Student Loan Refinancing
Updated: May 15
Should you look into refinancing your student loans?
2020 is arriving and for those of you with student loans outstanding, here is a potential New Year's Resolution: pay less interest on your student loans!
Student Loan Refinancing Refinancing student loans is essentially replacing one or more loans with a new loan that has better terms (interest rate, payback period). Both federal and private student loans can be refinanced with the purpose of (1) lowering your interest rate and (2) lowering the lifetime cost of your loans. Additionally, if you have multiple loans from multiple lenders, refinancing can enable you to consolidate all of your loan payments into one simple payment and reduce the hassle of your monthly payments. If you have a good credit score (many lenders seek borrowers with a score in the mid-700's) and a steady income stream, you probably have a good chance of lowering the interest rate that you are currently paying, leading to savings of hundreds, or even thousands, of dollars.
Pros and Cons of Refinancing Benefits of Refinancing: potentially large savings on the lifetime cost of your loans, a reduced monthly payment, one simple payment, the ability to drop a previous co-signer and release them of their liability. Possible Cons: refinancing into a longer payment term with a lower monthly payment can actually lead to a higher lifetime cost (just be aware of the lifetime cost!), applying can impact your credit score (although in most cases this should be minimal), refinancing a federal loan waives your right to cancellation/forgiveness programs Considerations Before Refinancing: Chances of Approval: A good credit score, steady income stream, and low revolving credit balances help to increase your chances of approval. If you have a credit card balance of over 30% of your revolving limit, it would be wise to reduce this via repayment or an increased credit limit before applying to refinance. Of course, you should only raise your limit if you are disciplined enough not to spend on that increased limit. (Paying down any credit card debt ASAP is one of the most important financial actions one can do as a young professional) Credit Score Effects: Most popular lending/refinancing sites will allow you to see possible refinancing offers without having your credit score affected by having you enter personal information that gives them a picture of your financial profile. If you do apply for a loan refinancing, it will trigger a credit inquiry which will impact your score. However, one additional inquiry typically only takes 5 or fewer points off of one's FICO score, according to myFICO. As long as you are not applying for other forms of credit at the same time or haven't done so recently, the impact should be minimal. Adding a Co-Signer: Adding a co-signer to a refinancing application can make sense if you are a recent grad or do not have a long credit/income history. Co-signing with someone who has a good credit score can lead to a greater chance of approval and a lower rate. It is also possible to release the co-signer at a predetermined future date. The risks of co-signing mainly involve the fact that you are sharing the liability of the loan with another person. If you miss a payment, it will also hurt their credit score. Thus, it is important to consider this only with someone who is close to you.
Where to Go to Refinance? Two of the most popular websites for viewing potential refinancing lenders and offers are Credible.com and Earnest.com. Below are brief overviews of each: Credible: To get your possible offers, here are the steps; (1) create an account, (2) enter information such as where you went to school, when you graduated, what was your degree level, what is your income, what is your rent, where do you live, (3) Credible identifies your current loans, select which (if not all) you want to refinance, (4) Credible produces a list of possible refinancing offers from lenders such as SoFi and Citizen's Bank. Earnest: The steps are largely the same with Earnest, except Earnest requires a few more in-depth pieces of personal information. The site requires you to enter your social security number and link a bank account before you can see your potential refinancing offers. Understandably, many people may not feel comfortable providing such information to a website. Others: Here is the link to the top student loan refinancing lenders/websites as rated by Top10.com... (Credible is #1 and Earnest is #2)... Top 10 Student Loan Refinancing Options