Private student loans can be an excellent way to pay for college when scholarships, grants, federal loans, and other financing options aren’t enough to cover tuition.
But when it comes to paying that money back, it can get overwhelming.
Depending on your credit and financial situation when you were first approved for a private loan, your interest rates may be high — making monthly payments unaffordable.
If you’re struggling to keep up with your payments, refinancing your student loans may be able to help you save money, get a lower payment, or a combination of both.
How refinancing private student loans works
Refinancing is the process of replacing one or more existing loans with a new one. With student loans, you can refinance private loans, federal loans, or both together. But why refinance your private student loans?
Here are some clear benefits you may be able to take advantage of:
- Lower interest rates: If you qualify, you may be able to score a lower interest rate than what you’re paying on your current loans. Depending on how much you owe, the savings could be hundreds or even thousands of dollars. But with private loans, even a slightly lower interest rate could be worth it. If you can qualify for a better deal to save money, it’s typically a no-brainer.
- Lower monthly payments: One of the byproducts of a lower interest rate is a lower monthly payment. If your cash flow is tight, paying even a little bit less on your loans every month can make a huge difference, especially if you’re not making up for it later with more interest charges. Or, you can also accomplish a lower payment by choosing a longer repayment term — some lenders offer terms up to 20 years.
- Payment flexibility: Whether or not you qualify for a lower interest rate, you can have some control over your monthly payment by choosing a shorter or longer repayment term. A shorter term would result in a higher monthly payment but would get you out of debt faster, if you can afford it. If you can’t, a longer repayment term could reduce your monthly payment substantially to a more affordable level. Either way, you can gain some control over your debt situation.
- Choice of lender: If you’ve had difficulties with your current lender, refinancing private student loans can give you the chance to shop around and look for other lenders with better customer satisfaction ratings, more generous forbearance options, or different features that are a better fit for your needs.
Also, it’s important to note that refinancing private student loans is a bit different than refinancing federal student loans because you’re not giving up any of the benefits federal loans provide. For example, most private lenders don’t offer income-driven repayment plans, and loan forgiveness programs aren’t an option.
One of the downsides of refinancing private student loans, though, is that there’s no guarantee that you’ll get approved based on your credit history. Even if you do, you may not be able to get a a better rate than you currently have.
The good news is that many private student loan companies allow you to apply with a cosigner. This person agrees to make payments if you can’t at any time, and the lender will use their credit history and income to help determine your eligibility.
Even if your credit isn’t perfect, a cosigner can help you qualify for a much lower rate and get more offers from a wider variety of lenders.
Many private lenders also offer cosigner release programs, which can allow you to remove your cosigner from the loan down the road when your credit has improved.
How to get the best rate when refinancing private student loans
If your reason for refinancing is to save money, it’s important to take steps that can have a concrete effect on your new loan’s interest rate. Here are some tips that can help you maximize your savings:
- Shop around: The best thing you can do is to shop around and compare multiple lenders before you settle on one. Each lender has different criteria for determining interest rates, and even though your situation doesn’t change, how they view it can vary. Purefy’s Compare Rates tool can help you compare rate quotes from multiple lenders in one place, making the process easier and faster.
- Improve your credit: If your credit score isn’t where you want it to be, consider taking some steps to improve it before you apply for refinancing. Check your credit score and credit report to identify areas that need to be addressed. Also, work to pay down credit card debt, get caught up on past-due payments, and avoid taking on new credit unless it’s absolutely necessary.
- Get a cosigner: As previously explained, a creditworthy cosigner can help improve your chances of scoring a lower interest rate, even if you qualify for a low rate on your own. Just keep in mind that your cosigner is taking on financial responsibility if you fail to make payments, so be clear about that upfront and take measures to avoid missing a payment.
Should I refinance student loans?
There’s no one-size-fits-all solution to refinancing student loans. Every situation is unique, and it’s important for you to take stock of yours and also research all of your options before settling on a decision.
In some cases, for instance, refinancing may not reduce your monthly payment to a level that’s affordable to you. In that case, you may want to reach out to your current lender first to see what their options are for modified payments or forbearance.
Also, if your credit score is low and you can’t find a cosigner, you may simply have to wait until you’ve had a chance to improve your situation before you apply again.
So to summarize, here are some questions to ask that can help you determine whether refinancing is right for you:
- Why refinance student loans? Think about your reasons and whether the benefits of refinancing apply to you.
- What’s my credit score? You typically need great credit to get approved on your own. Otherwise, you may need a cosigner.
- What’s my income? The higher your income, the better your chances of getting approved. Again, though, it’s possible to still get approved if you have the right cosigner.
- What do I lose? If your current lender does offer some extra features, what might you lose in the process of refinancing? Is there something comparable with a different lender, and is it important enough to miss out on other benefits of refinancing?
Also, make sure to take the time to compare rates from multiple lenders before you decide to refinance. This can ensure that you get the best deal and maximize your savings as you pay off your student debt.