People choose to refinance their student loans for a number of reasons. Some are seeking a lower interest rate or a different loan term, while others want to consolidate several monthly payments into one.
Refinancing can be beneficial, but it’s important to understand how the process works, what questions to ask prospective lenders beforehand, and eligibility requirements. Here’s what to know if you’re thinking about refinancing your student loans.
How does refinancing work?
Consolidation and refinancing involve replacing one or more loans with a single loan. However, you have different options depending on if you have federal student loans, private student loans, or both.
The U.S. Department of Education (DE) offers consolidation, a type of refinancing, through a Direct Consolidation Loan, which may be a helpful choice if your primary goal is to simplify your monthly payments while keeping the federal benefits associated with your student loans.
The DE does not consolidate federal and private loans together, but many private lenders offer that option. With private student loan refinancing, you can also have more choice over your rate and term of repayment. If you choose to refinance with a private lender, remember that you lose eligibility for federal benefits such as federal loan forgiveness or an income-driven repayment plan.
6 Questions To Ask Lenders Before Refinancing Your Student Loans
1) Is the interest rate fixed or variable?
With a fixed interest rate, your rate and monthly payments will stay the same over your loan’s term. But with a variable rate, they can increase or decrease. Generally, a student loan with a fixed interest rate is a wise choice if you’re more risk averse and want predictable payments. But a variable rate could work well if you’re comfortable with some potential risk and want the flexibility to benefit from possible rate decreases. Before choosing a variable rate loan, consider whether you can afford higher payments if interest rates spike for months at a time.
2) What loan terms do you offer?
Lenders typically offer repayment terms ranging from five to twenty years. Choosing a longer term typically lowers your monthly payments but may increase the total interest you pay, whereas shorter terms often lead to higher monthly payments with potentially lower overall interest costs. If your goal is to reduce your overall loan costs, a shorter loan term may be the better option. Carefully weigh how much you can afford to pay each month and then assess what a feasible loan term would be based on your budget.
3) What is the minimum or maximum amount that can be refinanced?
Many lenders may have a minimum or maximum amount that borrowers can refinance. For instance, you might only be able to refinance a maximum of $30,000 worth of student loans.
With ELFI, borrowers must have at least $15,000 in student loan debt to qualify for refinancing. Maximum refinancing amounts are at the lender’s discretion and are typically determined by the borrower’s education level and schooling, debt-to-income ratio, and credit score.
4) What fees do you charge?
Some lenders may charge origination and application fees and prepayment penalties. Before applying for a loan, ask prospective lenders which fees they charge. Avoiding lenders with high fees can help you keep more money in your pocket, and you won’t be penalized if you decide you want to repay your loan early. Note that ELFI doesn’t charge any origination, application, or prepayment fees.
5) Is my degree or school eligible?
Some banks and financial institutions restrict which type of degrees and what schools are eligible for educational loans. For instance, to qualify for a refinance with ELFI, applicants must have earned a bachelor’s degree or higher from one of these approved post-secondary institutions.
6) Can I use a cosigner?
A cosigner with good or excellent credit could help you qualify for a lower interest rate, depending on your situation. This person can be a trusted family member or friend who cosigns your new refinance loan, agreeing to pay it back if you default. Your lender will consider their credit in addition to yours when you apply. Applying with a trusted cosigner could be helpful if you have a thin credit file or poor credit.
What Do Lenders Require to Refinance?
When you apply for a student loan refinance, your lender will look at several things to determine if you qualify.
Here’s what they typically consider:
- Immigration status
- Age
- Credit score
- Income
- Debt
Borrower requirements vary by lender. And unfortunately, some lenders are vague about their refinancing criteria. By contrast, ELFI offers transparent eligibility guidelines. To qualify for refinancing or student loan consolidation through ELFI:
- Must refinance at least $10,000 in student loan debt.
- Must have graduated with at least a bachelor’s degree from a Title IV non-profit college or university.
- Must be a U.S. citizen or permanent resident.
- Must be at the age of majority or older at the time of the refinance.
- Must have a debt-to-income ratio and credit score that fall within our proprietary qualifications.
- Check out our eligibility requirements to see if you could qualify for refinancing.
Final Considerations
Refinancing your student loans might save you money if you’re able to qualify for a lower interest rate. Just remember you can lose some federal benefits if you decide to refinance federal student loans with a private lender. And be sure to ask prospective lenders about their fees, requirements, terms, rates, and more to find the best loan for your situation. If you’re considering refinancing with ELFI, see what you could save by using our Check Your Rate tool.
