How do I refinance my student loans?
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UPDATED: Oct 22, 2013
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Borrowers can apply for a refinance with their current student loan lender or with a new lender who offers refinancing services.
There are a number of places that a college loan borrower can go to get their debt refinanced. Before examining those though, it is necessary to understand what student loan refinancing is.
Similar to other types of refinancing, when a borrower refinances their college loan debt, they’re taking out a new loan with more favorable traits and paying off an existing loan with those new funds.
As an example, suppose a borrower has a student loan balance of $30,000. He has been paying a high interest rate for the last two years. However, he recently paid off his credit cards, and now has an improved credit score that qualifies him for a lower interest rate on his student loan. He successfully refinances and, under the terms of his refinanced loan, he pays a lower amount each month. As a result, over the lifetime of his balance he will end up paying less in interest, thus saving money.
Reasons to Refinance
Mark Coronado, Founder of Student Loan Away, said that if borrowers decide to refinance through federal programs, it can reduce their monthly student loan payments by up to 70 percent.
“This ability to refinance is extremely helpful to millions of student loan borrowers who might end up defaulting on their loans if they weren’t offered the chance to pay off the loans with more affordable monthly payments,” he said.
Choosing to refinance college loan debt can relieve the unhealthy debt burden that many graduates struggle with. This is especially important since so many graduates face a difficult time finding jobs. By paying less on student loans, borrowers have more money to put towards rent, groceries, and car payments.
Besides getting a lower interest rate, there are a few other reasons to consider refinancing one’s debt.
“Borrowers should definitely consider a refinance option to earn a lower rate, simplify to one lender for one easy payment, adjust term years, or access a potential cosigner release,” said Kenneth O’Connor, Director of Student Advocacy at LendKey. “Some borrowers may conclude that their current plan already has rates lower than refinancing options, so it’s probably not worth it for them.”
Refinancing Federal Student Loans
O’Connor continued to explain that Direct Loans, which are federal college loans from the government, offer no true refinancing option.
This isn’t inherently bad though, since federal student loans have a number of benefits that may make refinancing unnecessary. For example, federal college loans have deferment options and are often eligible for government-sponsored payment plans, like the income-based repayment program.
Even though federal student loans are the bulk of student debt, refinancing can still be very helpful for the millions of private college loan borrowers.
Refinancing Private Student Loans
While private student loans are a fraction of total student debt, they are common for people looking to attend graduate school.
This is because federal student loans are expensive or limited for post-undergraduate studies. As a result, most private student loan borrowers tend to be older when they decide to look for refinancing options.
Fortunately, borrowers have a number of options when selecting a refinancer: online lenders, credit unions, and banks are all some of the more traditional options available.
But amongst those, there are clear benefits some hold over others.
For instance, a credit union or online lender is more likely to offer a lower interest rate on refinanced student loan debt compared to a bank. This is because banks are not member-owned like credit unions are and, unlike online student loan lenders who only deal with college loans, banks struggle to recoup their recessionary losses.
Unfortunately for some borrowers, not all private student loan lenders offer refinance options.
“Providers like Sallie Mae and Chase no longer offer private student loan consolidations, while new market entrants from the credit unions have seen significant growth in this particular product line,” said O’Connor.
Increases in Refinancing
Reyna Gobel, author of CliffNotes Graduation Debt, said that Americans should expect to see more student loan refinances as the number of students increases along with the cost of tuition.
Since tuition keeps rising, due to demand and other factors, it costs more money to go to college. This cost gets so high that people need to borrow college loans to go to college. Once these people graduate, they then owe money on those loans, but they are now competing with everyone else that went to and graduated from college.
The amount of college loans that people borrow does affect whether or not they should look into refinance options.
“For instance, someone who has $10,000 in debt will likely be able to pay off a loan faster than someone who borrowed $100,000,” she said.
Even though for some households and individuals, $10,000 can be a lot of money, compared to student loan debt averages, it is a very manageable amount.
Borrowers also have the option to get their college loans consolidated, although this isn’t exactly a refinance since the main point of consolidation is grouping multiple loans into one, thus minimizing the amount of bills a student is responsible for with each passing month.