How Student Loan Refinancing Works and What to Know
Are you interested in reducing your monthly student loan payments? Refinancing your student loan might be a good option for you, depending on your repayment goals, but it’s important to do thorough research.
How does student loan refinancing work?
Education loans that originated from the U.S. Department of Education or another private lender can be included in a refinance application.
Which student loans can you refinance?
During the refinancing process, you can generally choose which student loans you’d like to include. For example, you can refinance only your unpaid private loans and choose to keep your federal loans as is. Similarly, you can decide to refinance all of your federal loans or a mix of federal and private. Depending on your eligibility and refinance lender, you might be able to refinance one loan or all of your unpaid loans.
How are student loans paid off and refinanced?
Refinancing lenders pay your original student loan lender(s) for the full remaining balance on your original loan(s). Afterward, you’ll repay the refinancing lender for the total balance that it paid on your behalf through a new, refinanced student loan.
This new loan has a new fixed or variable interest rate and new repayment terms based on your credit and other factors.
Common eligibility requirements for student loan refinancing
Each refinance lender makes its application and lending decisions based on its own criteria. Generally, these are the factors lenders consider when reviewing your refinancing application:
- Creditworthiness. In addition to your credit score, lenders check your credit history to see whether you’ve had a past default or bankruptcy on your record.
- Loan balance details. Lenders have a minimum and maximum loan amount they’re willing to refinance. Your loan balance and status must meet the lender’s requirements.
- Debt-to-income ratio. A debt-to-income (DTI) ratio is a calculation based on your total monthly debt obligations, divided by your total monthly income. Lenders review this ratio to determine whether you can comfortably afford to repay the loan.
- Academic program completion. Some lenders require that you’ve completed your program or that the institution you graduated from meets the lender’s requirements.
- Employment. A refinance lender will review your employment history and income to determine your ability to afford payments over the long term.
Advantages of refinancing student loans
Here are some reasons applicants choose to refinance their student loans:
Refinancing your student loan might help you access a lower interest rate
If your current loan has a high interest rate, you might be able to secure a lower rate. Private refinance lenders offer different refinancing rates, and, if you have strong credit, you might qualify for an interest rate that’s lower than what’s on your existing loan.
A lower interest rate reduces the cost of borrowing for your education overall. Depending on how much student debt you refinance, this could mean paying hundreds or thousands of dollars less in interest over time.
Refinancing your student loan lets you change your term
Student loan refinancing allows you to alter how much time you’re allowed to pay back the loan. If your goal is lowering your monthly payment amount to fit your budget, you can choose a longer repayment term.
The longer your term, the smaller your payment installments. This might be useful in the short term, but over the longer term, you’ll pay more interest. Depending on your financial situation, you might be comfortable with this compromise.
Refinancing your student loan simplifies the repayment experience
You might have borrowed multiple loans throughout your academic career. If you have a mix of loans from various lenders, you might be tasked with tracking various payment due dates and amounts.
A student loan refinance can often simplify your repayment process by letting you combine multiple loans into one convenient loan.
Refinancing your student loan could release an existing cosigner
Another key benefit of refinancing education loans is removing a cosigner from your original student loan agreement. Some lenders, though not all, offer a cosigner release option to remove a cosigner from your loan upon meeting certain requirements.
Refinancing lets you start fresh with a new loan agreement. You can exclude a cosigner previously attached to your debt and maintain yourself as the primary borrower on the account.
Disadvantages of student loan refinancing
Although there are advantages to refinancing your student loans, there are a few considerations to keep in mind.
Refinancing a student loan requires a credit check
Refinancing student loan debt involves transferring your unpaid balance to a new private lender. Unlike federal student loans, which typically don’t require a credit check, refinancing applicants generally need strong credit.
If you have bad credit, finding student loan refinancing options might be difficult, but not impossible.
Refinancing a student loan might require a cosigner
Similar to private student loans that are borrowed while you’re enrolled in school, some lenders might require refinancing applicants to have a cosigner. You might encounter this requirement if you don’t meet the lender’s credit or income underwriting criteria.
A cosigner is legally and financially responsible for repaying the loan if you don’t make payments. This individual must generally be creditworthy and meet the lender’s income requirements. Due to the level of liability, finding a willing cosigner who meets all the necessary criteria might be a challenge for some applicants.
Not all lenders have that requirement, however. Cosigners are not requested when you refinance a loan through MPOWER Financing.
Is refinancing an education loan right for you?
Each applicant’s situation is different. Before moving forward with student loan refinancing, ask yourself the following questions:
- Why do I want to refinance? What is my goal?
- What does my credit look like?
- Do I meet the lender’s minimum requirements?
- How steady and reliable is my income?
- Will I ever want to pursue federal student loan forgiveness?
- What kind of support do I want from a refinance lender?
Thinking through these questions can help you define what you ultimately want to get out of refinancing your education loans.
Student loan refinancing: the bottom line
Student loan refinancing is just one of many approaches to paying back your education debt. If you still feel that refinancing is right for you, check your rates with a handful of lenders to see which one can offer the most competitive rate and terms. Looking for a great place to start your search! Begin here with MPOWER Financing refinancing.
