How Much Can You Save By Refinancing Student Loans?June 8, 2020
When you refinance your student loans, you are obtaining a new loan with a private lender, often with a new interest rate, loan term, and monthly payment. You can refinance both federal and private student loans, and you can also refinance some or all of your current student loans.
By Caroline Farhat
There are several major benefits of student loan refinancing. It can save you money on your monthly payment, reduce your term length and save you in interest costs for the life of the loan. Interest savings can be in the thousands in some circumstances. It also simplifies your student loans because it allows you to consolidate multiple loans into one.
A question often asked when someone is considering refinancing is, “how much can you save by refinancing student loans?” Here are some of the primary factors that affect savings, some data showing the average savings that people have seen, along with a concrete example of how the savings come to be.
Factors that Affect Savings
When refinancing, everyone will experience different savings because the savings are based on several factors. Here are some of the factors that will affect the amount of savings you will see when refinancing student loans.
- Current interest rate and new interest rate – The amount you can save by refinancing student loans is significantly affected by the interest rate. If you have a high interest rate on your current student loans and now qualify for a much lower rate you would see a higher savings rate. However, if you do not qualify for a lower rate, your savings will be small, if you get any savings at all.
- Note: if you are looking to reduce your monthly payment and are not as concerned with saving money in the long term, you can refinance and extend your loan term to reduce your monthly payment. The interest costs over the life of the loan will increase in most cases, but you can always refinance your loan again in the future to save in interest costs.
- Credit score – A higher credit score indicates more credit trustworthiness. Therefore, the higher the credit score the lower the interest rate you may qualify for, thus increasing the amount you can save by refinancing your student loans. A cosigner may help you qualify for refinancing if your score is not that high.
- LIBOR rate – Private student loan interest rates are tied to the LIBOR rate. Therefore, if the rate is lower you can expect that interest rates for private loans will be lower. A lower rate equals more savings when refinancing.
- Term length – Increasing and decreasing your term length from your original term length can affect the savings.
- For example, if you have 10 years left on your loans and refinance to a 7 year term, you may not experience any monthly savings (unless your interest rate is significantly lower) because you are shaving 3 years off your loan term. The payment would have to be larger to make up for the difference in time. But you could save significantly in interest costs over the life of the loan.
- If you refinance to the same term or longer, you may experience significant monthly savings.
- Income – A higher income may qualify for a lower rate because the debt-to-income ratio may be lower. Debt-to-income ratio is one factor lenders consider to see how much payment you can afford.
- Amount of loan being refinanced – A larger amount of student debt to refinance has the potential for more savings.
- Different lender requirements – Each lender has their own specific minimum requirements and offers rates based on their individual factors. Therefore, lenders may offer different interest rates to you based on their individual requirements.
How Much Can You Save by Refinancing Student Loans?
Although many factors affect savings when refinancing student loans, here are some examples of what others have saved:
- A 2016 report shows borrowers who refinanced student loans lowered their interest rate by an average of 1.7%. They also reduced their term length by five years and saved an average of $18,668 over the life of the loan. If you had an extra $18,000 dollars, what would you do with it?
- Some professions are more likely to be burdened by student loan debt because of the amount of schooling it takes to achieve the required degrees. One such profession is nursing. The average nursing graduate in 2019 expected to have a median debt between $40,000 and $54,999. Many nursing graduates who refinanced student loans of $50,000 experienced savings of $110 to $170 per month.
- Here at ELFI we pride ourselves on great customer service and saving our customers money. The average savings for ELFI customers in 2020 is $272.00 per month. The total average savings in interest costs over the life of the loan is $13,940.1
Need more inspiration? Here is a scenario illustrating how refinancing can save you money:
If you have student loan debt of $75,000 with 10 years remaining at an interest rate of 8% APR you would be paying an estimated $910.00 per month. After refinancing you may be able to qualify for a much lower interest rate and have a new payment of $754.00, a savings of $156.00 per month. This would yield you a savings of $18,672 over the life of the loan.
When you refinance with ELFI there are no application fees, no origination fees, and no prepayment penalty, so you will most likely see the savings from refinancing is worth it. Interested in seeing how much you could potentially save? Check out our Student Loan Refinance Calculator.* With the calculator, you can get an estimate of savings and test different scenarios to determine if shortening or lengthening the loan term works better for your financial situation.
1Average savings calculations are based on information provided by SouthEast Bank/ Education Loan Finance customers who refinanced their student loans between 2/7/2020 and 2/21/2020. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon a number of factors.
*Subject to credit approval. Terms and conditions apply.
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