Should I refinance my private or federal student loans? If so, how?

By Gina Gallagher | Citizens 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?

Student loan refinancing consists of taking out a new loan with a private lender to pay off one or more existing student loans. Typically this is done with the goal of securing a new loan with a lower interest rate, although there may be other objectives such as simplifying monthly payments or paying loans off faster.

You may be able to refinance a variety of student loans, such as private student loans, federal student loans and federal Federal Direct PLUS Loans. 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 which loans you are interested in refinancing. The rates that are provided by institutions vary based on credit and other important factors. Refinanced rates can be fixed or variable rates.

Keep in mind that variable rates are subject to change and may be tied to SOFR, a benchmark interest rate. Note that some lenders will offer rate quotes based on a "soft" credit pull, which will not impact your score, but you'll need to complete an application in order to receive a rate offer. When you actually 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.

New loan terms and other benefits of refinancing

There are other ways refinancing could help save you money or simplify your student loan payments, such as:

• 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 may even be able to 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 when you become eligible.

What you need to qualify for student loan refinancing

When applying to refinance your student loans, lenders will review a variety of your factors (and your cosigner's, if applicable) to determine eligibility and interest rates. These factors may include:

• Credit score: A FICO® credit score ranges from 300 to 850, with 850 considered an excellent score.
• Income: This involves reviewing your debt-to-income (DTI) ratio, which is basically the percentage of debt you owe relative to your income.
• Payment history: This is a history of your payments to lenders. Having a history of on-time payments on credit accounts and other debts could help build your payment history and credit score, while missed or late payments could negatively impact it.

In addition, some lenders may require you to be a U.S. citizen.

Before you refinance those federal student loans…

Refinancing with a private lender may allow you to consolidate all of your private student loans and federal student loans. But while having just one loan payment offers many benefits, you need to carefully review the pros and cons before you 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.

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.

On the other hand, when it comes to refinancing private loans, it could be worth exploring. Whatever you decide, make sure to do your research so you can make a fully informed decision that's based on your individual needs and what works best for you.

Ready to see if refinancing makes sense for you?

If you're ready to explore refinancing your student loans, visit us to learn more about the Citizens Education Refinance Loan™. You can get a personalized rate in about two minutes with no impact to your credit score.*