget more accurately, instead of being at the mercy of market fluctuations.

If you recognize yourself in any of these circumstances, you will only have to find the solution that best fits your priorities, balancing the pros and cons, while doing some math.

Will you save from refinancing?

Let’s put aside the multiple student loans hypothesis, and consider you have currently just one loan you want to refinance, for the sake of simplicity. Assume you embarked on a $28,000 student loan with a 10-year term, and your current APR (annual percentage rate) is 6.79% fixed. Then, you found a lender who could refinance your loan at 4.95% under a 7-year loan term.

Your monthly payment for the current loan would be $322, with a total of $10.649.76 interest paid over those 10 years.

• If you accept the lender’s offer, your repayment will be $395 monthly, with a total interest of $5,187.72, spent in 7 years.

You clearly see that in face of $73 added monthly, you would pay off your debt 3 years in advance, and save more than $5,500 in interest. This is an ideal scenario in which refinancing is generally convenient.

If the lender sets an origination fee, which may be around 1% of the refinanced loan, you would have to leave on the table $2,800: being the case, refinancing would turn disadvantageous, at least in the short term.

Pros of student loans refinancing

If you were thinking to refinance your student loans right now, have a look at the listing below, where we summarize the benefits. All the following are “if”: a refinancing deal must have one or more of these features to be beneficial.

• Reducing your interest rate
• Not asking an extra fee for the service
• Decreasing the loan duration, which combined with the new rate, should anyway result in comfortable monthly loan installments
• Transitioning from a variable rate to a fixed one: this adds predictability, avoiding large unexpected spikes in the rate, so giving you peace of mind.

Cons of refinancing student loans

Despite the appeal of the benefits which come with refinancing, it isn’t always and anyway the best choice for everyone. In fact, there is no guarantee that you will gain from it, otherwise, the benefit you were seeking might be overtaken by the cons. One of the points below should suffice to say no to refinancing.

Here are the drawbacks you should consider:

• Origination fees: the presence of such or other fees that are charged for the service of refinancing your loans must be taken into account. While many lenders don’t charge fees, some of them do and may even require steep amounts, which can overcome the savings you would actually benefit from refinancing
• The term of the refinanced loan is much longer
• The credit score required to apply for the refinancing deal forces you to add a cosigner: this would be clearly an additional constraint, except (hopefully) if the cosigner is your beloved
• The new interest rate is significantly higher than at least one of your current loans: this is a no-brainer, but many people refinance when they have multiple loans, for the sake of obtaining one single payment schedule.
• The type of rate is such that it becomes unpredictable, and that’s the case if you’re presented with a variable interest rate: that is usually lower than a fixed one as a starting point, but you would risk facing unexpected spikes later, unnecessarily complicating your debt.
  
  According to many experts, it would be best to not switching a fixed interest to a variable rate, at least as far as refinancing is concerned.

When can you apply for refinancing?

You might be ready to refinance, but how soon you can do it? Let’s say you have still to finish your degree course, and you accrued a certain amount of debt from your student loan(s): in this case, it is very likely that you won’t be given a refinanced loan unless you can demonstrate a substantial income that allows you to repay the loan.

Lenders will typically have higher requirements for approving a refinancing offer, compared to the ones you are presented when you approach a student loan for the first time. That’s because you are basically requesting to change the condition of existing loans.

In some cases, using a cosigner will serve to bypass your limiting conditions, such as a low or non-existent credit score, but it really depends on the lender. Also, financing specialties like a medical or law degree is generally harder to obtain, on equal terms with other schools.

The right time to refinance is, in short: when you have a degree, and receive a decent income from your new job.

Can you actually apply for student loans refinancing?

Applying to refinance your student loans generally requires, first and foremost, that you have a certain credit score: you must be able to demonstrate that you can manage the debt taken with your new loan, based on where you are already standing financially. Depending on which company you turn to, the score requirement will differ: there are several companies allowing fair credit borrowers to refinance, that is to say with scores under 670, possibly down to 640.

Your income and its source are also important factors because lenders want to know that you can actually repay the recurring installments and that you will in the years to come.

Typically, refinancing offers include the chance to use a cosigner: this is crucial because most students once they get their degrees aren’t enough creditworthy to qualify, or any way to get an affordable rate. Anyway, it is highly likely that you already have a cosigner, instead of having to “hire” him/her just for the purpose of qualifying.

Generally, here are what lenders ask to finalize student loans refinancing:

• Having a degree: simply put, undergraduates usually will struggle to find a lender who can approve them for refinancing
• A minimum credit score: most lenders will require at least a 650 rating, and it is normally higher than the one with which you qualified for your student loans in the first place
• Receiving a minimum annual income: requirements vary noticeably among lenders. As a guideline, you should consider at least $24,000 of steady income, with proof of payment using at least the most recent three-month pay stubs
• Low DTI (debt-to-income ratio): this means that you are already using a relatively low percentage of your salary to pay for outstanding debts of whatever kind, including credit cards, car loans, and alike. It’s safe to consider that your DTI must not exceed 50%, and the lower it is (ideally below 40%) the better your refinancing deal.

Are there alternatives to refinancing?

There is the chance that refinancing is not accessible to you, because you couldn’t find a lender accepting your credit score, or your income is too low. However, you still need to consolidate your debts, or making your loan more affordable, seeking a lowered rate or shortened term. There are several other options to consider, and each of them will have its own pros and cons. About the latter, essentially you will prolong the duration of your student loan (along with its total cost ), in exchange for short-term relief, and that’s true with all these alternatives, except for the rare cases of loan forgiveness.

• Deferment: most lenders allow you to dilute your student loan term, and should do this through a transparent policy. To defer means you can temporarily suspend to pay the installments, for a varying number of months, after which you are called to resume the regular payments plus the ones you missed in that “grace period”. In case you had a Direct Subsidized Loan, interest will be covered by the government in the period of stop.
• Forbearance: this is basically a deferment for which you do a request, (that can approved or denied), with the difference that interest accrued during the pause timeline continue accruing.
• Income-based repayment. You only repay a percentage of your discretionary income, usually from 10 to 20%, and you have different time schedules to do it. This is one of the typical options you have with federal student loans, however a few private companies also makes this option available.
• Forgiveness: this means literally that you become exempted from repaying the pending balance, but you guess it can happen in very few cases, under extraordinary circumstances.

Bottomline

If you have to refinance in mind, you are on the same boat as lots of Americans today. Just make sure your choice is wise, and that you turn to reliable student loan refinancing services. We recommend LendKey, a company interfacing with thousands of community banks and credit unions: you will be presented with personalized rates for your situation, with several of the best offers from those institutions. You can see our complete review here.