How Does Student Loan Refinancing Work?July 18, 2019
Updated January 21, 2021
When you take out a student loan, you agree to a specific set of terms and conditions regarding your payment schedule and interest rate. But what happens when those terms and conditions no longer offer the best possible financial option? For example, are you stuck if interest rates drop, or if you need more time to pay down your loan total?
In these cases, student loan refinancing may be the solution you’re looking for. You can refinance both federal and private student loans with a new lender, and you’ll have the chance to earn a better interest rate, as well as change your student loan repayment term. You can also explore cosigner release when you refinance your student loans.
It’s important to note that student loan consolidation and refinancing share some similarities, but are not the same thing. Consolidation offers you the opportunity to roll many federal student loans into one, and then to pay the weighted average interest rate, rounded up to the nearest one-eighth percent.
Student loan refinancing, on the other hand, enables you to combine the private and federal loans of your choosing. Unlike consolidation, you’ll earn an interest rate largely based on your credit score and debt-to-income ratio. If either of these factors has improved since you took out your loans, you may be eligible for a better interest rate.
Can I Change my Loan Terms?
Before graduating, you probably didn’t give much thought to student loan repayment terms. That being said, student loan terms that fit your needs and goals before starting school aren’t always ideal for you following graduation. For this reason, it is possible to change your loan terms after you graduate by refinancing your student loans.
If you are approved for student loan refinancing, the new loan servicer pays the old loan servicer for the cost of the loan. The student loan debt is then transferred to the new loan servicer. With the new loan typically comes new and better student loan terms.
Student Loan Refinancing Process
Contrary to the common belief, student loan refinancing is not typically a complicated process. Normally, it’s simple and straightforward, and can even be accomplished online.
Here are a few of the steps you’ll take to refinance your student loans:
- Choose which student loans to refinance
- Explore interest rates with multiple lenders
- Choose which lender you’d like to refinance with
- Fill out the refinancing application
- Continue making payments while you wait for approval
- Sign and finalize the loan agreement.
After being approved for refinancing, your new student lender will pay your old lender, and your loan will be transferred to the new lender. You’ll begin making payments based on the terms of your new agreement.
Why Should I Refinance my Student Loan?
Simply put, student loan refinancing works when you can take out a new loan in order to pay off the first loan with better terms. Here are four reasons why you might want to refinance your student loan:
Your Income Has Increased
If you’re making more money than you were when you took out your student loans, then your debt-to-income ratio has likely improved. Many lenders include a minimum income as part of their student loan eligibility requirements to ensure the payments will be feasible.
If you’ve already refinanced your student loans, but have since earned a significant pay increase, then you can refinance again for a chance at a better interest rate. There’s no limit to how often you can refinance your student loans.
Your Credit Score Has Improved Since College
Student loans provided by the federal government don’t take credit scores into account – every borrower is given the same interest rate regardless of credit history. If you have taken out a private student loan, your interest rate could have been impacted by your or your cosigner’s credit score.
After a few years in the workforce, your credit score usually improves. An ideal time to refinance your student loans is when your credit score exceeds 650. This should enable you to refinance your loan at a lower interest rate.
Most student loan refinance companies will require a minimum credit score for refinancing approval, so be sure to seek that information out before applying.
A Longer Credit History Could Improve Your Interest Rate
Interest rates for private student loans are usually affected by your or your cosigner’s demonstrated credit history, and most student loan refinance companies will provide a minimum credit score to apply for refinancing. A refinancing company will also usually provide favorable terms to a borrower who has illustrated a financially responsible credit history – for example, by paying bills on time. An individual who has multiple defaults on their credit history is likely to receive less favorable terms or be turned down for refinancing.
Overall Interest Rates May Be Lower
Interest rates for student loans are tied to certain economic indicators at the time you applied for the loan. So, you may have a student loan with an above-average interest rate because you went to college when interest rates were high. When interest rates decrease because of changing economic conditions, you will almost certainly be able to refinance and get a better deal on your new loan.
You Don’t Qualify for Loan Forgiveness or Income-Driven Repayment
Student loan refinancing can be an especially great fit if you aren’t relying on federal benefits, like income-driven repayment, or working toward Public Service Loan Forgiveness (PSLF).
If you are utilizing federal student loan benefits, you may choose to think twice before refinancing, as you’ll lose them after refinancing your student loans. If these don’t apply to you, however, there are very few downsides to researching rates from potential refinancing lenders.
Student Loan Consolidation
Refinancing gives you the option of consolidating several student loans with different interest rates into a single loan with a more favorable interest rate. One loan with one interest rate is much easier to manage.
When Should I Refinance my Student Loan?
The primary reason to refinance your student loan is to shift into a much more favorable loan. That loan could have a lower interest rate and save you money. Additionally, if you qualify, you’ll have the flexibility to adjust the repayment terms. This means that you could pay the loan off with a shorter term or extend the term so it costs you less every month or is easier to manage.
Fixed and Variable Interest Rates
When you apply to refinance your student loan, you can choose between a fixed or a variable interest rate. A fixed rate doesn’t change unless you are refinancing again. A variable rate will fluctuate over time based on certain economic indicators.
Variable rates coincide with low-interest rates across the economy, and they can sometimes fall to below 3%. If you find yourself with a high income and interest rates are declining, then it may be possible to get a great refinancing deal. This works by choosing a variable interest rate and paying off your loan entirely before interest rates start rising again, or by taking advantage of a low fixed interest rate and sticking with it.
Avoiding the Risks of Refinancing Student Loans
Refinancing your student loan can be a great choice, but there are some risks you want to watch out for:
- High-interest rates. If interest rates are high, you might end up paying more over time than if you had stayed with your original loan.
- Too many fees. Make sure that refinancing fees don’t outweigh the savings from your lower interest rate. Look for student loan refinancing that comes with no fees.
- Unrealistic repayment schedules. Federal student loans provide you with access to repayment plans based on a low yearly income. Make sure that you can meet the monthly payments on your refinanced loan.
Advantages of Student Loan Refinancing With ELFI
Refinancing with a reputable student lender like ELFI can help to avoid many of the common risks. With a focus on customer service, we aim to empower our customers’ student loan repayment journeys. Here are a few of the benefits of refinancing your student loans with ELFI:
- No hidden fees
- No prepayment penalties
- No origination fees
- No application fees
- You can pre-qualify without hurting your credit score
- ELFI’s personal loan advisors will be there to help throughout the process
Use ELFI to Refinance Your Student Loans
You may be pleasantly surprised at how easy it can be to repay your loan faster and more effectively. Doing so can help you avoid the stress of too much student loan debt and enjoy a more prosperous financial life. It can be hard to tell when the best time to refinance your student loan is, so click here for a student loan refinancing calculator to determine how much you might save. For a no-obligation consultation, call ELFI at 1.844.601.ELFI.
Terms and conditions apply. Subject to credit approval.
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