Student Loan Refinance

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Should you refinance your student loans?

If there’s one hot financial topic it has to be the subject of student debt. For those that have student loans, you are constantly worrying about how to manage your payments and save for a better future. The average monthly payment is about $400 a month, leaving many borrowers with little cash for saving because of student loan debt.

“Should I refinance my student loans?”

That’s a question many borrowers ask, but they often don’t recognize some of the details and consequences of refinancing until it’s too late.

If you want to know if you should refinance your student loan or not, read on to learn if you can refinance and whether it’s a smart financial choice or not.

Student Loan Basics

The world of student loans can be incredibly complicated and confusing. There are various types of loans, different loan terms, and interest rates.

Before we get into refinancing student loans, let’s review some of the basics around student loans.

There are two main types of student loans. There are federal student loans, which you get directly through the federal government and the Department of Education. There are private student loans, which are funded through banks, credit unions, and other private lenders.

There are also subsidized and unsubsidized loans. With subsidized loans, interest doesn’t build up on the loan while you’re in school or if you have to defer payments.

Unsubsidized loans are loans where the interest accrues on the loan while you’re in school and out of school, whether you’re on a payment plan or not.

All of these things come into play when you decide to refinance your student loan or not. You should know who your lender is and whether or not your loans are subsidized or not. You should also see if you have a variable interest rate or fixed interest rate.

Can You Refinance Student Loans?

Many people wonder if it is even possible to refinance student loans. Yes, you can refinance student loans, even those that are federal student loans.

However, you don’t refinance them in a way that you would normally refinance a loan. It’s considered to be student loan consolidation because you’re taking it to a private lender. In other words, your private lender pays your remaining balance of federal student loans.

Your loan is similar to personal loans because you have a single loan with a private lender. You then repay the bank according to the loan repayment terms.

If your loan is through a private lender, you shouldn’t have problems refinancing your loan, as long as your credit is good, and you have a strong credit history.

You can refinance student loans as often as you need to. Sometimes, though there can be too much of a good thing. You want to make sure that you can still receive a lower interest rate and lower monthly payment.

How Can You Refinance Student Loans?

Lenders will look at two primary factors to assess your ability to pay the loan back once you submit a loan application. The first is your credit score and passing a credit check. The second factor is your debt to income ratio. 

You’ll need to check your credit report before you apply for a loan. This will give you an idea as to where you stand and you can make improvements to your score before you apply for student loan refinancing.

For example, you can pull your credit report and find that your credit utilization rate is high. If that’s the case, you can focus your attention on getting a lowering that rate and existing debt payments. That will raise your credit score and improve your chances to get approved.

A good credit score will also determine your interest rate. A poor credit score can result in a high-interest rate and completely defeat the purpose of refinancing.

If you get turned down for a loan because your credit score is subpar or you just don’t have the income, you can explore the possibility of having a cosigner on the loan.

A cosigner can be a friend, parent, or another relative that has the credit score and income qualifications to get approved for the loan.

When you have a cosigner on a loan, you are responsible for making the on-time payments each month. If you miss a payment, your co-signer becomes responsible for the student loan payments. You’ll have to work hard to repair that relationship and pay them back.

When Student Loan Financing Makes Sense

Are you still wondering, “Should I refinance my student loan?”

Student loan refinancing isn’t for everyone. There are some general guidelines to follow to know if refinancing a student loan is right for you.

Do you have a federal student loan and are on a repayment plan, such as Public Service Forgiveness or Income-Driven Repayment? 

When you refinance a student loan, you are leaving the federal student loan system. These repayment programs go away as private lenders don’t offer them, including student loan forgiveness.

You also have to look at the interest rate of the loans you have. Banks will determine your interest rate based on your credit score. With federal loans, interest rates are set by Congress in July of each year.

In some cases, you can refinance a student loan with a lower interest rate and better repayment terms. If you find that you come out ahead and can meet the monthly payment without a problem, refinancing would make sense. It may make sense if you decide to buy a home and want to qualify for a mortgage. 

Another factor to examine is the life of the loan and the total loan amount of the new loan. It’s tempting to just look at the monthly payment and go with it because you save money each month.

You may find that you’re paying much more in interest to the bank because the repayment terms are much longer than what you currently have.

Should I Refinance My Student Loans?

Can I refinance my student loans? Should I refinance my student loans? These are common questions borrowers ask to lighten the load of student loan payments.

It is possible to refinance student loans. Whether or not you should refinance depends on several factors. You have to look at the type of loan you have, the interest rate of your current loan, and the repayment options when refinancing.

Do you want more financial tips? Read this article to discover other ways to lower your bills.