Refinancing Private Student Loans

Highlights: 

• Student loan refinancing is the process of combining individual federal and/or private student loans into a single, new loan offered by only one private lender.
• The ultimate aim of student loan refinancing is to save money as you work to repay your debts.
• Under the right circumstances, refinancing student loans can be extremely beneficial. However, refinancing isn't the right option for every borrower.

Managing student loan debt can be tough, especially if you’re repaying private loans, which typically offer fewer debt relief options than federal loans and often have higher interest rates. However, refinancing may be a helpful debt management strategy that makes sense for your situation. Here’s what to know about refinancing your student loans and how to tell if it’s the right option for you.

What is student loan refinancing?

Student loan refinancing is the process of combining individual student loans — which may have different federal and/or private lenders, interest rates and repayment terms — into a single, new loan offered by only one private lender. Ideally, your new loan will have a lower interest rate and better terms than your previous loans, making it easier and more affordable to pay back what you owe.

Refinancing is available for both federal and private student loans, although the process may differ depending on which loan types you have. It’s also important to note that refinancing with a private lender is a different process than loan consolidation with a federal lender. Although consolidation also combines multiple loans together, it will not lower your interest rates and is only available for federal student loans.

When should you refinance private student loans?

The ultimate aim of student loan refinancing is to save money as you work to repay your debts. So, to decide whether you should refinance, you’ll have to look at your existing loans. Then, ask yourself if refinancing would reduce your monthly loan costs or otherwise improve your financial situation in some meaningful way.

You may be a good candidate for refinancing if you have:

• Private loans with high fixed interest rates. Fixed interest rates remain the same for the life of the loan. So, think about the interest rate you received when you first qualified for the loan. Then ask yourself whether anything about your financial situation has changed that might make it possible to qualify for a lower interest rate today. Has the economy improved, leading to a drop in interest rates? Have your credit scores improved, making you a more desirable option for lenders? If so, refinancing might be a good option to help you save money by securing a lower interest rate. Even a small percentage difference can have a significant impact on the total amount of interest you pay on a loan.
• Private loans with variable interest rates. Unlike fixed interest rates, variable rates change in response to market fluctuations. You may be able to secure a loan with a better fixed interest rate if the economy is strong and interest rates are low.
• Private loans with short repayment periods. Loans with a short repayment period mean higher monthly payments, which could put a strain on cash-strapped borrowers. Refinancing offers the opportunity to secure a longer repayment term, spreading out what you owe. Smaller monthly payments may help you save money month to month — but remember that you could end up spending more in interest payments over the life of the loan.
• A good credit history and credit scores. Generally speaking, the better your credit scores and credit history, the better chance you have at securing a lower interest rate and other favorable loan terms from lenders. If your credit scores have improved since taking out your loans, refinancing could help you qualify for better interest rates than you did initially.
• Access to a co-signer. Even if your credit scores aren’t ideal, you may still be able to qualify for refinancing with a co-signer, which is someone (typically a family member or friend) who agrees to be legally responsible for repaying the loan if you can’t. A co-signer makes you a less risky borrower from the lender’s perspective.
• Steady income. A stable income is a good indicator to potential lenders that you will make your monthly payments in full and on time.

When shouldn’t you refinance private student loans?

Under the right circumstances, refinancing private student loans can be extremely beneficial. However, refinancing isn't the right option for every borrower. For example, if your credit scores have decreased or your financial situation has taken another negative turn since you took out your loans, refinancing could land you with higher interest rates than those on your original loans.

Refinancing may not be right for you if you have:

• Poor credit history and no access to a co-signer. With a bad credit history and no co-signer, you’re unlikely to be approved for refinancing. If you’re struggling financially, reach out to your lender to negotiate a repayment plan that works for your financial situation. If you can, work on improving your credit scores by making payments on time and in full, reducing your total debt and making sure you have a good balance between loans and credit card debt.
• A high debt-to-income (DTI) ratio. Your DTI ratio is the total amount of debt payments you owe every month divided by your gross monthly income. To a lender, this number is a strong indicator of your ability to repay what you owe. Lenders typically prefer to see a DTI ratio under 45%. Higher DTI ratios suggest you may be unable to repay any additional debt you take on.
• Private loans in default. If your loan is in default — meaning you’ve missed one or more payments — it will be very difficult for you to refinance your loans. A loan in default will appear on your credit reports and can cause your credit scores to drop significantly, signaling to a potential lender that you’re unable to repay any new debt.
• Special benefits through your original lender. Some private student loan providers offer special rates and terms to their borrowers. If you are receiving any benefits via your original loan agreement, think carefully about refinancing. Be sure that any new benefits you would receive outweigh those in your original loan agreement.

How does student loan refinancing work?

What happens when you decide to refinance? Like any loan, the first step is all about research. You should start by reviewing your credit scores and credit reports.

You can receive free Equifax^® credit reports with a myEquifax account. You can also get free credit reports from the three nationwide consumer reporting agencies - Equifax, Experian^® and TransUnion^® - at AnnualCreditReport.com.

If possible, consider a lender that offers pre-qualification — a pre-screening process that will give you a good idea what interest rates and other terms you might be eligible for, without any impact to your credit scores.

Once you find a lender you like, you’ll complete the application process. The interest rates offered for your new loan will depend on your credit reports and credit scores, and may be a combination of fixed and variable rates. If your application is approved and you agree to take out your new loan, you’ll begin repayment to your new lender.

Refinancing private student loans can be an attractive option for borrowers — reduced monthly payments and lower interest rates aren’t exactly a hard sell. With a little research and some careful consideration, you may be able to refinance your loan, save some money and feel more in control of your debt repayment process.