Refinancing Your Student Loan

What You Should Know Before Refinancing

Refinancing Your Student Loan
April 15, 2014

If you have graduated with student loans that have relatively high interest rates compared to the market, do you have options to refinance? You do, but you have to consider some things to determine if refinancing is right for you.

  • Your Objective – Are you trying to pay your loan off earlier, reduce your total interest paid, or reduce your monthly payment? In the latter case, you may be able to find a better interest rate, but you will probably end up extending the terms.

  • Type of Loan – If you have Stafford Loans or other federally subsidized loans, your refinancing options are limited. Many private lenders will not accept federal loans for refinancing, although there are a few who will. Most are new lenders such as the alumni-based financing group Social Finance (SoFi) and Common Bond, which are directed at graduate students.

    Federal loans come with benefits such as income-based, income contingent, or pay-as-you-earn repayment options that you will lose upon refinancing. You may be better off looking at the federal Direct Loan Program and changing to a different payment plan to lower monthly costs, or consider a loan consolidation. Both will cost money in the long run, but you can extend terms and lower monthly payments while retaining some of the federal loan flexibility.

    If you have a private loan, search for a better deal through traditional lenders, or variations such as SoFi listed above. It is best to start with your existing lender; they may cut you some slack to keep your business.

  • Your Current Financial Situation – Are you in a stable job with steady income? Has your credit rating changed since you took out the original loan? Since you are in essence applying for a new loan through refinancing, lenders will be re-assessing your risk. If you have had to run up credit bills or your income is not stable, you probably cannot beat your existing interest rate and terms. Conversely, if things have improved, shop around for rates and terms. The time to refinance is before you get into trouble.

    If you have been paying for several years, you have probably paid most of the interest and are now repaying mostly principal. Unless you are getting a really great deal, you may be better off making an extra payment toward principal instead of refinancing.

  • Your Current Interest Rate – Stafford loans are at a temporary low (3.86%-5.41%) as they switch from a standard fixed rate to a fixed loan term rate that is determined each year by a margin added to the 10-year Treasury rate (thanks to 2013 legislation).

    That will be hard to beat in the private market, which is currently around 5.5%. Past Stafford rates were 6.8%, and you can probably beat that in the private market (currently around 5.5%) – if you can find a lender that will refinance Federal Loans.

Calculators are available online to help you determine whether you can save money by refinancing, and/or switching to a variable rate loan. Do not forget to take refinancing fees and costs into account as you evaluate your options. Don't forget about tax ramifications, either. Refinancing may negate your student loan deduction (since it is not a student loan anymore; it's a new loan).

Keep your objective in mind, check for limitations or losses you may run into by refinancing student loans (especially federally subsidized ones), compare your loan options, and make sure you understand all terms and fees for any new loans. If you follow that plan, you are very likely to make the best decision for your situation.

Find out quickly at what rate you can refinance your student loan.

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