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Should you refinance your student loans?
Short answer: if you have student loans, you should at least strongly consider refinancing.
What is refinancing?
Refinancing is basically restructuring your student loans to change the payment terms (the interest rate, monthly payments, and number of months to pay-off). Here’s how it works: a private lender pays your student loan debt in full, then issues you a new loan to cover that payment. So instead of making payments to your original lender, you make payments to this private lender who paid off your original loans.
Why would these private lenders be willing to pay off your debt? Well, they make good money for it! They have the cash available to pay off the debt right away, then they get to charge you interest every month. So it’s like an investment for them. They pay a bunch of money upfront and get paid back with interest year after year.
Why should I refinance?
The goal of refinancing is usually to lower your interest rate and lower your monthly payments. This only works if the interest rate offered by a private lender is lower than the current interest rate on your existing student loans. Interest rates have fallen from 6.8% in 2006 to just 3.76% in 2016 (source). If you originally took out a loan before 2010, you have a great chance of saving some serious cash by refinancing!
Refinancing is also helpful in changing the pay-off time-frame. You can get quotes from private lenders for a shorter loan term, which would get you debt free sooner! Or a longer loan term, which could reduce your monthly payment if you’re struggling to pay your bills each month. Keep in mind a longer lease term means you’ll be paying more in interest, so as long as you can make the payments, keep the loan terms short.
Is refinancing the same as consolidating?
No. Consolidating is taking your multiple student loans (you’ll often get a separate loan each year or semester) and combining them into one loan. The interest rate doesn’t change when you consolidate, so it doesn’t save you any money. It’s just easier to keep track of one loan than four or more loans. And it makes payment easier since you just have to make one payment per month on your consolidated loan instead of multiple payments to each of the different original loans.
But to save money, you need to consider refinancing, not consolidating.
Here are the factors you need to consider before refinancing:
1. Are the available interest rates lower now than they were when you originally got the loans?
This is the big question. To benefit from a refinance, you need the current rates to be lower than the rate on your existing loans. Check out these recent-year rates:
| School Year | Direct Subsidized Loans (Undergrad) | Direct Unsubsidized Loans (Undergrad) | Direct Unsubsidized Loans (Graduate) |
| 2016-2017 | 3.76% | 3.76% | 5.31% |
| 2015-2016 | 4.29% | 4.29% | 5.84% |
| 2014-2015 | 4.66% | 4.66% | 6.21% |
| 2013-2014 | 3.86% | 3.86% | 5.41% |
| 2012-2013 | 3.40% | 6.80% | 6.80% |
| 2011-2012 | 3.40% | 6.80% | 6.80% |
| 2010-2011 | 4.50% | 6.80% | 6.80% |
| 2009-2010 | 5.60% | 6.80% | 6.80% |
| 2008-2009 | 6.00% | 6.80% | 6.80% |
| 2007-2008 | 6.80% | 6.80% | 6.80% |
| 2006-2007 | 6.80% | 6.80% | 6.80% |
These available interest rates are just a guideline. Your interest rates will depend on your credit and income, but it would be exceptionally difficult to get a better rate from a refinance if the current available rates are higher than the rates on your existing loans. But you’ll notice in the table above that the 2016/17 school year subsidized loan rates are a very low 3.76%. This is great news for most borrowers looking to refinance!
2. How is your credit?
Better credit gets you a better (lower!) interest rate. Good credit shows the lender that you make your payments in full and on time, so it’s not super risky for them to lend you money. In exchange for the lower risk, they give you a better interest rate.
Hopefully your credit has improved since you originally took out those loans because you’ve had more time to build your credit history. That would help you get a lower rate on your refinance. If, for whatever reason, you credit has gotten much worse since your original student loans were issued, you might not be able to get a lower interest rate, so a refinance wouldn’t save you any money.
3. How is your income?
Hopefully your income has also improved since college! Higher income will often get you a better interest rate because it shows the lenders that you have the money available to make your monthly payments. Again, lenders look at borrowers on a risk-basis. If you have good credit and good income, there is less of a risk that you’ll fail to pay back your debt. And the lenders are willing to give you a better rate since they aren’t taking a huge risk on you.
Now for most lenders, good income isn’t enough. They also want to see how much other debt you currently have so they know your income covers all of your debts. Let’s say you make good money: $100,000/year. Good income? Check! But what if your debt payments add up to $90,000/year, leaving you just $10,000 to pay all your current living expenses (groceries, gas, utilities, etc.)? Compared to someone with the same income and debt payments of just $40,000/year, you’re a much bigger risk. That other person has $60,000 left after their debts are paid, so lenders feel like they are more likely to be able to make their payments in full and on time on a new debt.
This is called your debt to income ratio, and lenders like to see your debt as a lower percentage of your income.
4. Would you be waiving any federal protection by refinancing?
The last factor you should consider before applying for a student loan refinance is whether or not you have any federal protection on your existing loans that would disappear if you refinance.
In some cases, there are government programs for student loan forgiveness (like for some teachers and public servants). This isn’t usually the case, but it is something you should look into to make sure you’re not waiving rights that could benefit you more than the refinance.
How to Refinance
If you’re feeling good about the possibility of refinancing your student loan debt, you should get a free quote right away (as in, before you move on to something else today and forget you ever considered a refinance!).
SoFi has become to the go-to student loan refinance company over the past few years. Their members save an average of $19,000 when they refinance student loans, and they have a cool professional networking community to boot.
Head over there and see how much you can save by refinancing today!
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