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Student Loan Refinancing

What Is Student Loan Refinancing And How Does It Work?

August 27, 2018
Updated August 25, 2020

 

If you’re an adult with student loan debt, you may have heard of a process called student loan refinancing. In this post, we’ll walk you through everything you need to know about refinancing student loans, such as what student loan refinancing is, how to refinance student loans, how to compare lenders and rates, the eligibility requirements to refinance, how you can tell whether now is the time to refinance, and more.

 

What Is Student Loan Refinancing?

Student loan refinancing is the process of obtaining a new loan with a private lender. That new loan pays off your old loan and typically sets you up with a new loan servicer, new interest rate, and new repayment term. People usually refinance their student loans with the goal of lowering their interest rate, lowering their monthly payment, or shortening their repayment term to pay off their loans faster. 

 

The interest rates and terms available vary by lender, and the rates you are provided typically depend on your personal financial situation, including factors such as your credit score, credit history, and debt-to-income ratio. It’s normally best to refinance when you have the opportunity to lower your interest rate, make repayment more manageable, or save money over your loan term.

 

For example, maybe you have a mix of private and federal student loans that are higher interest than what you can currently get with a private lender. So if you have $25,000 in loans and you’re paying anything from 5% to 8.75% interest, if you can get them refinanced at 4%, then you can save a lot of money in interest over the life of your loans. Watch this video for a breakdown of how student loan refinancing works.

 

 

How to Refinance Student Loans

When preparing to refinance student loans, you may wonder how long the process takes, or how many steps are involved. Here are the main steps in the refinancing process, so you can know what to expect from the start:

 

Compare Lenders & Rates

The first step in your journey to refinance your student loans should always be to shop around for the best lenders and interest rates. If you’re not going to save money (either your monthly payment or the amount you’ll pay over your loan term) then it usually doesn’t make sense to refinance. That’s why most people look first to interest rates to understand whether they should refinance or not. If you qualify for significantly lower interest rates than what you currently pay, then take a look at how much you’ll save and see if it makes sense to move forward. An online student loan refinancing calculator can give you an idea of how much you could save by refinancing.

 

It’s also important to compare lenders when refinancing. When you check what rates you qualify for with a lender through a process called prequalification, they will generally require a soft credit check. However, this is nothing to worry about, as soft credit checks will not impact your credit score. Also worth noting is if you would prefer a fixed or variable interest rate. If interest rates are currently low, then a fixed interest rate may be your best option. These are generally best for borrowers, but if interest rates may go lower and stay lower, a variable interest rate could be a good option.

 

In the case that multiple lenders offer you similar rates and terms that can save you money, it’s also important to compare lender benefits and their reputations. Look into student loan refinancing reviews of each lender you’re considering. Additional factors could include the lender’s customer service and forbearance options in the case of an emergency. A lender with great customer service could be very helpful during your first time refinancing.

Consider Loan Terms & Payment Options

Briefly mentioned above, another factor for student loan refinancing can be the terms of your loans or the amount of time that you’ll continue to pay these loans before they are paid off. When you refinance, you can typically choose loan terms of 5, 7, 10, 15, or 20 years, but these terms can vary by lender. Shorter loan terms typically come with lower interest rates, and the rate rises with the length of the repayment term.

 

By choosing a shorter student loan repayment term, you will likely receive a lower rate than a longer term loan, saving you in interest over time and allowing you to pay off your student loans faster. However, depending on how much your interest rate is reduced, your monthly payment may be the same or higher. The main benefit of a shorter repayment term is saving in interest and paying off your loans faster.

 

By switching to a longer repayment term, you can lower your monthly payment to make repayment more manageable. Depending on how much your interest rate is reduced, you may still save money in interest over the life of your loan term. A third option is to choose the same repayment term, in which case you will save money in interest if you acquire a lower rate, and your monthly payment will also be lower.

 

Choose a Lender and Apply

After you’ve weighed the options above, it’s time to choose your lender and apply. Several documents are required for applying for student loans, and they will likely be some combination of the following:

  • Loan verification statements
  • Proof of employment (in the form of a W-2, pay stub, or tax returns)
  • Proof of residency
  • Proof of graduation
  • Government-issued ID

When you submit your student loan application completely, it’s important to remember that this will likely incur a hard credit check which could affect your credit score by several points. Only fully submit your application when you’re completely ready.

 

Sign the Refinancing Agreement & Pay Off Your Student Loans

It will likely take some time before your application is approved, and while you are waiting you should continue to pay off your student loans. Once you are approved, your lender will pay off your original loans, and from then on, you will make your loan payments to them or their associated servicer. If you’re having second thoughts, you have several days, known as the rescission period, to cancel your refinanced loan. 

 

Student Loan Refinancing Approval Criteria

There are a number of student loan refinancing requirements that play a role in whether or not you are approved for student loan refinancing, such as your credit score, credit history, and debt-to-income ratio. 
Possibly the most important requirement is your credit score. Traditionally a “good” credit score is about 680 or higher. Most lenders won’t qualify you for refinancing if your credit score is below 660, but that’s not always the case. The better your credit score, the better rates you’ll receive from lenders. Additionally, your credit history plays a role in your ability to refinance. If your credit score isn’t above the minimum, another option you have is refinancing with a consigner who meets the eligibility requirements. However, it’s important to remember that your consigner will also be responsible for the loan.

 

Best Ways to Refinance Student Loans

The benefits of refinancing student loans differ by loan type, and there are several factors to consider before moving forward with refinancing. 

 

Private Loans

When considering refinancing private loans, it usually comes down to the math of how much you’ll save. Because there are so many private student loan options, you should compare your specific interest rate, terms, and borrower benefits offered by your lender before refinancing private student loans. Unlike in the case of refinancing federal student loans, you probably aren’t losing any benefits or borrower protections by moving from one servicer to another. Calculate how much you’ll save by refinancing in order to help make this decision.

 

Federal Loans

Federal student loans can also be refinanced with a private lender. These are some of the most common loans to refinance because many people can receive better interest rates than they received when they originally took out their loans. Refinancing federal student loans also allows borrowers to shorten their repayment terms to save additional interest costs and pay off their loans faster.

 

One reason to think twice about refinancing federal student loans is that when doing so, you lose access to certain benefits that the federal loan program offers. These benefits include the options of Income-Driven Repayment plans and the option of Public Service Loan Forgiveness (PSLF).

 

You can also refinance other kinds of student loans like Parent PLUS loans. Parent PLUS loan refinancing can be done by the parent who holds them or can be transferred to the student/child from whom the money was borrowed, so either can refinance them.

 

Keep in mind that you don’t have to refinance all loans of either type. You might have one or two private or federal loans that are at a higher rate and you want to refinance those, but you keep others as-is because the rates and servicers still fit your needs. The loans you choose to refinance are up to you.

 

Student Loan Refinancing Alternatives

While student loan refinancing offers many benefits, there are alternatives for individuals who have a variety of needs. Here is a list of refinancing alternatives:

  • Income-Driven Repayment Plans – These repayment plans offered by the federal government allow borrowers to adjust their repayment terms and monthly payments based on their income and family size. The federal government offers fours types of income-driven repayment plans for different needs.
  • Deferment – Another option provided by the federal government, deferment allows you to delay making payments on your student loans for a period of time. Beware, however, that interest may still accrue.
  • Forbearance – Forbearance allows you to either forgo making payments on your student loans or pay them at your leisure for a period of time. During this time, interest is not accrued. Forbearance is typically offered in the event of economic hardship.
  • Consolidation – Consolidating your student loans simply means combining several loans from different servicers into one loan. The interest rate you get from consolidating is based on an average of your combined loans, or a weighted average. Through the federal consolidation program, your loans will be rounded up to the nearest 1/8th percent. Learn about student loan consolidation vs. refinancing.

When is it time to refinance your student loans?

Deciding when to refinance student loans at the perfect time is different for everyone. The decision is largely personal. Your best bet is to have a firm grasp on where you are financially and how you will benefit from refinancing. For instance, if you plan on taking advantage of federal student loan programs, or your credit score and history aren’t in the best shape, refinancing may not be right for you. However, for many, refinancing can save significant money on interest and on loan payments over time, due to lower interest rates, shorter loan terms, and lower payments. Alternatively, refinancing can serve to alleviate some financial stress by lengthening your repayment term and thus lowering your monthly payments. If you’re interested in refinancing, you can prequalify with ELFI in minutes to see your rate, without affecting your credit score. If you have questions, contact us to speak with one of our Personal Loan Advisors.

 


 

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person making pros and cons list for refinancing private student loans
2020-09-25
10 Pros and Cons of Refinancing Private Student Loans

This year we have seen record low refinancing rates for student loans. If you have private student loans and have been thinking about whether you should refinance them, we hope this post will help you make a decision. We will run through the essentials and the pros and cons of refinancing your private student loans.  

6 Benefits of Refinancing Private Student Loans

Private student loans are loans borrowed through banks, credit unions or other private lenders and can consist of original private loans or a loan that you already refinanced. When you refinance, there are many benefits you can experience. Here are the pros of refinancing your private student loans:  

1. Obtain a Lower Interest Rate

When you refinance a private loan, you are paying the loan off with the new loan you borrow.  The new loan can have a lower interest rate than the rate you previously had on your old loan. A lower interest rate can lead to thousands of dollars in savings depending on the amount of the loan, your old interest rate and your new rate. A lower rate can help reduce your monthly payment and save you money in interest cost over the loan term.  

2. Make Your Repayment More Manageable

If your monthly payment is becoming difficult to pay, refinancing is a good way to help make your payment more manageable. This can be done by obtaining a lower interest rate, as previously mentioned, that can help lower your payment. You can also lengthen the loan term when you refinance. When you extend the loan term it makes the monthly payment lower, but will increase the amount of interest charges you will pay.  

3. Pay Debt Off Faster

Ready to pay your loan off faster? This can be achieved through refinancing in multiple ways. If you have 10 years remaining on your loan term and
refinance to a 7 year loan term or shorter , you will have a higher payment but will have the loan paid off 3 years earlier. Another way to pay off your loan faster is if you refinance and obtain a lower interest rate, your payment will be lower monthly. But if you continue to pay your old monthly payment or more towards the new loan you will be able to knock out your debt quicker.  

4. Release a Cosigner

When you refinance your private student loan you can use the opportunity to release a cosigner from your previous loan. As long as you have a strong credit history and credit score, along with stable income, you can qualify for the new loan on your own. To qualify for the best interest rates available most lenders look for a credit score at least in the high 700s. At ELFI a minimum credit score of 680 is needed for refinancing.*  

5. Combine Multiple Loans

If you have multiple student loans, refinancing is a great way to simplify your finances. You are able to pay off all the previous loans and focus on paying off just one loan. It’s also easier to keep track of your due date so you never miss a payment. Having only one loan may also help keep you motivated on your debt paying journey instead of seeing multiple student loan debts you have to pay.  

6. Choose a Different Lender

If you are not happy with your current student loan lender, refinancing allows you to change to a different refinancing lender by refinancing with whichever lender is the best fit for you. So if you have questions about your loan but can never seem to get answers from your lender, refinancing can help you fix that. At ELFI we pride ourselves on providing a simple and easy process for refinancing along with award-winning customer service loan advisors.

However, just like there are benefits to refinancing private student loans, there are also some cons to consider.  

1. Lose Benefits with Your Current Lender

If you refinance your student loan with a different lender, you may lose benefits you have with your current lender. Some benefits that lenders may provide are an interest rate deduction for setting up auto-pay for your payment, forbearance options, or career coaching. Before you look to refinance with a different lender, weigh whether a new interest rate from a different lender outweighs any benefits you may be giving up.

2. Get a Higher Interest Rate

If you are refinancing to extend your loan term to make the payment more manageable, you may end up with a higher interest rate then the previous rate you had. This would make refinancing your loan more costly in the long term because of the additional interest you will end up paying. In order to avoid this, make sure to get personalized rate quotes from multiple lenders so you know your options and how it will affect your monthly payment and the total amount of interest you will pay.

3. Raise Monthly Payments

When you refinance you have the ability to choose a new loan term. Selecting a shorter loan term then the amount of time you had left on your loan can increase your monthly payments. Typically refinancing lenders provide loan terms of 5, 7, 10, 15, or 20 years. If you had 8 years remaining on the loan you want to refinance and select a loan term of 7 years you may see an increase in your monthly payment unless you are qualifying for a significantly lower interest rate.

4. May Extend Time to Repay

When selecting your loan term when you refinance, if you choose a longer loan term then the amount of time you had remaining on your loan, you will be stuck paying the debt off longer. However, this can be beneficial if you need to lower your payment to fit within your current budget. You can also combat this issue by paying more than the required monthly payment when you can afford it, to help pay the loan off quicker.

The Bottom Line

Every financial situation is unique so it’s best to determine what is right for your circumstances. When you weigh the pros and cons of refinancing private student loans, you will most likely find it is advantageous for you because of all the different potential benefits.  
  *Subject to credit approval. Terms and conditions apply.   Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
Man refinancing his student loans to a longer term
2020-09-23
Should You Refinance Student Loans to a Longer Term?

If your student loan payments are becoming overwhelming, it could be time to consider refinancing. When you refinance your student loans, you’ll not only have the option of consolidating multiple loans into one monthly payment; you’ll also have the chance to change your student loan repayment term.   When you take out private loans, you have the option of choosing to repay them over a short period of time or a longer period. We’ve compiled the pros and cons of both, as well as some situations in which a longer student loan repayment term might be the right fit for you.  

Is it time to refinance your student loans?

Refinancing your student loans is a great way to lower your interest rate and earn financial freedom more quickly. You can refinance both private and federal loans, and if you’re tracking a multitude of payment dates and timelines, consolidating your loans through refinancing can be a great way to simplify your financial life and work toward becoming debt-free.   You can refinance your loans as many times as you’d like, so even if you’ve already refinanced once, it never hurts to explore new lenders! Now is an especially good time to refinance your student loans, as interest rates have recently dropped as a result of the COVID-19 pandemic. As of September 18, 2020, student loan refinancing rates are as low as 2.39% for variable interest rate loans and 2.79% for fixed interest rate loans.   If you think now is the right time to refinance your student loans but you’re not sure, keep reading for more insights. We’re here to support your journey toward financial freedom and applaud your researching smart money moves!  

Signs it might be time to refinance your student loans:

  • You think you could earn a better interest rate. If interest rates recently dropped or your credit score has gone up, research your options to see if refinancing could be the right choice for you.
  • You have mostly private student loans. If your loans are through private lenders, now could be the time to consider refinancing, as you won’t risk losing any federal benefits.
  • You need more financial flexibility. If your student loan payments are keeping you from accomplishing other financial goals, refinancing could help by lowering your interest rate and extending your student loan repayment term. To learn more about the pros and cons of a long student loan repayment term, read on.
 

What happens when you change your student loan term?

A student loan repayment term calculates how long you have to pay back your loans in full. ELFI, for example, offers varying repayment terms for student loan refinancing.   When you consolidate and refinance your student loans, you’ll have the opportunity to change your student loan repayment term. This is especially useful if you’ve taken out several loans with different amounts and timelines.  

Choosing a longer term for your student loans

Opting for a longer student loan repayment term means you will pay more in interest over time. Each monthly student loan payment, however, will have a lower balance than if you had opted for a short repayment term.   If you're looking to accomplish several financial goals, like saving for a down payment on a house or purchasing a new car, lengthening your student loan repayment term may give you the flexibility you need to work toward those goals. Be advised, however, that if you do opt for a long student loan repayment term, the total amount you’ll pay in interest will go up. At the end of the day, the right student loan repayment term for you depends primarily on your long-term financial goals.

It might be time to refinance your student loans to a longer term if:

  • You want the financial flexibility of a lower monthly student loan payment
  • You’re expecting a drop in income and need to lower your monthly expenses
  • You’re having difficulties keeping up with your current student loan payments
 

What about shortening my student loan repayment term?

If none of the above scenarios apply to you and your most pressing question is “how can I pay off my student loans faster?” then a short student loan repayment term could be right for you.   Unlike a long student loan repayment term, you’ll make larger monthly payments but will pay less in total interest. Opting for a short student loan repayment term is the right choice for borrowers who have the financial flexibility to make larger monthly payments for a short period of time.   Learn more about short student loan repayment terms in our recent blog, “Choosing the Right Student Loan Repayment Term.”  

Refinancing student loans with ELFI

Ready to explore your student loan refinancing options with ELFI? Great! We’re excited to help. In addition to potentially lowering your interest rate and choosing a new student loan repayment term, when you refinance with ELFI, you’ll also work directly with a Personal Loan Advisor who will help provide a seamless, personalized refinancing experience.   Don’t take our word for it. Check out recent customer reviews on Trustpilot! If you’re ready to explore potential interest rates by refinancing with ELFI, check out our Student Loan Refinance Calculator.*  
  *Subject to credit approval. Terms and conditions apply.   Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no­­­ control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
Man contemplating which student loans to refinance in 2020
2020-09-10
Which Student Loans Should You Refinance in 2020?

With interest rates favorable to student loan borrowers, right now can be a great time to refinance. But not all loans are created equal. In fact, it may be better to wait to refinance certain types of loans. Keep reading to find out which student loans you should refinance in 2020.    By Caroline Farhat  

Refinancing Rates at All-Time Lows. Should You Refinance?

Refinancing interest rates for student loans are at an all-time low in history. This is due to the Federal Reserve lowering interest rates in response to the COVID-19 pandemic. When the Federal Reserve lowers interest rates, this impacts rates that lenders will use on loans that you borrow. This change affects private student loans with variable interest rates and any new loan that you want to take out, including refinancing rates. This makes it an ideal time to refinance if you have certain loans.      As of September 8, 2020, student loan refinancing rates are as low as 2.39% for a variable interest rate loan and 2.79% for a fixed interest rate loan. If you refinance now you could potentially be saving thousands of dollars over the loan term because you will be able to lock in a low interest rate. This will also save you on your monthly payment.   

Example of Savings When Refinancing

Here is an example of how much can be saved by lowering your interest rate:    If you have $60,000 in student loans and an interest rate of 9% with 10 years remaining on your loan term, your estimated monthly payment would be $760.00. If you took advantage of the low interest rates now and qualified for a fixed rate of 3.76% you could save as much as $159.00 per month and over $19,000 in interest over the remaining 10 years.    To find out your possible savings, use our
Student Loan Refinance Calculator* where you can put in your specific loan numbers to obtain an estimate of the amount of savings for your specific situation.   So now that you see how beneficial it can be to refinance student loans, which ones should you try to refinance in 2020?   

Considerations for Refinancing Federal Student Loans

Federal student loans are currently benefiting from the protections provided by the CARES Act and the subsequent Executive Order signed on August 8, 2020. The benefits provided include: 
  • 0% interest - Right now federal loans are not accruing any interest because of the lowered interest rate. This means the loans are not increasing and can actually be paid off faster if payments are made while the interest rate is 0%.
  • Administrative forbearance - This means no payments are due during forbearance. Payments are set to resume in January 2021. 
  • During the administrative forbearance, payments that you would have made during this time but are not required to make, still count towards forgiveness for loans in the Public Service Loan Forgiveness program. 
  All of these benefits are set through December 31, 2020, making it more ideal to wait until 2021 if you want to refinance any federal student loans. If you have federal loans and were to refinance them now, you would lose these federal benefits. During this time if you have a federal student loan it is best to use the money that you would normally be paying on your loans to save for an emergency fund, pay off other high interest debt, or use it to make a lump sum payment on your loans when payments resume.    

Best Student Loans to Refinance in 2020

The loans that would be best to refinance now in 2020 include:  

Private Student Loans

If you obtained private student loans in the early 2000s you could have an interest rate as high as 9%. Refinancing older student loans would greatly benefit from the much lower interest rates. Even if you have newer student loans with a lower interest rate than 9%, with rates so low you may be able to refinance with a shorter term length and still be able to see savings and cut time off your student loan.    Here is how that could work: with a student loan balance of $60,000 with 18 years remaining at 7% interest you would be paying approximately $489 per month. But if you refinance the loan and qualify for a rate of 4.07% you could save an estimated $43 per month, over $25,000 in interest, and cut your loan term down to 15 years. That’s saving you time and money on your student loans!  

Variable Interest Loans

If you have a variable interest rate loan, you may also be experiencing the benefits of the interest rates being lowered. However, just as rates can be lowered, they can be raised. If you want the security of knowing your rate cannot go up, now would be a good time to lock in a low fixed interest rate.    

Bottom Line

Refinancing is a great way to save money on your loans. Knowing the current student loan environment is helpful to determine the best financial move for you now. With the current CARES Act, refinancing only your private student loans and not your federal student loans may be the most financially savvy move you can make this year.  
  *Subject to credit approval. Terms and conditions apply.   Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no­­­ control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.