Student Loan Refinancing: Decide If It’s Right for You

Refinancing your student loans could come with a big payoff, but it also comes with big changes: a new lender, new repayment term and new interest rate. Refinancing federal loans might also mean losing certain benefits.

NerdWallet is here to help you consider the pros and cons, and navigate the process if you decide to go for it. Use this infographic to determine if refinancing is a good option for you, and then read on to learn more.

Via: NerdWallet

Refinancing: The basics

When you refinance student loans — whether federal, private or both — a new lender pays off the loans and issues you a new private loan for the combined balance of the old loans.

Your credit score will determine the interest rate you get. Refinancing marketplace Credible, for instance, says borrowers who have a credit score of at least 680 will have the most success on its platform. If you don’t have good or excellent credit, you can ask someone you trust — like a parent or sibling — to be a co-signer. A creditworthy co-signer can help you qualify for refinancing and get a better rate.

Most lenders will offer you a repayment term between five and 20 years. Keep in mind that a shorter repayment timeline will save you money in interest. You’ll also be able to choose between a fixed and variable interest rate. Variable rates often start out lower than fixed rates, but they may go up in the future.

Persis Yu, an attorney for the Student Loan Borrower Assistance Project at the National Consumer Law Center, says that if your current loan has a fixed interest rate, “it’s important not to get lured too easily by something that may be lower now but won’t be in the future.” 

Consider refinancing if:

Your loans have high interest rates

The most compelling reason to refinance is to pay less in interest.

If you took out a federal student loan in 2007, for instance, you’d be paying 6.8% of your loan balance each year in interest. That rate has since dropped to 4.29%, but the government doesn’t offer refinancing at current, lower interest rates. Interest rates for private student loans can be even higher than those for federal loans.

But private refinancing companies can give you a lower rate on loans if you’ve developed strong credit history. That could mean thousands of dollars in savings on both federal and private student loans over time.

You have great credit or a co-signer

In general, refinancing is best for borrowers who have job security, responsible financial habits and a clean credit history.

Lenders use your credit score to determine how risky it is to lend you money. A credit score in the 700’s or 800’s shows that you’re trustworthy, and will get you the lowest interest rates. It’s also important to show lenders you have a steady income and stable job history. If you don’t meet these requirements, you can get a refinanced loan with a co-signer who does.

Some lenders require you to have attained a certain degree or to have graduated from particular schools. Check each lender’s requirements thoroughly — or shop for a lender using a marketplace like Credible’s — to make sure you meet their prerequisites before applying.