Should You Refinance Private Student Loans?
November 22, 2019
Private student loans can be a great way to help pay for college if your federal financial aid falls short, but they can be expensive.
If your credit has improved since you first took out your student loans, you need some more flexibility with your payments, or you’re looking for extra savings, refinancing private student loans may be worth considering.
And because private student lenders typically don’t offer the same benefits as the U.S. Department of Education — think income-driven repayment plans and access to forgiveness programs — there’s not a lot to lose if it makes your life easier financially.
What it means to refinance private student loans
A refinance loan is a new loan that allows you to pay off one or more existing loans. Private student loan consolidation is another term for the process because you can consolidate multiple loans from one or more lenders into one, simplifying the repayment process.
Depending on your situation, refinancing private student loans can lower your monthly payment, interest rate, or both, and it could also help you pay down your debt more quickly.
There are lenders who offer private student loan refinancing options. Each lender has its own set of repayment terms, interest rates, and other features, and they typically don’t charge any upfront costs. As a result, there aren’t many downsides to private student loan consolidation, as long as you can qualify for the terms that you need to achieve your financial goals.
How to know when to refinance private student loans
As you take a look at your student loan situation, here are four primary reasons to consider private student loan refinance opportunities.
You want a lower interest rate
Compared with federal student loans, private student loans typically charge higher interest rates. Unlike the U.S. Department of Education, private lenders base your interest rate on your creditworthiness (and your cosigner's, if applicable).
If your credit has improved since you first applied for your loans, it’s possible that you could now qualify for a lower interest rate.
To give you an idea of the potential savings, let’s say you have $20,000 in loans with an interest rate of 8% and a 10-year repayment plan. If you can refinance that balance down to 6% with the same repayment term, your monthly payment would drop by $21 per month, and you’d save $2,474 in interest over the life of your new loan.
You need a lower monthly payment
Scoring a lower interest rate can help reduce your monthly payment. But even if you can’t qualify for a lower rate, private student loan consolidation can allow you to lengthen your repayment term and provide some relief.
As an example, let’s take the same loan terms as above ($20,000 balance, 8% interest rate and 10-year repayment term). But instead of lowering the interest rate, we get a loan that offers a 20-year repayment term instead.
In this scenario, your monthly payment would drop by $75, which could make a big difference if you’re pressed for cash. The only thing to keep in mind with this path is that you’ll end up paying a staggering $11,031 more in interest with the new loan.
While taking a longer repayment term to get a lower payment can be a good short-term solution, consider refinancing again with a shorter term when you’re financially able to do so to save on interest.
You want to pay down your debt faster
Planning to refinance private student loans with a shorter repayment term can help you eliminate them more quickly and save money on interest — not only because you’re paying off the debt faster, but also because shorter repayment terms typically come with lower interest rates.
However, if you do this, be ready for a higher monthly payment. For example, taking the same examples above, let’s say you qualify for a five-year repayment term with a 6% interest rate.
With your new loan, you’ll pay $144 more each month, but you’ll also save a whopping $3,919 in interest — and you’ll be debt-free five years sooner.
You want to drop a cosigner
Because of strict creditworthiness standards, many college students need a cosigner to qualify for private student loans. But while that arrangement can help you, it’s not ideal for your cosigner.
More specifically, the loan shows up on the cosigner’s credit report and makes it seem like they have more debt than they really are responsible for. If you end up missing a payment or default, it can wreck your cosigner’s credit in addition to your own credit.
Private student loan consolidation can be a great way to relieve your cosigner of their duties by paying off the original loan. If you’ve established a solid credit history since you first took out the loan, consider refinancing the debt in your name only.
How lenders will determine your interest rate
If you’re specifically looking to refinance private student loans to reduce your interest rate, there are a few factors that lenders will consider when deciding which rate to give you.
Private student lenders use a risk-based pricing model to decide which interest rate and other terms to offer you. This means that if you’re considered a risky borrower, you’ll be offered a higher interest rate versus someone who’s viewed as a lower risk.
Some of the factors that lenders use to determine your interest rate include:
- Your credit score
- Information on your credit report
- Your income and employment status
- How much total debt you have
In other words, just having a high credit score may not be enough. If your credit history is limited or you have a high debt-to-income ratio (a large percentage of your monthly gross income goes toward debt payments), it could lead to a higher interest rate than you expected.
Also, remember that shorter repayment terms are typically associated with lower interest rates because it limits the amount of time the lender is taking a risk by lending you money.
Compare interest rates and other terms before you apply
Different lenders have different criteria for how they determine interest rates. As such, it’s crucial that you take some time to shop around and compare rates and other terms from multiple lenders. Even if the first offer you see is better than what you currently have, it’s still possible that you can find something better.
Applying with multiple lenders, however, can be time-consuming. To speed up the process, consider Purefy’s rate comparison tool. Simply share a little bit of information about yourself and your loans, and Purefy will give you customized rate quotes from multiple lenders in one place.
This allows you to easily compare several options and pick the right one for you without visiting each lender’s website individually. Once you pick the offer you’re interested in, you’ll be redirected to the lender’s application page to finish the process.
Refinancing private student loans can be an excellent way to achieve financial goals. As you think about your finances, consider how private student loan consolidation can help, and be sure to shop around to find the right fit for your needs.