Refinancing with Earnest
Refinancing rates from 1.99% APR. Checking your rates won’t affect your credit score.
In years past, you were stuck with your student loan interest rates. Borrowers had little to no options for changing their repayment situations.
But as more and more borrowers felt the pinch of student loan debt repayment, a new industry was born to help make it a bit more manageable: student loan refinancing.
You might have heard about student loan refinancing, but aren’t quite sure if it’s right for you. In this guide, you’ll learn everything you need to know to decide whether you should refinance your student loans.
What is student loan refinancing?
Student loan refinancing is the process of obtaining a new loan at a new interest rate. Typically, you can refinance both your federal and private student loans, which involves paying off your old loan and obtaining a new one, with different repayment terms and (hopefully) a better interest rate.
Student loan refinancing is different than consolidation, though many people erroneously use the terms interchangeably. Consolidation typically refers to taking out a Direct Consolidation Loan and combining all of your federal student loans into one loan with one interest rate.
While there are some similarities with refinancing, consolidation does not offer any interest savings. In addition, private student loan borrowers are not eligible for consolidation. Because of this, refinancing can be a good option for private student loan borrowers or for those with a combination of federal and private student loans.
The key benefit of refinancing is the potential to save thousands of dollars in interest over the life of the loan. Borrowers with Grad PLUS loans, for instance, have interest rates hovering around 7% — through refinancing, you could get approved for a much lower rate, saving you a lot of money.
Using the additional savings, you could pay more money towards your principal balance, invest, or start an emergency savings fund.
Should you refinance? What to consider first
Student loan refinancing is a great way to make payments more manageable, but there are important things to consider before you decide to refinance your student loans.
Through the process of refinancing, you are essentially applying for a private loan. If you already have private loans, that might not be an issue. But if you have federal student loans, you will give up your federal student loan protections, including:
- Income-Driven Plans. When you refinance your federal student loans, you will no longer be eligible for income-driven plans such as Income-Based Repayment, Pay As You Earn, and more. You might not need these options right now, but if times get tough, they could be a lifesaver.
- Loan Forgiveness. Federal student loans have some loan forgiveness options, through the the Public Service Loan Forgiveness program, Teacher Loan Forgiveness Program, and more. Though loan forgiveness with these options have their own set of terms and conditions, loan forgiveness will not be an option at all if you refinance your loans.
- Deferment and forbearance. If you fall on serious financial hardship, postponing your payments through deferment or forbearance can help. However, if you refinance, you may have limited options to postpone your payments.
When you refinance your student loans, you’re working with a private lender and forfeit the federal protections offered to you with your federal student loans. This doesn’t mean that you shouldn’t look into refinancing as a viable option, but it’s something to seriously consider.
The process of refinancing is irreversible, so you cannot go back and obtain these benefits at a later date. Once you refinance, you’re going to be with your refinancing company for the duration of your repayment.
How to determine your refinancing eligibility
Because student loan refinancing companies are private lenders, there is more than just one option for student loan refinancing. In fact, there are multiple companies in the student loan refinance marketplace that you can choose from. But before you pick one, it’s key to determine your eligibility.
Student loan refinancing companies tend to have stricter eligibility terms, so before you go through the hassle of applying, do your research regarding the eligibility requirements for each lender.
Most lenders require you to have a good credit score, typically around 700, though each lender is different. Lenders also want proof of a stable income and cash flow to support your new loan.
Aside from financial requirements, some lenders might only work with borrowers in certain career fields or from particular schools.
To determine your eligibility, check out our list of refinancing options and look for eligibility information listed on each lender’s website. Be sure to read the fine print, as refinancing may not be available in all states.
How to find the best student loan refinancing companies
Once you’ve assessed your eligibility and narrowed it down to a few possibilities, it’s time to choose the best lender for you. Here are some things to consider to help you find the best lender for you:
- Does your lender offer fixed rates, variable interest rates, or both?
- How much could you save with their interest rate? Use a refinancing calculator to see potential savings.
- What are the repayment terms and how will that affect your monthly payment?
- Do they offer any perks? For example, SoFi offers Unemployment Protection and has an Entrepreneur Program, while CommonBond has a Social Promise to give back to the community.
- What are others saying about the lender? Do they have a good reputation? Check out reviews to hear from your peers.
- Do they have an option to postpone your payments if you lose your job or fall on hard times?
- Is there an origination fee or prepayment penalty?
- What are the minimum and maximum amounts of debt they will refinance?
- What kind of customer support do they offer? Are they easily accessible?
After doing a comparative analysis between lenders, pick your top three and start applying.
Why three? Even after you’ve assessed your eligibility and chosen your top three lenders, you still have to get approved for refinancing. Each lender has their own requirements and some are stricter than others. Depending on your credit score and your income, one lender might be more likely to approve you than another.
In the end, you want to have options and find the best lender for you. Even if you were rejected for refinancing, you can apply again at a later date when your situation changes.
How to prepare for refinancing
Before you apply for student loan refinancing, you’ll want to do a quick financial audit and prepare some documents to help the process move along smoothly. Here are some steps to take to prepare for refinancing.
- List out all of your federal and private student loan totals.
- Write down your loans’ interest rates next to the total.
- Create a third column and include your loan servicer’s information, including phone, email, and mailing address.
- Gather your most recent pay stubs. (While you’re at it, look at your after-tax monthly income — how does that compare to your proposed monthly payments?)
- Collect last year’s tax return.
- Check your credit reports from the three major bureaus using AnnualCreditReport.com.
- Check your credit scores on CreditKarma.com.
Taking these steps can help you prepare to refinance your loans and have all of your information in one place.
Choosing your refinancing terms
Through student loan refinancing, you may be able to choose from various repayment terms and interest rates.
Consider your repayment term carefully and assess how it will affect your monthly payment. In other words, will your monthly payment be going up, staying the same, or going down? It all depends on the repayment terms that you choose.
Most refinancing companies offer repayment terms of five, 10, 15, or 20 years. Of course, we believe it’s best to pay off your loans as quickly as possible. But you should also make sure that whatever repayment term you choose is manageable for you and allows you to reach other financial goals, too, like saving for retirement.
In regards to interest rates, carefully assess the impact of choosing a fixed or variable rate. Fixed rates are typically a tad higher than variable rates — but they are fixed, meaning they won’t go up or down over the life of your loan.
Variable rates tend to be lower and are currently an attractive option. That’s because variable interest rates are linked to the Federal Reserve and for the past few years, interest rates have been at historic lows.
But before you opt for a variable rate to save money, understand that rates are expected to rise in the near future. You could end up with a higher interest rate down the line than if you had selected the fixed rate option.
If you think you can aggressively pay off your loans in just a few years, a variable rate loan could help you achieve that. But if you choose a longer repayment term, you may be better off with a fixed interest rate. To save extra money on interest, see if your prospective lender offers auto-pay, which usually comes with a 0.25 percent interest rate deduction.
Refinancing your student loans could be a great way to save money on your student loans, but it’s still a major financial decision. You’ll want to carefully assess the costs and the benefits of student loan refinancing and choose what is right for you.
If you do choose to refinance your loans, start thinking about what you’ll do with the additional savings so you can put your extra money to work.