It’s official. The federal student loan payment pause is over. As interest begins accruing again and millions of borrowers wait in anxious anticipation for their first monthly statement to arrive, they may be wondering what options they have for making their monthly student debt burden more manageable.
In previous posts, we covered two options available for borrowers with federal student debt, income-driven repayment plans and federal loan consolidation. In this post, we’ll take a deeper look at an option that’s available to all borrowers, regardless of whether you have federal or private student loans: student loan refinancing.
Other posts in this series:
Student loan refinancing is the process of taking out a new private student loan to pay off your old student loan (federal or private).
Refinancing doesn’t get rid of your student debt, instead it swaps your old loan (or loans) for a new one with a new interest rate (usually better than your old loan’s interest rate), a new loan term, and a new minimum monthly payment.
Though some may use “refinancing” and “consolidation” interchangeably, student loan refinancing and student loan consolidation are not the same thing. “Consolidation” refers to the official federal loan consolidation program and “refinancing” refers to the process described above.
Both programs are similar in that they (a) could help you lower your minimum monthly payment by lowering your interest rate, (b) may change your repayment term and (c) swap your old student loan for a “new” one, but “consolidation” is only available for federal loans (and your new consolidated loan will still be a federal loan) and “refinancing” is only done through private lenders (and your new loan will be a private loan).
Refinancing is a student debt management option that is available to both federal and private student loan holders. However, that being said, not everyone can automatically refinance their student loans.
Because refinancing is done through private lenders, any borrower who wants to refinance will most likely have to meet certain criteria before they can qualify for refinancing. This criteria may vary across lenders but borrowers who want to refinance will typically need:
Borrowers who don’t meet a lender’s criteria may still be able to refinance their loans, but they’ll most likely need a qualified co-signer to complete the process.
Not everyone can refinance their loans and, honestly, not everyone should. There are significant pros and cons to the process that all borrowers should be aware of and consider before they decide to refinance. Read on to learn more.
There are a few benefits to refinancing your student loan. Depending on your offer, refinancing your student loan could result in:
One great benefit to refinancing your student loans is that it almost always will lower your interest rate, sometimes more than loan consolidation would (depending on your credit score and the current macro-environment).
When you consolidate your federal loans into a Direct Consolidation Loan, your new interest rate will be a weighted average of your existing interest rates. With loan refinancing, you may be able to secure a rate that’s even lower than any of your current rates, especially if you have a high credit score and/or interest rates are low.
Variable interest rates can be unpredictable. Even if you have a low interest rate on your loan now, you don’t know if that rate will increase in the next few months, and if so, by how much. That uncertainty can be stressful.
One benefit of refinancing, especially if you have loans with a variable interest rate, is that you may be able to secure a new loan with a fixed interest rate. If you refinance at a time when rates are especially favorable for borrowers, that’s even better!
Refinancing your loan could help you lower your monthly payments through both a lower interest rate and a longer repayment period.
For example, let’s say you have a student loan with a $10,000 principal, 5% interest rate, and 10 year repayment term. You decide to refinance your loan and receive three offers to refinance: one at a 4% interest rate over 10 years, one at 4.5% over 15 years, and another at 5% over 20 years. In each scenario, you would be able to pay a lower amount each month by refinancing ($101, $76, and $66 respectively vs your original monthly payment of $106).
But… be warned stretching out your loan over a longer repayment period means that you could pay more interest over the total life of the loan..
If your goal is to pay off your student debt as quickly as possible, refinancing your loans could help you shorten your repayment period.
Depending on your refinancing offer, you may be able to take out a new loan with a shorter loan term than your original student loan (e.g. 8 years instead of 10). This means you could get out of debt sooner but be aware that it may come at a price–depending on your new balance, interest rate, and loan term, you could end up having to make higher minimum monthly payments for the duration of the loan.
If you have multiple loans, private and/or federal, you could combine some (or all) of them by refinancing them into a single loan with new terms. This would make it easier for you to manage your student debt by reducing the number of individual payments you need to keep track of.
Just note that if you have multiple federal loans, you also have the option of combining your loans through federal loan consolidation. Depending on your financial situation and goals, consolidation may potentially be better a better route for you.
Refinancing a student loan also comes with drawbacks. Refinancing your loan could result in:
This one is important for all the borrowers with federal loans out there. If you refinance your federal loan, you will have essentially converted it into a private loan and, as a consequence, you will lose access to benefits and programs that are only available for federal loans.
These benefits and programs include access to income-driven repayment plans, federal loan consolidation, forgiveness opportunities, federal loan forgiveness programs like Public Service Loan Forgiveness, and temporary programs like the new “on-ramp” period that prevents a delinquency from being reported if you miss a full monthly payment. You’ll also lose any progress you’ve made towards federal loan forgiveness programs.
Borrowers refinancing a private student loan don’t have to think twice about this, but borrowers who are considering refinancing a federal student loan should weigh their other options before refinancing their loans.
This is the potential dark side of the benefits mentioned above. Depending on the terms of the refinancing offer, borrowers could lower their minimum monthly payment but end up paying more in total interest over the life of the new loan. In some scenarios, this could cause a new loan to ultimately be more expensive than the original loan.
Returning to our original example of a student loan with a $10,000 principal, 5% interest rate, and 10 year repayment term.
In both scenarios where the monthly payment was lowered because the repayment term increased, you would ultimately end up paying more in interest over the lifetime of the refinanced loan, than you would have with the original loan (you would pay around $10K and $17K in interest respectively vs $6.5K on the original loan).
Whether or not you should refinance your student loans depends on your overall financial situation and goals. Important factors to consider are:
If you have private loans and can secure better loan terms, refinancing may be a great option for you. If you have federal loans, you may want to explore income-driven repayment plans or federal loan consolidation before considering refinancing, especially if you’re working towards federal loan forgiveness.
If you have stable income and a great credit score, refinancing might get you better rates (whereas your rate with loan consolidation would always be a weighted average of the existing rates on your consolidated loans).
Disclaimer: This guide is purely informational and is not intended as financial advice as every situation is unique. For more in-depth guidance on whether or not you should refinance your student loans, we recommend you speak to your financial advisor.
If you’ve decided to refinance your student loans, make sure you shop around to find the best refinancing offer. You should speak to different lenders before you apply to get a quote or browse refinancing marketplaces, like Sparrow to find the most competitive offers.
Sparrow helps you easily find the most-affordable loans. They’ll show you real, pre-qualified rates for free without impacting your credit score. Start browsing refinancing offers now.
Talk to your employer about offering a student loan repayment benefit with Highway. Our employee toolkit has all the talking points you need to ask your HR team for this benefit. You can also send them a copy to get the conversation started today.
Disclaimers: This guide is purely informational and is not intended as financial advice as every situation is unique. For more in-depth guidance on whether or not you should refinance your student loans, we recommend you speak to your financial advisor. Additionally, Sparrow is a partner of Highway and we may make a commission if you decide to refinance through Sparrow’s platform.