How Can I Refinance My Student Loans?

The constant drop in interest rates has allowed student loans to join mortgage and automobile loans in the marketplace for refinancing.

The Fed’s moves threw open the door for student loan borrowers who could refinance their loans to under 2% at some places. That would be good news, especially for the 34-and-younger age group that owes about half of the $1.4 trillion in student loan debt.

For many of them, this could their first try at refinancing so knowing the steps to take and questions to ask will help save money on interest rates and maybe pay off the loan sooner.

First Steps in Refinancing Student Loans

To refinance your student loans, call up a lender and ask them to walk you through their loan application process. The lender will assess your financial portfolio and background; if they like what they see they’ll extend an offer. The higher your income and credit score, the better shot you have at locking in a lower rate.

Don’t confuse student loan refinancing with student loan consolidation.

Refinancing is the term we use when talking about private student loans. Consolidation refers to federal student loans. If you want to secure a lower interest rate, you need to refinance your loans. You can still do this with federal student loans; however, you will be stripped of your eligibility for federal loan forgiveness programs and repayment plans.

This is why refinancing won’t be for everybody. You should be confident in your job security and in your ability to maintain a high income before severing your federal loan lifelines. Even if you’re refinancing a private student loan, there are usually fees to factor into your decision-making process as well.

The point is: don’t let the perks of refinancing overshadow the shortcomings.

We can help you weigh the pros and cons of student loan refinancing, so when it comes time to sign a contract, you will know exactly what you’re walking into.

How to Refinance Your Student Loans

Refinancing student loans is a pretty straightforward process. Here are the steps you need to take to get it done:

1. Do your research on refinancing interest rates: Look up the average rates and qualifications across various lenders. Make sure you visit all three major lending sources: banks, credit unions and online lenders.
2. Evaluate the loan terms and choose your lender: Choose a lender whose terms align best with your needs and goals.
3. Prepare your documents and fill out the application: Get your paperwork ready and apply.
4. Don’t stop paying your student loans: Don’t abandon your old lender before hearing back from your new one. Keep up with your payments to avoid late penalties and fees.

Be patient and don’t rush into a bad deal just because you’re eager to sign a new deal. The difference in a few points of interest could be thousands of dollars over the lifetime of a loan.

Here’s an example to show you how much refinancing can save you.

Let’s say you have a $30,000 loan with a 6% interest rate. After 10 years of paying $333.06 a month, you will have forked over $9,967.38 in interest alone.

This time around let’s say you have the same $30,000 loan but instead with a 4.5% interest rate. After 10 years of paying $310.92 a month, you will have paid 7,309.83.

By finding a lender to cut your interest by 1.5%, you save $2,358 over 10 years. You could save even more money by paying more than the monthly requirement.

Now that you know what you stand to gain (or lose), let’s dive a little deeper into the steps of student loan refinancing.

Do Your Research on Refinancing Interest Rates

Rates will vary depending on where you go. Student loan refinance lenders will use your income and credit portfolio to gauge your risk as a borrower; the lower the risk, the lower the rate.

There’s no way to tell for sure what you will be offered beforehand because standards vary by lender. Some put a premium on a high income while others salivate at the sight of a good credit score. Research the average interest rates for your credit bracket so you can minimize the risk of being shorthanded by a lender. Know your value (or what the lender perceives as your value) before negotiating terms and conditions.

Evaluate the Loan Terms and Choose Your Lender

This is where you weigh the pros and cons of all the lender’s terms and conditions.

Some things to ask yourself while evaluating loan terms:

• Will you go with a fixed rate or a variable rate?
• How long do you want to spend repaying the loan? 10 years? 20?
• What are the credit score requirements?
• Can you put down collateral (car, home) to secure the loan and possibly improve the interest rate?
• Are there any prepayment penalties?
• Is there an origination fee?

Many lenders will charge you an origination fee, which is often represented as a percentage of the loan. They range between 1%-10%, so they can be either slight or substantial.

A 10% origination fee on a $30,000 loan is $3,000. That’s a “small” loan in itself. Make sure that the fees from your new loan don’t cut into the savings you garnered from ditching your old one.

Choose terms according to how you would like the repayment process to go. Keep in mind that a shorter repayment period means larger payments and vice versa.

Prepare Your Documents and Fill Out the Application

Get together everything you need to complete your application. This step is simple so it can easily be overlooked. Just remember, you will save both yourself and your lender a lot of time (which equals money) and stress if you come to the phone ready with all the right paperwork.

Here are some things you will want to have in front of you while applying to refinance your student loans:

• Social Security number or equivalent
• Driver’s license, government-issued ID or passport
• Income verification, i.e. pay stubs, tax returns, etc.
• Student loan statements

Don’t Stop Paying Your Student Loans

Don’t stop sending in those payments, even if you’ve been pre-approved for your new loan. You don’t want your new lender to see that you’ve missed a payment, especially not in those crucial moments as they decide whether or not to finance your new loan. This isn’t to mention the late fees you could accrue. No matter how you look at it, it’s a good idea to stay on top of your payments.

Student Loan Payoff Process

When you refinance your student loan, you take out a brand-new loan with a new lender. For the remainder of the loan, you will be paying your new lender. Your old lender is no longer a factor once all the paperwork has gone through.

However, some borrowers worry about overpaying their old lender before their new contract has been approved. You have to pay when your due date arrives, but if you’re approved for the new loan you will be refunded any payments you made while awaiting your pending approval.

So, don’t worrying about paying extra; just make sure you pay on time.

Can Refinancing Help Me Pay Off My Debt Faster?

Refinancing can help you pay off your debt faster in a few ways. One way is by reducing the length of the loan. For instance, you can refinance a 60-month loan into a 45-month loan, setting you debt-free 15 months earlier than scheduled.

Another way to pay off the debt faster is to refinance to a lower interest rate while at the same time increasing your monthly payments. This way, you will pay less in interest every month, while also paying less in total over the life of the loan.

Refinancing to a lower interest rate will only get you out of debt quicker if you continue to make the same payments you were making, or higher. In other words, if you lower your monthly payments it will take you even longer to crawl out of debt. The only reason to lower your monthly payments is if you’re struggling to make ends meet.

If you want to free yourself of debt as soon as possible, you need to make as the highest  monthly payment you can afford, without overextending your resources or exhausting your cash flow.