Lower rates. Lower monthly payments. Refinancing student loans sounds like a sure thing, right? For many of you, consolidating and refinancing student loans can be a prudent strategy to save money on your student loans and lower your monthly payment. However, despite all the options and choices, the student loan refinance process doesn’t have to be daunting.
No worries! Let’s simplify the process and break it down so it easier to digest. And most importantly, so you can start saving.
1. Am I Good Candidate To Refinance My Student Loans?
When you first borrowed your student loans, you may have had both a federal student loan and a private student loan. Your federal student loan is likely at the same high rate as everyone else’s federal student loan, since the federal government offers the same fixed rate to all borrowers. If you have a private student loan, it likely is a variable rate loan with a high interest rate. This is because when you borrowed that loan, you were in school and you may have had a limited credit history, which meant that your student loan company deemed you a higher credit risk.
Now, you may have graduated, become employed, and developed a stronger credit history. As a result, you may be able to qualify to consolidate and refinance your existing federal student loans and private student loans into a new private loan with a lower interest rate.
If your goal is to obtain a lower interest rate, lower your monthly payments, switch from a variable interest rate to a fixed interest rate (or vice versa), or change the loan term to a longer to shorter number of years to repay your loan, then you may be a good candidate to refinance student loans.
The federal government, through the U.S. Department of Education, does not refinance student loans. However, you can refinance both federal student loans and private student loans with several private student loan companies.
2. Should I Choose A Fixed Interest Rate Loan Or A Variable Interest Rate Loan?
It is really a personal choice and should be considered along with your finances, loan amount and loan term.
If you like the predictability of paying the same amount each month and don’t want to worry about your monthly payments potentially changing each month, then a fixed rate loan is probably best for you. Plus, if you plan to pay off your loan over a longer time period (e.g., 10-20 years), then you may prefer to lock in your interest rate now and not be impacted by changes in interest rates in the broader market.
Variable interest rate loans are typically priced lower than fixed rate loans and can offer more savings initially. If you plan to pay off your loans over a shorter time period (e.g., 10 years or less), then you may prefer to choose a variable rate loan. However, if interest rates rise, then you should be prepared to make higher monthly payments and pay higher total interest over the life of the loan.
3. Do I Have To Pay An Origination Fee?
By the way, what is an origination fee? An origination fee is a charge upfront from the student loan company to process an application for a new loan.
Most student loan companies do not charge an origination fee to refinance your loan. Why? Well, it is hard to justify charging a customer for an origination fee when you already have an existing student loan and are just refinancing the student loan to a lower interest rate.
Some student loan companies do charge an upfront origination fee on “in school” loans (typically 2% or less), which are loans that one borrows while one is a student.
4. Can I combine my federal student loans and private student loans when I refinance student loans?
Yes, you can combine federal and private student loans with certain student loan companies when you refinance student loans. You also may be able to refinance student loans that you previously consolidated with the federal government through the U.S. Department of Education (e.g., Direct or FFEL) or a private student loan company.
Double check with your lender when you refinance your student loans to make sure. Also, when you refinance your federal student loans, you lose most flexible student loan repayment plans and other protections connected with a federal student loan. That said, some student loan companies offer flexible student loan repayment plans, including deferment forbearance.
Again, you should check with your new prospective student loan company and be sure to ask the new student loan company the differences between your new, refinanced student loan and your existing federal student loan.
5. Will I Need A Co-Signer For My Student Loans?
If you have a limited credit history, you may need another creditworthy person (e.g., a parent, spouse, relative or friend supportive of your educational goals) to help you qualify for a loan. A creditworthy cosigner is one who has strong credit and an ability to repay the loan.
The benefit of a co-signer is that a lender considers the income and credit history of both you and the co-signer, which improves your chances of being approved for a student loan. A co-signer is equally responsible with you for the loan obligation.
Some lenders offer a co-signer release, which means that a co-signer can be “released” from your student loan and would no longer have an obligation to pay your student loan.
6. Is my school or degree eligible for student loan refinance?
Be sure to check the student loan company’s website or call the student loan company’s customer service team to check school and degree (and other) eligibility requirements. For example, many private lenders lend to student loan borrowers from accredited Title IV university and graduate programs. Title IV schools are higher educational institutions eligible to offer federal student loans to its students under Title IV of the Higher Education Act of 1965.
Each student loan company has different eligibility criteria to refinance student loans, which may include being a U.S. citizen or permanent resident, your employment status, historical financial responsibility, and income and expenses, among other factors.
7. Can I get an autopay discount?
Yes! Most lenders offer up to 0.25% discount off your student loan interest rate if you sign up for auto pay. This means you receive an interest rate reduction of 0.25% on the total amount of your student loan so long as you authorize the loan servicer to automatically deduct monthly payments from your bank account. For example, if your interest rate on your new loan is 3%, you can lower your interest rate on your new loan to 2.75% (which is equal to 3.0% – 0.25% discount) for the life of the loan so long as you remain signed up with auto pay.
8. What will my monthly student loan payments look like?
Hopefully lower than what you are currently paying! You are in the driver seat – so you should consider a student loan that fits your personal and financial needs. Your monthly payment is primarily a feature of your interest rate, loan term and loan amount.
- Fixed Interest Rate. If you have a fixed interest rate, your monthly student loan payment will remain constant each month for the duration of your loan.
- Variable Interest Rate. If you have a variable student loan payment, your monthly loan payment may change each month based on the underlying benchmark such as 1 Month LIBOR.
- Shorter-Term Loan. If you have a shorter-term student loan (e.g., 10 years or less), your monthly payments may be higher than if you have a longer-term loan (more than 10 years) because you have a shorter period to pay off the loan.
- Longer-Term Loan. The longer the term of your loan (e.g., the number of years to pay back your loan), the more interest that will accrue over time and the more interest you will owe.
So, you should decide how much you can afford to pay now versus over time and find the loan product that works best for your personal and financial needs. And remember – most student loan companies offer up to 0.25% discount off your interest rate if you sign up for auto pay. The autopay savings can really add up.
9. How much time will I have to repay my student loan?
That’s entirely up to you. Most lenders offer a variety of terms for student loan repayment that range from 5 to 20 years. You will want to think about your financial situation today and if you want to have lower payments and spread out your student loan payments over a longer time period, or whether you want relatively higher loan payments each month so you can pay off your loan faster.
For example, with a fixed rate student loan, you will have higher monthly payments with a 10-year loan compared to a 20-year loan, but you will save 10 years’ worth of interest costs by paying your loan off in 10 years (rather than 20 years).
10. What is the maximum student loan amount that I can borrow?
Each lender’s maximum student loan amounts vary, but some student loan companies have no maximum limit.
11. After I refinance my student loans, what kind of customer service can I expect?
This should be one of your top questions. Since you will be tied to this student loan company for a long time (think 20 years if you have a 20-year loan), you need to make sure the student loan company is attentive, available and answers your questions promptly. Are they friendly when you call? Are they patient in answering questions? Are they accessible via phone, email and/or chat? Are they problem solvers? Do they want to make your life easier?
Overall, you should make sure you are comfortable with the student loan company’s customer service team.
12. After I refinance my student loan, what if the student loan company sells my student loan?
It happens – and a lot more than you think. You may refinance your student loan with a new lender, start getting comfortable with the new lender, and wham – you receive a letter in the mail stating that your student loan has been sold to a new student loan company. Suddenly, thoughts run through your head. Why me? Was something wrong with my student loan? Have I been tricked? Where are they sending me? Will this now change the terms of my student loan?
All reasonable questions. The short answer is…don’t worry.
It is very common for even the best student loan companies to originate a new student loan or refinance student loans only to sell that student loan to a third party down the road. Loan sales is one of the way that student loan companies make money and is a very common legal practice in the student loan industry. If your student loan is sold, you likely were not singled out. Rather, your student loan was likely sold with other student loans in a group sale transaction.
When a student loan sale is made, the terms of your student loan do not change based on the sale itself. Even if you have a new student loan company who purchased your student loan, that new student loan company is required to adhere to your existing student loan terms.
You should focus on whether the servicer of your student loan will change. The servicer is the company (which may be a third party or your original student loan company) that collects payments on a student loan, responds to customer service inquiries, and performs other administrative tasks associated with maintaining a federal student loan on behalf of a student loan holder.
In any event, if your student loan is sold, don’t worry. Contact your existing student loan company and new student loan company and have them walk you through the details. This is a normal occurrence within the private student loan sector and often times does not impact your student loan repayment experience.
13. What if I lose my job during the student loan repayment period?
It’s a scary thought. Here you are: you just took on this large student debt load (albeit at a lower interest rate) and then you unfortunately lose your job. Now, you need to figure out a way to deal with the monthly student loan repayment without any income coming in the door.
The good news is that most federal student loans and some private student loans are eligible for some form of relief – student loan repayment programs such as student loan deferment or student loan forbearance while you get back on your feet during a period of temporary financial hardship. For example, you may be able to decrease monthly payments or even suspend payments during a limited time period. However, interest may still accrue during this period, even if you are not required to pay it.
Some student loan companies will even help you find a job if you lose your existing one. You should check with your prospective student loan company to learn more about what happens if you lose your job and face a temporary financial hardship.
14. Are there any prepayment penalties if I want to pay off my student loan faster?
Most of the private student loan lenders now have no prepayment penalty. So if you can pay off your student loan faster than what is required, then way to go.
15. How long does it take for my student loan application to be approved and funded?
Most private student loan companies will provide you with a preliminary interest rate offer within 2 minutes. After you receive that offer, you can start uploading any financial documents that the lender requires (e.g., pay stubs or proof of income) and other documents like your diploma or proof of graduation. Typically, the approval and funding process can be completed within weeks and is based on how quickly you can provide the requested documents to complete your application.