When my husband and I got married, we had over six figures of student loan debt. It wasn’t exactly the ideal way to start our life together.
However, it did force us to have a lot of money conversations early on and make sure we were on the same page with our finances. And for that, I could not be more grateful.
One of the topics of conversation was the fact that, while most of our debt was from federal loans with reasonable interest rates, he had one private student loan with an astronomical interest rate — About 14%. Yeah, that was painful.
One of the first money decisions we made together was to decide to refinance that private loan. With literally only a few minutes of effort, we were able to reduce his rate by about 60%. When we ran the numbers, we found that we were saving ourselves tens of thousands of dollars over the life of the loan.
Refinancing a student loan is an amazing way to reduce your interest rate and save yourself a ton of money in the long run.
In this article, you’ll learn what student loan refinancing is, whether student loan refinancing is the right choice for you, and how to refinance a student loan.
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What is student loan refinancing?
Refinancing a student loan is essentially taking out a new loan to replace your old one. When you refinance a student loan, you take out a loan from a private lender. That lender pays off your existing loan, and you now have a new loan with new terms, a new interest rate, and a new monthly payment.
You can refinance both private and federal student loans, though certain types of loans may make more sense for refinancing.
How do I know if refinancing is right for me?
The primary reason to refinance a student loan is to save money over the life of the loan as a result of a lower interest rate. In the case of Brandon and I, we reduced our loan by more than 60% and saved our future selves tens of thousands of dollars.
Here are some reasons that student loan refinancing might be the right choice for you:
YOU HAVE A LOT OF STUDENT LOAN DEBT
Even with aggressively paying down our loans, it’s still going to take Brandon and me years to pay them off. For that reason, any reduction in interest rate would have been worth it for us. If you know you’re going to be paying down your loans for many years, refinancing to a lower rate is definitely worth it!
YOU HAVE HIGH-INTEREST DEBT
Even if you don’t have a ton of student loan debt, a high interest rate can be miserable. I know far too many people who see their student loan balances increase because of interest! If you have a high rate right now, refinancing is definitely something to consider.
YOU HAVE A STABLE INCOME AND A GOOD CREDIT SCORE
While it would be amazing if everyone could refinance to a lower interest rate, that’s simply not how it is.
Just like qualifying for any other loan through a private lender, refinancing your student loans with a low rate will require you to have a credit score and income that makes you a desirable loan candidate. If you do have an excellent credit score, you may be able to get a really good rate.
How do I refinance my student loans?
Alright, we’ve talked about what student loan refinancing is and when it might be the right choice for you. But how the heck do you actually do it? Luckily, it’s a lot easier than you may think.
STEP 1: REVIEW YOUR CREDIT REPORT
First of all, I definitely recommend doing a quick review of your financial situation before applying for any loans. The last thing you want is to fill out an application and find that your credit score has unexpectedly dropped or that you have a negative mark on there.
Checking ahead of time will help you to avoid any unwelcome surprises. If you check your report and your score has dropped or there’s a negative mark, you may want to take some time to get that ironed out before refinancing.
STEP 2: SHOP AROUND FOR DIFFERENT RATES
Don’t just pick a lender because someone else used them. Spend some time shopping around. Lenders will allow you to fill out a prequalification form, and it only takes a few minutes. That way, you’ll be able to compare a few different offers.
STEP 3: CHOOSE THE BEST OFFER FOR YOUR SITUATION
Once you have all the offers in front of you, you can choose whichever one is right for you. It usually makes sense to go with whichever company offers the lowest interest rate, but make sure to read all of the terms, such as the repayment period and forbearance options.
If you’re shopping for a loan to refinance your student loans, I recommend Credible. You can see rates from more than a dozen different lenders to find the best loan for your situation.
STEP 4: FINALIZE YOUR NEW LOAN
After you choose a lender, you’ll probably have a bit more paperwork to fill out to finalize the loan. Then they’ll handle the process of paying off your old loan, and it’s just a matter of making your monthly payments!
When is refinancing not a good idea?
Refinancing your student loans is an excellent choice for some people. In the case of my husband and me, refinancing his student loan is saving us tens of thousands of dollars over a period of several years.
But it’s also the case that refinancing simply isn’t for everyone. Let’s talk about a few of the reasons why you might be better off not refinancing your student loans. Some of these reasons are specific to people with federal loans, while others apply to anyone.
IF YOU’RE ON THE PATH TO STUDENT LOAN FORGIVENESS
There are several federal student loan forgiveness programs available to individuals working in certain fields, such as teachers and public servants.
However, these programs are only available for federal loans. If you refinance loans with a private lender, you are no longer eligible for those programs. If you think you’ll be able to take advantage of one of those programs, you may be better off not refinancing.
As a note, please do a LOT of research on these programs before you get your heart set on them. Student loan forgiveness is never a guarantee and plenty of people who expected to have their loans forgiven have thus far been denied.
IF YOU NEED AN INCOME-DRIVEN REPAYMENT PLAN
Like so many recent college graduates, I remember being so excited when I learned about income-driven repayment plans. After all, I was a low-paid government worker and wanted to be able to reduce my monthly student loan payment as much as I could.
Then it became clear that the lower my monthly payments, the longer it would take me to pay my loans off. For that reason, I generally don’t recommend income-based repayment plans (or limiting yourself to your minimum monthly payment).
That being said, I recognize that many of us go through situations in life (myself included) when our income is low and we just can’t swing a higher payment. Heck, one of the first phone calls I made after my divorce was to my student loan lender, asking them to lower my payment based on my income.
If you currently rely on an income-based repayment plan to afford your bill each month, refinancing is not for you. Private companies are far less likely to offer these plans.
IF YOU CAN’T QUALIFY FOR A LOWER RATE
The big benefit of refinancing your student loans is to reduce your interest rate. My husband and I were able to reduce his rate by more than 8% by refinancing — We won’t talk about how outrageous it is that his rate was high enough to be reduced that much in the first place.
If you already have a very low rate or you shop around and find that you can’t qualify for a lower one, then refinancing is not for you. You definitely don’t want to refinance for a higher rate!
If your credit history is preventing you from getting a better student loan refinance rate, take the next 6-12 months and work on boosting your credit score so you can try again in the future.
IF YOU MAY NOT BE ABLE TO MAKE YOUR LOAN PAYMENTS
The federal government has programs in place that borrowers can take advantage of if they run into financial hardship and can’t pay their monthly loan payments anymore. Private companies aren’t always so understanding.
If you’re struggling to make your student loan payments and legitimately fear the day is coming when you won’t be able to pay, I wouldn’t refinance from a public loan to a private one.
I can entirely relate to the feeling that you’re never going to get those loans paid off. I understand the anxiety that comes with seeing the amount that you owe increasing each month rather than decreasing because your interest rate is so high.
Trust me when I say: I understand.
Refinancing isn’t for everyone, but being able to refinance your student loan can be a serious game-changer for reducing your monthly payment, reducing your interest rate, and saving yourself a hell of a lot of money in the long run.