Student loan debt can be a crippling burden, and any strategy that can help you eliminate yours faster — or with less interest — is a good one.
One of the most prominent ways to save money while paying down student loans is through refinancing, and Purefy’s Compare Rates tool can help you maximize those savings.
But is it a good idea to refinance student loans, and why should you consider it? Here’s everything you need to know.
What is student loan refinancing?
Student loan refinancing is the process of consolidating one or more existing student loans into a new one through a private lender.
You can choose to refinance both federal and private loans. When the process is complete, the new lender uses loan funds to pay off your old loans, replacing them with a new account, presumably with a lower interest rate or more flexible repayment terms.
For example, let’s say you have four student loans:
- Loan A: $10,000 with a 6% interest rate
- Loan B: $3,000 with a 4.5% interest rate
- Loan C: $6,000 with a 5.8% interest rate
- Loan D: $12,000 with a 7% interest rate
Between these loans, your weighted-average interest rate is 6.2%. So why refinance student loans?
If you’re able to qualify for a lower rate than that with a refinance loan, it could save you significantly on interest over to life of your loan while making it easier to pay off your balance more quickly.
3 reasons to refinance student loans
Not everyone qualifies, but among those who do, there are three primary benefits of refinancing student loans.
- Lower interest rate: If you’re eligible, you may be able to score a lower interest rate, which can reduce your monthly payment and save you substantial cash on interest costs. With a lower monthly payment, you may have more room in your budget to put extra dollars toward your debt to pay it off faster.
- Payment flexibility: The standard repayment term with the federal government and many private lenders is 10 years. And while the U.S. Department of Education offers different repayment terms after you start making payments, most range from 20 to30 years. With a student loan refinance, you’ll have greater flexibility to choose the payment plan you want, whether that’s shorter or longer than what you currently have — giving you more control over your monthly payment.
- Lower debt-to-income ratio: If you qualify for a lower interest rate and monthly payment, it will lower your debt-to-income ratio, which is an important factor all lenders consider — especially mortgage lenders. If you’re hoping to buy a home in the near future, a lower debt-to-income ratio can make it easier to qualify for the mortgage you want.
3 potential considerations before you refinance student loans
While there are some significant benefits to refinancing student loans — especially becoming debt-free sooner and saving money on interest charges — there are some things that may make you think twice about it.
- Not everyone qualifies: To be eligible for student loan refinancing, especially with low interest rates, you typically need to have a very strong credit history and a relatively high annual income. If you don’t have these, you can add a creditworthy cosigner to the loan, but even that is no guarantee you’ll get a low enough rate to make it worthwhile.
- You’ll lose federal loan benefits: The federal government offers several benefits to its borrowers including access to loan forgiveness and income-driven repayment plans, strong forbearance and deferment options, and a generous path out of default if you stop making payments. Since a student loan refinance provides you with a new private loan, you’ll no longer qualify for those features.
- Potential impact to cosigners: If you do get a cosigner to apply with you and you’re approved, they’ll be responsible for making payments if you don’t. The loan will also show up on their credit report, which can make it difficult for them to get approved for credit in the future and can hurt their credit score if you miss a payment.
How to maximize your savings while shedding student loan debt
If you understand both the benefits and drawbacks of refinancing student loans and want to proceed, the best way to maximize your savings is to shop around before applying.
Every private lender is different in how they determine creditworthiness and refinance rates. So even if you qualify for a lower rate than what you’re currently paying with one lender, you may be able to get an even lower rate with a different one.
Student loan refinancing companies typically don’t require a hard credit check to get a rate quote. But it can be time-consuming to visit multiple lender websites and go through the prequalification process with each one.
To make that process go more smoothly and quickly, use Purefy’s Compare Rates tool. Simply input some basic information about you and your student loan debt, and you’ll be presented with rate quotes from several lenders in one place.
This feature makes it easier to compare and contrast the different offers you get, and also provides a seamless transition to apply with the lender of your choice.
Don’t fret if you can’t qualify on your own
There may be circumstances that make it challenging or even impossible to qualify for student loan refinancing on your own. Fortunately, private lenders typically allow you to add a cosigner to your loan application.
Because that person is effectively guaranteeing to make payments if you can’t, their credit history and annual income will be used during the underwriting process and can improve your odds of getting approved for a favorable rate.
What’s more, many private lenders offer cosigner release programs. These programs make it possible to have your cosigner removed in the future, so the loan will no longer affect their credit. To qualify for these programs, you typically need to make a minimum number of consecutive on-time payments — the lender determines how many — and meet certain credit requirements.
In other words, you need to prove that you’re able to take on the loan at the current interest rate without your cosigner. This can take time, as you may need to improve your credit history and boost your income, but the effort is worth it.
The bottom line
Refinancing your student loans can make a huge difference in your repayment plan, making your loans much easier to manage. If you’re considering refinancing your loans, use Purefy’s Compate Rates tool to simplify the comparison process and potentially save even more money in the process.