How to refinance student loans in 6 steps
If you’re thinking about refinancing your student loans, following these six steps can help you make the right decision for your financial future.
If you’re wondering how to refinance student loans, you’re not alone. Americans owed almost $1.73 billion in student loan debt in the third quarter of 2021, according to Federal Reserve data. If you’d like to potentially lower your monthly payment and save on interest, refinancing may be the best option for you.
Refinancing to a lower interest rate may help you pay off your student loan debt faster, but this may not be beneficial for all borrowers — especially those with federal student loans. Keep reading to learn about how to refinance student loans, the pros and cons of refinancing and how to determine if refinancing is right for you.
Credible lets you easily compare student loan refinance rates from various lenders.
- How to refinance student loans in 6 steps
- Student loan refinancing vs. student loan consolidation: What’s the difference?
- What are the requirements for refinancing student loans?
- Student loan refinancing pros and cons
- What credit score do I need to refinance my student loans?
- Can I refinance my student loans more than once?
How to refinance student loans in 6 steps
When you refinance, you take out a new loan to replace your current loan (or loans). The new loan pays off your old loan, but this doesn’t eliminate your debt. Instead, you’ll start making monthly payments on your new refinance loan, which will ideally have a lower interest rate.
For example, imagine that you owe $50,000 in student loan debt with an interest rate of 6% and 20 years left on your repayment term. Your monthly payment would be $358. But if you were to refinance your student loan down to a 3% interest rate with the same loan term, you’d pay $277 per month and save more than $19,000 over the life of the loan.
To refinance your student loans, follow these six steps.
1. Shop around and compare rates
Before you take out any type of loan, it’s always wise to shop around and compare rates. Certain factors affect the interest rates you’re offered, such as your credit score, debt-to-income ratio and credit utilization ratio. These factors will likely influence your interest rate no matter which lender you choose. But you do have control over them.
You can use a free refinancing calculator to determine what range of rates you may qualify for. You can also adjust the data to see what rates you might be eligible for if you were to increase your credit score or lower your debt-to-income ratio.
Keep in mind that fixed interest rates are often more beneficial to borrowers than variable interest rates. Variable rates may be lower at first, but they can rise over time based on the current market. Fixed interest rates will remain the same throughout the duration of your loan, regardless of market fluctuations.
2. Choose your lender and loan terms
Now that you’ve identified your loan options, it’s time to choose your lender and repayment options. If you choose to refinance with your current lender, or a lender you’ve worked with in the past (such as your bank), you may qualify for more flexible loan terms.
On the other hand, some lenders may extend unique benefits to entice new borrowers to apply, such as a lower fixed interest rate. By shopping around and comparing rates, you can determine which lender can secure you the lowest interest rates for your refinance. You may also want to consider how much you could save by choosing the shortest repayment period. Although your monthly payments will likely be higher with a shorter repayment term, you’ll save more on interest in the long run.
3. Apply for the loan
Applying for a loan can be a quick and easy process if you’re informed and prepared. While the exact process varies by lender, most lenders will want to see basic documentation prior to your approval, such as recent tax returns, W-2s, pay stubs, bank account statements and information on any outstanding loans.
One benefit of choosing your primary financial institution as your lender is that it may already have some of this information on file, which can save you time when applying.
4. Close on the loan
Once you’ve officially applied for the loan, the lender will review your application and give you a decision within a few days (some applications with online lenders can be processed in a matter of minutes). Sometimes, borrowers who prequalified for a loan may not be approved for the actual loan. The reasons for this usually involve poor credit histories, and you may need to lower your debt-to-income ratio or add a cosigner to be approved. Your lender will clearly explain your options if this occurs.
If you’re approved for the loan, you’ll sign your loan documents and your new lender will pay off your original loans.
5. Keep making payments on your original loans
One of the most important steps in successfully refinancing your student loan is to keep making payments on your original loans until the payoff is complete. Your new lender will pay off your existing lender, but it may take time to process.
Always continue paying your original lender on time; failing to do so could result in additional fees and negatively affect your credit. You’ll receive documentation when the new lender has fully paid off the original loan.
6. Set up automatic payments for your new loan
Now that you’ve officially refinanced your student loans, it’s important to make your loan payments on time each month. Setting up automatic payments for your new loan is one of the easiest ways to prevent a missed monthly payment. Some lenders will even offer a discount for setting up automatic payments. You can always choose to pay more than the minimum each month if you’d like to pay down your balance faster.
Student loan refinancing vs. student loan consolidation: What’s the difference?
After you’ve learned how to refinance student loans, you may be curious about another option: student loan consolidation. Consolidating is not the same as refinancing, and it’s important to know the differences between the two before choosing either option. Refinancing your loan is the act of paying off an existing loan (federal loans, private loans or a combination of both) by replacing it with a new loan through a private lender.
Student loan consolidation combines multiple federal student loans into a single federal Direct Consolidation Loan. Your interest rate will be a weighted average of all your existing federal loans, so you might not receive a lower rate. But you’ll only have one monthly payment, so this can make it easier to manage your student loan debt. You can’t consolidate private student loans into a federal Direct Consolidation Loan.
Can I refinance both federal and private student loans?
Yes, you can refinance both federal and private student loans. This option may be beneficial if you anticipate paying off your student loans in full. But refinancing federal student loans into a private loan has downsides — by refinancing with a private lender, you’ll lose any federal benefits and protections that come with your federal loans, including income-driven repayment plans and Public Service Loan Forgiveness. Think carefully before refinancing a federal student loan.
What are the requirements for refinancing student loans?
No matter which lender you choose, you’ll have to meet certain requirements to refinance your student loans. While specific eligibility requirements vary by lender, here are the factors that most lenders consider:
- Credit score — To qualify for approval, lenders will assess your credit score. The higher your credit score, the better rate you’ll receive.
- Credit history — Lenders will also assess your credit history, specifically looking at your history of making on-time payments.
- Debt-to-income ratio — Your current outstanding debts, such as credit cards, mortgage loans and auto loans, will also be assessed.
- Income level — Many lenders will want to see that you’re consistently earning above a specific income level before approving your refinance.
- Minimum loan amount — Some lenders require a minimum loan amount to qualify for refinancing.
You can compare student loan refinance rates with Credible, and it won’t affect your credit score.
Student loan refinancing pros and cons
Just as taking out your initial student loans had its advantages and drawbacks, you must also be aware of student loan refinancing pros and cons. Reference these points when deciding if refinancing is the right move for your financial future:
Pros of student loan refinancing
- Shorter loan terms — With a new loan, you may be able to choose a shorter repayment term. Changing your repayment period from 30 to 20 years can reduce the total amount of interest you’ll pay.
- Single monthly payments — Repaying your student loans on time is critical to your financial health. Refinancing can offer you a single monthly payment that’s easier to manage.
- Cosigning potential — You have the ability to add a cosigner to your new loan, which can improve your chances of getting approved and receiving a lower interest rate.
Cons of student loan refinancing
- Longer payoff periods — While a new loan may lower your monthly payment, it could potentially lengthen your repayment term, which means you’ll pay more interest over the life of the loan. If your budget allows, you may benefit from paying a higher monthly payment over a shorter repayment period, which will help you save on interest and pay off your student loan debt faster.
- Unchanged interest rates — Although you can potentially refinance your loan for a lower interest rate, the rate you’re offered may not make a significant difference in the long run. For example, moving from a fixed rate of 6% to a rate of 5.5% will lower your overall payments, but not by much. In this case, refinancing your student loans might not be worth it.
- May not qualify — There’s no guarantee that you’ll be approved for student loan refinancing, even with a cosigner. If you were relying on refinancing to free up some money in your budget, you may have to choose another financial strategy instead.
What credit score do I need to refinance my student loans?
Credit score requirements for refinancing vary from lender to lender, but you can never have too high of a score. You’ll typically need at least good credit to qualify. Many lenders want to see a credit score above 600 for minimal approval and above 700 to offer the lowest interest rates. If you have a low credit score or no credit history, adding a cosigner may help you get approved for a refinancing loan and secure a lower rate.
If you’re ready to refinance, use Credible to compare student loan refinance rates from various lenders in minutes.
Will student loan refinancing hurt my credit?
Whether student loan refinancing will hurt your credit depends on the type of credit inquiry that takes place when you apply: a hard inquiry or a soft inquiry. When you apply for prequalification, lenders typically run a soft inquiry, which won’t hurt your credit score. When you formally apply for a loan or other credit product, the lender will run a hard inquiry, which may temporarily lower your credit score by a few points.
Refinancing your student loans may lower your credit score temporarily because it will involve a hard credit pull. But paying back your loans on time will help you maintain your credit score, and even improve it over time. Keep in mind that missing payments or defaulting on payments can have a substantial negative impact on your credit score.
Can I refinance my student loans more than once?
You can refinance your student loans more than once, but it’s not the right decision for everyone. Refinancing may be a good option if lowering your monthly payments can help you reach other financial goals, such as saving for a down payment on a home. You may also want to refinance if your goal is to pay off your loans faster over a shorter term. Some borrowers find it helpful to refinance by cosigning with their spouse so that they can receive the lowest interest rates available.
It may not be wise to refinance your student loans multiple times if you won’t receive substantial savings from month to month or over the life of the loan. Keep in mind that frequent hard credit inquiries will lower your score, affecting your ability to get the best refinancing rates.