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To Refinance or Not to Refinance Student Loans?

Please read carefully while considering to refinance your federal student loans:

Due to recent events, including an executive order by the President to waive federal student loan interest during the COVID-19 crisis, we are recommending that all customers with federal student loan debt carefully consider their options before refinancing with a private student loan. Customers should explore all available resources at their disposal to understand how the executive order may impact you. Additional proposals by congress have also been announced that may impact customers with federal student loan debt. When you refinance, you waive any current and potential future benefits of your federal loans and replace those with the benefits of the Education Refinance Loan.

Please carefully review your current and potential future benefits on your federal loans before refinancing.

Key Takeaways

  • Refinancing allows you to consolidate higher-interest loans into a single loan with a lower interest rate.
  • You can refinance both private and federal student loans with a private lender.
  • Refinancing federal student loans with a private loan may cause you to forfeit benefits of federal loan programs, including income-based repayment and loan forgiveness.

By Gina Gallagher | Citizens Bank Contributor

The lessons you learned in college will last you a lifetime. What shouldn’t last forever are those high monthly payments on your student loans. However, there may be a way to get some relief: refinancing your student loans. But is refinancing your student loan debt a smart idea for you?

To answer that, you need to do a little homework (yep — that again!) by reading on to see what refinancing is all about.

What is student loan refinancing?

When you refinance your education loans, you’re using funds from one private lender to pay off higher-interest loans you have with other lenders. The result is having one new loan that offers a lower interest rate.

The loans you pay off could be private student loans with other financial institutions or even federal loans you have with the government. They also could be from a federal parent PLUS Loan. Keep in mind, though, that refinancing federal loans with a private lender could result in forfeiting some of the benefits available with federal loans. (More on that later.)

How does the application process work?

When it comes to getting a refinance loan, you have lots of options, including banks, credit unions, and other lending institutions. Interest rates will vary by lender. To start the process and determine your rate, you'll be asked about existing education loans in your name and those for which you have cosigned. The lender will review your credit profile for eligibility to provide rates and terms. This initial credit check will be a “soft credit pull,” which will not impact your score. The rates you'll receive are based on your credit and may include a combination of variable and fixed rates. Keep in mind that variable rates are subject to change and may be tied to LIBOR, a benchmark interest rate. When you do apply with a lender, a hard inquiry will be made on your credit report, which could impact your credit score.

Student loan refinancing is about saving money

If you’ve heard a lot of buzz about refinancing student loans, there’s a good reason why: It could potentially save you a lot of money. For example, suppose you have $25,000 in private student loans at an interest rate of 7% with a 10-year repayment period. Your monthly payments would be $290. If, however, you refinanced that loan at a fixed interest rate of 4% for the 10-year term, your monthly payment would drop to $253, saving you $37 a month. While that may not seem like a huge savings, you would save quite a bit over the life of the loan — $4,459.

Pro tip: Use our loan refinancing calculator to see how much you could potentially save.

New loan terms and other benefits of refinancing

There are other ways refinancing can save you money. You won’t have to pay origination fees to get the loan or prepayment fees if you want to make extra payments. Plus, you can enjoy other benefits:

  • Converting variable-rate loans to a fixed rate. A lot of education loans offer variable interest rates that are subject to change if interest rates rise. Those higher rates mean higher monthly payments for you. Refinancing to a fixed-rate loan offers the peace of mind and predictability of fixed monthly payments, making it easier to budget.
  • One loan payment. If you have multiple existing loans with multiple lenders, consolidating them into one loan can make your life a little easier. Instead of making multiple payments to multiple lenders each month, you’ll only have to make one single monthly payment to your loan servicer. You can even sign up for automatic payment to make paying even more convenient.
  • Faster repayment options. With an interest rate reduction, you may be able to lower the repayment term while still paying the same amount, since more of your payment will go toward the principal.
  • The opportunity to remove a cosigner. If you have a cosigner on your student loans, and don’t have the option for a cosigner release, refinancing could allow you to remove your cosigner, thereby allowing you to build up your credit score and gain financial independence. Keep in mind, however, that if your cosigner has a better credit report than you and you refinance on your own, you’ll likely end up paying a higher interest rate.

What you need to qualify for student loan refinancing

To refinance your education loans, you’ll need to meet certain criteria:

  • Good credit history: In general, private lenders will require you to have a FICO score in the high 600s or 700s. You could, however, still refinance with a cosigner who has a good credit score.
  • Sufficient income: Lenders have a fancy term to determine that: your debt-to-income (DTI) ratio, which is basically the percentage of debt you owe relative to your income. In general, lenders will require a debt-to-income ratio of 50% or lower. If your DTI ratio is 20%, they’ll love you even more.
  • A solid payment history: When you lend money to someone, you want to know they have a history of paying back their debt. Lenders think the same way. So if you have a history of not paying student debt on time, you likely won’t be granted your refinancing request.
In addition, some lenders may require you to be a U.S. citizen.

Before you refinance those federal student loans…

When you refinance or consolidate your private student loans, you’ll do so with a private lender. That lender will allow you to consolidate all your private loans as well as your federal loans. But while having just one loan payment offers many benefits, it may not make sense for you to refinance and consolidate your federal loans. The reason? Federal loans come with some attractive benefits — and refinancing them to a private loan could result in forfeiting them.

One such benefit includes income-driven repayment plans. Say, for example, you decide to make a career change and expect your income to drop. If you have a federal loan, you may be able to have your current loan payments reduced. If you were to refinance your federal loan to a private loan, you would lose that opportunity.

Another federal loan benefit you could lose is loan forgiveness. If you work in certain types of public service jobs, you could be entitled to have portions of your federal loans forgiven. You won’t have that forgiveness if you consolidate your student loans with a private loan.

The chart below highlights some of the benefits available with federal loans. Make sure you understand them before you consider refinancing your federal loans with a private loan.

Potential federal loan benefit

What to think about

Income-based repayment

  • Some federal student loans entitle you to a lower monthly payment if you have a low income.

Loan forgiveness for borrowers in certain public service jobs

  • Borrowers in certain types of public service jobs (government jobs, teaching jobs, the military, AmeriCorps, Peace Corps, and many other nonprofit jobs) may be entitled to have portions of their federal loans forgiven.
  • Most private lenders do not offer loan forgiveness.

Military benefits

  • Active duty military personnel are eligible for several federal loan benefits. However, some private lenders also offer military deferment and an interest rate cap.

Longer medical and economic forbearance plans

  • These plans may excuse repayment of federal loans for up to 24 months in the event of medical or economic hardship, which is more than what private lenders offer.

Defaulted loan options

  • You have options to remedy any defaulted federal loans, such as rehabilitation, consolidation, or repayment in full.

Employee repayment benefits

  • Some employers, including certain public agencies and the military, include payments on federal student loans in their employee benefits package.

Loan forgiveness (if your school closed or committed fraud related to your loans or educational services)

  • In rare circumstances, federal loans may be forgiven by the Department of Education if your school has closed or if you were defrauded by your school.

If these benefits are important to you, the federal government offers the Direct Consolidation Loan for consolidating federal loans. Student loan consolidation could allow you to maintain some of the federal benefits, though the rate you would receive would not be lower.

On the other hand, when it comes to refinancing private loans, you really have little to lose. In most cases, it costs nothing to refinance. Plus, you could potentially save thousands of dollars in interest payments and lower your debt-to-income ratio, which will be important when you need to apply for other loans in the future (such as a mortgage).

Put your refinancing knowledge to the test

Think you’ve learned a little more about refinancing? Take out your figurative No. 2 pencil and answer the following frequently asked questions:

Ready to see if refinancing makes sense for you?

Visit our student loan and refinancing center for more information on refinancing your student loan debt. You can also call 1-888-411-0266 to speak with a Student Lending Advisor. We’re ready to provide the unbiased advice and guidance you need.

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