Student Loan Refinancing: Is It Right for You?

It's becoming exceedingly rare to meet a person that earned a college degree without having to finance some part (or all) of their education.

Sure, there are some folks who don't have any student debt on account of receiving some help from their family. I also personally know people who were able to financially plan a route where they could pay tuition as they went along by utilizing junior college programs, as well as grants and scholarships. But with the ever-increasing cost of higher education, these types of stories are becoming increasingly scarce.

At the time of this writing, student loans account for more debt than credit cards and auto loans in the United States. Only mortgage debt surpasses student loans among the largest debts for Americans (source). For those who want a college education, student loans have become almost a necessity.

This debt can put real stress on a person's finances. You may have heard the statistic that close to 40% of Americans would be unable to cover an unexpected $400 expense—leaving some people to turn to payday loans for emergency expenses.

If you’re one of the millions of Americans who are struggling to find enough money to pay all of your monthly bills, refinancing your student loans may be an option worth considering.

The benefits of refinancing can include:

• Reduce your monthly payment. Create some breathing room in your budget by paying less each month for your student loan debt.
• Pay off your loans faster. You can either opt for a shorter term or pay extra on the principal since the monthly payment will be lower.
• Pay less in interest over the life of the loan. Reducing your interest rate can make a huge difference by throwing away less money over the life of the loan.
• Reduce your debt-to-income ratio. A lower debt-to-income ratio will help you get approved for a mortgage or other types of loans.

Unlike refinancing a mortgage, student loan refinancing typically won’t cost you anything. There are usually no fees or prepayment penalties to consider, but be sure to check the details of your loan. If you can get a lower rate, it usually makes sense to take it.

When Does It Make Sense to Refinance Student Loans?

If you’re trying to decide if you should refinance, here are the situations where you would benefit:

• You get a lower interest rate. If the interest rate on the new loan is lower than the rate on your current loans, you can save money each and every month. This is the most common reason for refinancing.
• You get a fixed interest rate. If your current loan has a variable interest rate, you may want to get some added security by refinancing into a loan with a fixed rate that won’t change in the future.
• You have solid credit. Typically, you’ll need a credit score of at least 650-680 to qualify for a student loan refinance.
• You want to consolidate. Many students and grads have multiple loans, and that means you’ll need to make several payments each month. You could consolidate multiple loans into a single loan and make just one payment.
• You want to remove a co-signer. If you needed a co-signer on your original loan but now you’re able to qualify on your own, you might want to refinance to remove the co-signer.

When It Doesn’t Make Sense to Refinance Student Loans

Of course, there are also some situations when refinancing isn’t the right choice.

• You’re not finished with school yet. Typically, you’ll need to graduate before you’ll be able to refinance.
• You’re pursuing forgiveness. Private student loans aren’t eligible for forgiveness or relief like federal student loans might be. If you’re pursuing forgiveness, or if you think you might in the future, hold off on refinancing.

Comparing Lenders

Comparison shopping is an important part of the student loan refinancing process. To make it easier for you, here are three leading companies you can check to find the best rate.

CommonBond

CommonBond makes the refinancing process very simple. In just a few minutes you can see the rate you’ll get. You don’t need any documents to get the quote and it won’t impact your credit score.

Features of CommonBond include:

• Fixed rates, variable rates, and hybrid rates.
• Set up automatic payments and get a 0.25% discount.
• Get up to 24 months of forbearance over the life of the loan.
• No fees and no prepayment penalties.

Additionally, CommonBond has a partnership with Pencils for Promise. For every loan or refinance, CommonBond will cover the costs of education for a child in the developing world.

Education Loan Finance (ELFI)

Like CommonBond Education Loan Finance also makes it easy to get your quote with just a few minutes of your time. It’s free and requires no commitment, so there’s really no reason not to check and see what rate you can get.

Features of ELFI include:

• Fixed rates and variable rates.
• Terms for refinances range from 5-20 years.
• Student loan amounts from $15,000.
• No fees or prepayment penalties

According to ELFI, their average refinance customer saves $214 per month and $18,699 over the life of the loan.

LendKey

LendKey partners with hundreds of banks to offer you the lowest rates. LendKey matches borrowers with the right banks according to the needs of each specific loan.

It’s easy to check your rate with LendKey, and it won’t impact your credit score. They also provide extensive information on their website to help you learn about any aspect of student loans.

Features of LendKey include:

• Fixed and variable rates.
• Flexible terms from 5-20 years in length.
• No origination fees.
• Minimum loan amount of $5,000.

Frequently Asked Questions

Can I refinance my student loans more than once?

Yes, you can refinance student loans as often as you’d like. Since the interest rates are heavily impacted by your credit score and since there are typically no origination fees, it makes sense to check the rates every now and then. If your credit score has improved, you might be able to easily save money each month by refinancing.

How much money can I save by refinancing my student loans?

It depends on the details of your current loan (like your interest rate) and the details of the refinance loan you qualify for. Of course, it also depends on the balance of your loan. Many grads are able to save $200 per month or more by refinancing. Since the process of getting a quote is quick and easy, it’s certainly worth your time.

Do student loans affect mortgage applications?

Mortgage and other loan applications are usually impacted by your debt-to-income ratio. With a lower debt-to-income ratio, your applications will be more likely to be approved. By refinancing to get a lower rate on your student loans, you’ll also wind up with a lower monthly payment. This will improve your debt-to-income ratio and may help your chances of being approved for a mortgage.

Will refinancing student loans damage my credit?

Most lenders use a soft credit pull when providing a quote, and soft inquiries do not impact your credit score. In order to complete the refinance, one hard pull is needed, and that can impact your credit score by a few points (usually 1-5 points). However, if you have several hard pulls from student loan lenders within a 30-day period, it will only impact your credit score once. As a result, it’s best to shop around quickly and make a decision.