Over the past few years, student loan interest rates have fluctuated significantly. Depending on when you took out your loans and your credit score at the time, you may have a rate in the double digits. Such a high rate can affect your payment amount, and you’ll pay much more than you originally borrowed over the life of your own.
One strategy you can use to manage your debt is student loan refinancing — an approach that can change your rate and adjust your payment amount. By learning how student loan refinancing works and what types of borrowers can benefit from it, you can decide whether it makes sense to refinance your debt.
What Is Student Loan Refinancing?
Student loan refinancing is a process where you work with a private lender to take out a new loan for the amount of your current student loans. You use the new loan to pay off your existing loans, effectively replacing them with another loan.
Refinancing combines your other student loans into one, easy-to-manage loan, with one loan payment to manage. The process also allows you to change your loan terms. When you refinance your debt, you could qualify for a different interest rate, repayment term, and monthly payment amount.
Reasons to Refinance Your Student Loans
Student loan refinancing can make sense in the following scenarios:
1. Your Income Increased
If you’re making more money than you were when you took out your student loans, then your debt-to-income ratio has likely improved. Many lenders include a minimum income as part of their student loan eligibility requirements to ensure the payments will be feasible.
If you’ve already refinanced your student loans, but have since earned a significant pay increase, then you can refinance again for a chance at a better interest rate. There’s no limit to how often you can refinance your student loans.
2. Your Credit Score Has Improved Since College
While federal student loans give the same rates to borrowers regardless of their credit scores, that’s not the case for private student loans. With a private student loan, your rate is dependent on your credit history and credit score.
If, after working and building your credit, your score has improved, you can refinance and potentially qualify for a lower interest rate. Over time, that lower rate can help you save a substantial amount of money.
Most student loan refinance companies will require a minimum credit score for refinancing approval, so be sure to seek that information out before applying.
3. Overall Interest Rates May Be Lower
Student loan rates are tied to a variety of economic factors, including the Federal Funds Rate, commonly referred to as the Fed. When the Fed rate decreases, rates on loans tend to follow suit.
If the Fed rate was high when you initially took out your loan and has since dropped, you could refinance and qualify for a lower rate.
4. You Don’t Qualify for Loan Forgiveness or Income-Driven Repayment
Student loan refinancing can be an especially great fit if you aren’t relying on federal benefits, like income-driven repayment, or working toward Public Service Loan Forgiveness (PSLF). If you are utilizing federal student loan benefits, think twice before refinancing, as you’ll lose them after refinancing your student loans. If you aren’t eligible for those benefits or only have private loans, refinancing can make sense.
5. You Want to Simplify Repayment
You likely took out several loans to pay for your education. According to Saving for College, the typical bachelor’s degree recipient has eight to 12 loans by the time they graduate. Managing that many loans can be overwhelming; you have to juggle different loan amounts, rates, loan servicers and payment due dates.
Refinancing your debt streamlines your debt by consolidating your loans together. Going forward, you’ll have just one loan account to manage.
6. You Need a Lower Monthly Payment
If your student loan payments are unaffordable, refinancing may help. You could refinance and potentially secure a lower interest rate, or you could choose a longer loan term. With these options, you may be able to reduce your monthly payment amount and free up cash in your budget.
7. You Want to Switch Interest Rate Types
While federal student loans only have fixed interest rates — meaning the rates stay the same for the life of the loan — private student loans can have fixed or variable rates. Variable rates can change along with economic conditions, so they can increase over time. Refinancing allows you to convert your variable-rate loan to a fixed-rate loan, or vice versa.
8. You Want to Release a Co-Signer
As a college student, you likely had a limited credit history and limited income, so you probably needed a co-signer to qualify for private student loans. Co-signers are legally responsible for the loans until they’re paid in full. Not all lenders offer co-signer releases, so one of the only ways to remove the co-signer from the loan is to refinance it solely in your name.
If you meet the lender’s eligibility requirements, you can qualify for refinancing on your own and remove your co-signer.
Student Loan Refinancing Process
Refinancing is a straightforward, simple process. You can refinance your loans in a few steps:
- Choose which student loans to refinance: You can refinance all of your loans, or just a few. For example, if you have both federal and private loans, you may opt to refinance only your private debt, and leave your federal loans untouched.
- Explore interest rates with multiple lenders: Some lenders, such as ELFI, allow you to get rate quotes without affecting your credit score. These tools are a great way to shop around and view potential interest rates.
- Choose a lender: Once you find a loan option that fits your needs, you can fill out an application. You’ll typically need to include your college information, details about your employment and income, loan statements and consent to a hard credit check. The lender will review your application and notify you of its decision; the review process can take a few days.
- Review the loan agreement: If the lender approves your application, the lender will send you a loan agreement outlining the terms of the loan. Review it carefully, checking the rates, fees, and repayment terms. If all of the details look good, sign and return the agreement.
- Continue making payments: Once the loan agreement is sent back, the lender will work with your existing loan servicers to pay off the current loans. The process can take a few weeks; until you receive a notification that the loans have been paid in full, continue making the required monthly payments to avoid late payment fees.
Avoiding the Risks of Refinancing Student Loans
Although refinancing can be advantageous for many borrowers, there are some drawbacks to keep in mind:
- Not everyone qualifies for a lower rate: Some borrowers can qualify for a lower rate, but not all borrowers will. Depending on your loans’ current rates and your credit, you may not be eligible for a lower rate, and refinancing won’t help you save money.
- Loss of federal protections: If you refinance federal student loans, you’ll convert them into private loans. As a result, you’ll no longer be covered by federal protections like income-driven repayment plans, general forbearance, or federal deferments.
- Customer support varies: Refinancing is provided by private lenders, and customer service levels vary by company. Review lender reviews on TrustPilot to ensure you select a reliable, responsive lender.
Advantages of Student Loan Refinancing With ELFI
Refinancing with a reputable student lender like ELFI can help to avoid many of the common risks. With a focus on customer service, we aim to empower our customers’ student loan repayment journeys. Here are a few of the benefits of refinancing your student loans with ELFI:
- No hidden fees
- No prepayment penalties
- No origination fees
- No application fees
- You can pre-qualify without hurting your credit score
- ELFI’s personal loan advisors will be there to help throughout the process
Use ELFI to Refinance Your Student Loans
You may be pleasantly surprised at how easy it can be to repay your loan faster and more effectively. Doing so can help you avoid the stress of too much student loan debt and enjoy a more prosperous financial life. It can be hard to tell when the best time to refinance your student loan is, so explore our student loan refinancing calculator to determine how much you might save.
