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When Does it Make Sense to Refinance or Consolidate Your Student Loans?
Tackling student debt is something many former students deal with for years after they graduate or leave school. Student loan refinancing is an option that may help some with debt save on interest or lower their payment size. Whether you have federal student loans or private student loans, the opportunity to refinance is an option to consider.
- Splash Financial
Min. Loan$5,000Fixed APRas low as 2.54%Eligible DegreesUndergraduate & GraduateOffer Details
Fixed APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rate options range from 2.88% (without autopay) to 7.27% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Rates are subject to change without notice. Fixed rate options without an autopay discount consist of a range from 2.88% per year to 6.21% per year for a 5-year term, 3.40% per year to 6.25% per year for a 7-year term, 3.45% to 5.08% for a 8-year term, 3.89% per year to 6.65% per year for a 10-year term, 4.18% per year to 5.11% per year for a 12-year term, 4.20% per year to 7.05% per year for a 15-year term, or 4.51% per year to 7.27% per year for a 20-year term, with no origination fees. The fixed interest rate will apply until the loan is paid in full (whether before or after default, and whether before or after the scheduled maturity date of the loan). Variable APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Variable rate options range from 1.99% (with autopay) to 7.10% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Our lowest rate option is shown with a 0.25% autopay discount. Our highest rate option does not include an autopay discount. The variable rates are based on the Variable rate index, is based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of April 27, 2020, the one-month LIBOR rate is 0.43763%. The interest rate on a variable rate loan is comprised of an index and margin added together. The margin is a fixed amount (disclosed at the time of your loan application) added each month to the index to determine the next month’s variable rate. Variable rate options without an autopay discount consist of a range from 2.01% per year to 6.30% per year for a 5-year term, 4.00% per year to 6.35% per year for a 7-year term, 2.09% per year to 3.92% per year for a 8-year term, 4.25% per year to 6.40% per year for a 10-year term, 2.67% per year to 4.56% per year for a 12-year term, 3.44% per year to 6.65% per year for a 15-year term, 4.75% per year to 6.93% per year for a 20-year term, or 5.14% per year to 7.10% for a 25-year term, with no origination fees. APR is subject to increase after consummation. Variable interest rates will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. The maximum variable rate may be between 9.00% and 16.00%, depending on loan term. The floor rate may be between 0.54% and 4.21%, depending on loan term. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
- Discover Private Consolidation Loan
Min. Loan$5,000Fixed APR3.49%–6.99%1Eligible DegreesUndergraduate & GraduateOffer Details
Lowest APRs shown for Discover Private Consolidation Loans are available for the most creditworthy applicants who are approved and choose a shorter repayment term, and include a 0.25% interest rate reduction while enrolled in automatic payments. The fixed interest rate is set at the time of application and does not change during the life of the loan. The variable interest rate is calculated based on the 3-Month LIBOR index plus the applicable margin percentage. For variable interest rate loans, the 3-Month LIBOR is 0.250% as of April 1, 2021. Discover Student Loans may adjust the rate quarterly on each January 1, April 1, July 1 and October 1 (the “interest rate change date”), based on the 3-Month LIBOR Index, published in the Money Rates section of the Wall Street Journal 15 days prior to the interest rate change date, rounded up to the nearest one-eighth of one percent (0.125% or 0.00125). This may cause the monthly payments to increase, the number of payments to increase or both. Your APR will be determined after you apply. Visit Discover.com/student-loans/consolidation.html for more information, including up-to-date interest rates and APRs.
- Credible
Min. LoanVariesFixed APR2.55%–9.15%Eligible DegreesUndergraduate & GraduateOffer Details
The lenders on the Credible.com platform offer fixed rates ranging from 2.79% – 9.15% (2.79% – 9.15% APR). Variable interest rates offered by the lenders on Credible.com range from 1.89% – 8.90% (1.89% – 8.90% APR). Variable rates will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. Rates are subject to change at any time without notice. Your actual rate may be different from the rates advertised and/or shown above and will be based on factors such as the term of your loan, your financial history (including your cosigner’s (if any) financial history) and the degree you are in the process of achieving or have achieved. While not always the case, lower rates typically require creditworthy applicants with creditworthy co-signers, graduate degrees, and shorter repayment terms (terms vary by lender and can range from 5-20 years) and include loyalty and Automatic Payment discounts, where applicable. Loyalty and Automatic Payment discount requirements as well as Lender terms and conditions will vary by lender and therefore, reading each lender’s disclosures is important. Additionally, lenders may have loan minimum and maximum requirements, degree requirements, educational institution requirements, citizenship and residency requirements as well as other lender-specific requirements.
When to refinance student loans
A simple definition of refinancing is when you get a new lender to pay off an existing loan. You no longer make payments on your initial loan (because it is paid off), but instead, you make payments to the new lender who paid off your initial loan.
But why would you want to refinance your student loans? Melissa Brock, Money Editor at Benzinga, can name two good reasons.
“There are two reasons you might want to refinance your student loans. First, you may want to reduce your overall interest rate, particularly if you’ve got high student loan interest rates on your plate. You could save thousands of dollars.” says Melissa Brock, Money Editor at Benzinga. “Second, you could reduce your monthly payments as a result. This could be a major benefit if you’re trying to be budget-conscious.”
Refinancing only makes sense when you can get a better interest rate than you currently have. If you refinanced with a worse interest rate, you would owe more money.
The only time that you might consider refinancing for a worse rate is if you are concerned with lowering your payments. By refinancing with a longer repayment period, you’ll pay more money in the long run, but your payments will be smaller. This option should only be utilized on rare occasions where you have no other choice.
Ultimately, those with private student loans should refinance whenever they can get a better rate and save. If you have a federal student loan, you may want to consider refinancing to save money, but you will need to know that you’ll no longer be on a federal plan.
When refinancing student loans doesn’t make sense
Refinancing student loans is not just about saving money if you have federal student loans. Federal student loans come with additional repayment options and protections not afforded to private student loans. You are not able to refinance a federal student loan into another federal student loan.
Your only refinancing option is to move to a private student loan option. While this may still be a good option as you can save money, you will lose the additional protections of federal student loans. More specifically, this includes the unique repayment options available through FedLoan servicing. Additionally, those seeking public service federal loan forgiveness will not want to refinance, as they will become ineligible for this program.
How to refinance federal student loans
- Gather all necessary documentation to refinance your federal student loan. The list of documents includes your current loan information, a copy of your credit report, income statements (W2s, pay stubs, etc.), and any other asset information that may be pertinent to lenders. You’ll need this information and documentation for the loan refinancing approval process.
- Shop lenders willing to refinance federal student loans. Look at trusted lenders who offer refinancing options. Start looking at the rates, repayment terms, and loan details pertinent to your refinance. The goal is to find the lender offering the best student loan refinancing rates and the most favorable repayment terms.
- Understand the differences between federal student loans and private student loans. When you refinance your federal student loan, you’ll be taking on a private student loan. Yes, this can save you a substantial amount of money. Just make sure you know the differences between the two types of loans. You won’t have the same repayment options or loan forgiveness programs available with a private student loan.
- Complete the approval process. Most lenders will run a quick prequalification process. If you pass this, you’ll then push forward with the approval process. Upon final approval, your new lender will pay off your existing federal student loan. From then on, you will make your payments to the new lender
Student Loans 101
How to refinance private student loans
- Find the best student loan provider offering to refinance. Look at the available rates, repayment terms, loan terms, and the reputation of the different lenders. Find the one that offers the most savings and the most favorable terms for your situation.
- Get together all your loan documents, including everything you needed when you applied for your initial private student loan. You’re going to need your current loan information, a copy of your credit report, income verification, 10-day pay off amount for the original loan and anything else pertinent that a lender requests.
- Complete the loan refinance approval process by providing your necessary paperwork. Once you are approved, your new lender will pay off the old lender. From then on, you’ll make payments to your new lender at the lower rate.
Consolidation vs. refinancing
Refinancing a student loan is different than consolidation. Consolidation is taking several loans and lumping them together into one new loan. Instead of your new loan provider paying off one loan, it will pay off all of your different loans.
| Consolidation | Refinance |
|---|---|
| Best utilized when you have multiple loans | Best for one loan or when you can achieve a better rate with only one loan |
| Offers simplicity by turning multiple monthly payments into one single payment | Stays constant at one single monthly payment |
| Generally utilized one time throughout the life of your loans | May be utilized multiple times when applicable |
The risks of refinancing
While the financial rewards can be ample when you refinance high interest or unmanageable loans into a new product, there are risks to consider as well. Most of these risks come into play when you refinance or consolidate federal loans with a private lender.
Doing so means saying goodbye to all of the Department of Education benefits offered on federal loans, like income-driven repayment plans and public service loan forgiveness, plus stopgap measures such as deferment and forbearance.
The other big risk that comes with refinancing is one we already talked about — extending your repayment timeline so much that you actually pay a lot more interest on your student loans over time. Before you refinance your loans to get a new monthly payment, make sure to look at the total amount you’ll pay over time and compare it to your total loan costs now. If it’s considerably more, you might want to rethink refinancing and consider alternative strategies to lower your monthly payment instead.
Alternatives
Refinancing or consolidating your loans is not the only option. FedLoan Servicing is a federally approved provider who can assist with loan repayment options. The company offers three main repayment options that may help you to lower your payments. Additionally, you may have access to a federal loan forgiveness program if you meet the eligibility criteria.
- Pay as you earn (PAYE)
- Income-based repayment
- Income contingent repayment
- Federal loan forgiveness program
More information about federal loan repayment options is available through FedLoan Servicing.
Too long, didn’t read?
Determining if student loan refinancing is a good fit for you requires a detailed look at the cost-savings, loan term changes, and your financial goals. When interest rates drop or your credit profile increases, you may find options to save on the lifetime of your loan. Lenders offer better rates when money is less expensive to them (lower fed interest rates) or when lending to you is less risky (your credit score or creditworthiness gets better).
You’re never going to be forced to refinance just by shopping for your options. Take a look at the available rates and loan options and see what your potential refinancing savings are.
Meta – Refinancing your student loans may deliver extensive savings, lower monthly payments, and more favorable repayment terms for some borrowers.
This content is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of TheSimpleDollar.com, and may not have been reviewed, approved or otherwise endorsed by the financial institution.
