When shopping around to refinance your student loans, one piece of information that is not usually available is the interest rate you’re eligible to receive. You can usually find a range of interest rates offered by a lender on their website, but because rates are typically based on credit scores, you may not know the exact rate you qualify for until you apply and are approved.
The closest estimation you can make when shopping for a loan is with an interest rate quote. Some lenders, like Citizens Bank, offer shoppers their interest rates and potential savings without submitting a full application. A quoted rate can be a great help when shopping for a loan, allowing you to closely estimate the potential cost of a loan without submitting an application or impacting your credit. Only after you have submitted an application will an inquiry be made on your credit report.
When it comes to student loans you need your total amount of student debt, current monthly payment, the length of time you have to repay, and the interest rate in order to estimate and compare the cost of your repayment options. You may also need to indicate the highest level of degree you have earned, as some lenders offer different rates based on the type of degree you have.
To give you examples of how you may be able to adjust your budget by refinancing, we’ll take a look at Sam, who’s shopping for a refinance loan. Remember, these are only examples; the interest rate, repayment term, and monthly payment options you qualify for will be based on your credit – and your co-signer’s credit, if you apply with one.
Sam is 26 years old, is living with his parents and currently has three separate student loans with a combined total balance of $50,000. Each loan has a variable interest rate at 6% and a 10 year repayment length, which requires him to make a total of $555.10 in student loan payments each month. His goal is to lower his monthly payments and debt-to-income ratio as he prepares for the rent or mortgage payment on a new home.
During his research for a refinance loan, one lender offers a rate quote along with the estimated costs and monthly payment amounts he could receive by refinancing. Here are the repayment options he finds:
|Repayment Length||Interest Rate Type||Interest Rate||APR||Monthly Payment||Total of Payments||Estimated Monthly Savings|
While reviewing the results, Sam notices that choosing the longest time to repay the loan leaves him with the smallest monthly payment – creating the room in his budget he wanted. He also finds that choosing a longer time to repay leads to a higher overall cost, which is important to consider when deciding to refinance. The chart below gives a simple view of the correlations between the length of time to repay, interest rate, and overall cost. In Sam’s situation, he would want to focus on the 15 and 20 year repayment lengths for the smallest monthly payments.
Now, let’s see how Sam would approach his research under different circumstances. Suppose he’s older and, after helping his daughter pay for her education, has the same amount of student loan debt. With a bit more room in his budget and an eye on preparing for retirement, Sam researches the potential of refinancing to reach his goals sooner. Once again, Sam finds a lender that offers him a rate quote with the same results above.
With his focus being the lowest overall cost and paying off the debt faster, Sam hones in on the shorter repayment lengths. While the monthly payment for the shortest term is much higher than his current payments, he notices the total cost of borrowing is much lower than the longer repayment lengths. Based on the examples above, Sam would pay about $30,000 less in total by choosing the 5 year loan compared to the 20 year option.
While variable interest rates are often lower than fixed rates – as you can see in the example results – there is always the potential for the variable rate to fluctuate over time, making it impossible to accurately calculate how much interest you can expect to pay over the life of the loan. All of Sam’s current loans have variable interest rates so his goal for refinancing could be to make the repayment of his debt more predictable by moving to a fixed rate.
With many of the variable rate indexes on the rise, this potential benefit of refinancing has become increasingly attractive. To give you an idea of how things have changed, the one-month LIBOR (the variable rate index for many student loan lenders) was at 0.20 in November of 2015, but in a little over a year it increased to 0.76 for January 2017. That means any variable rate loan that uses the one-month LIBOR is racking up 0.56 percentage points more interest than it was in late 2015. One way Sam could potentially ease his concern of rising rates in the future is by refinancing his student debt into a fixed rate loan. Then if variable rates decrease in the future, Sam could always refinance his loan again and choose the variable rate.
Whether you find yourself in a scenario similar to these, or you have a completely different financial goal in mind, getting a rate quote can make shopping for a refinance loan much easier. Without knowing the interest rate you can expect to receive, estimating the cost of a loan is a shot in the dark. Once you have a rate quote you’ll be able to run the numbers for any scenario you can think of, and you’ll be more confident when you make the decision to apply and choose your new repayment terms. Click here to request an interest rate quote for the Education Refinance Loan.
Another key point to remember when shopping for a refinance loan is that not all loans are the same. Each loan option has its pros and cons; it’s up to you to decide which option is the right fit for your situation. Regardless of your financial goal, it’s always important to consider the rates, terms and benefits of your existing loans before refinancing. Check out "Should I Refinance?" to learn more about the potential trade-offs associated with refinancing student loans.