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- Refinancingcould make sense if you could get a better interest rate or you need to change your repayment timeline.
- Opting for a longer repayment timeline can make your monthly payments smaller, but it will cost you more in interest over time.
- If you want to refinance your student loans, reach out to a lender to start the process.
Interest rates have been on the rise for both federal and private student loans over the past few years. For example, interest rates for federal undergraduate direct subsidized loans have jumped from 3.73% to 5.50% in two years. So if you have taken out student loans in the past few years, you may have a good rate already, but there may be cases where you could get a better interest rate if you refinance your student loans today.
You have high interest rates
Interest capitalization is when the unpaid interest on your loans accrues and gets added to your principal balance. Capitalization commonly occurs when you have multiple student loans with high rates and can add years to your repayment timeline.
Interest rates on private loans tend to fall around 12 to 15 percent on the high end and are typically between 4 and 5 percent for the most creditworthy borrowers. The rates will vary depending on whether the loans are fixed or variable and your financial health.
Variable vs. fixed interest rates
Variable rates are subject to change and fluctuate based on market activity. Fixed rates remain the same from the moment you get approved to the day you pay off your full balance.
The Federal Reserve has been hiking interest rates at historic levels in an attempt to cool off the over-inflated economy. As a result, any new private loans will see increased interest, as well as existing private loans with variable interest rates.
Before refinancing, take a look at your original rate and loan type. If your original loan has a variable rate and the refinance loan has a lower, fixed rate, you should consider refinancing as soon as possible in the case that the Fed hikes interest rates again in the near future.
The rates you’re given are based on your creditworthiness and overall financial health. If you currently have a debt-to-income ratio below 30 percent, have a positive payment history on your debts and have a good credit score (between 670 and 800), you could stand a good chance of scoring a lower rate.
The lender offers prequalification
Prequalification is a tool offered by most private lenders that allows you to see your eligibility odds and predicted interest rate with no impact to your credit score.
If a lender features prequalification, the tool will be featured on its website and is an online process. Many lenders advertise a simple application process that takes minutes to process so you can easily compare lenders. Plus, it can help you avoid failed applications and hard credit checks.
If you’re in good financial health but the lender doesn’t offer prequalification, it may be better to shop around. With interest rates high, it’s possible that you could end up with higher rates and less favorable terms.
You want to change your payment timeline
If you’re having trouble making your loan payments, refinancing can help make your monthly payments more manageable through altering the repayment period.
With most lenders, you can choose to lengthen your repayment timeline to lower your monthly payment requirements. While this method provides short-term financial relief, keep in mind that you’ll end up paying more interest over the lifetime of your loan.
How to refinance private student loans
The refinance process will vary from lender to lender, but generally will operate similarly to the private student loan application process. The first thing you’ll need to do is compare lenders to find the best rate available and then complete the application process once you find a lender who meets your needs.
The lender will then be in touch with you regarding the status of your loan and repayment term. Keep paying your original loans during the application process so you don’t fall behind and be on the lookout for any information from the new lender.
How to refinance your loans with bad credit
The easiest way to refinance your student loans with bad credit is to enlist the help of a co-signer, or a trusted person in good financial health who also takes legal responsibility for the loan. Creditworthy co-signers increase your approval odds and can help you land a better interest rate. But it’s important to consider your ability to make the payments and the potential negative implications that co-signing could have on your relationship before asking.
There are also lenders that cater primarily to low-income individuals and those with a less-than-stellar financial history, but most of the lenders require a good credit score at minimum and often come with higher rates. You’re more likely to qualify with a lender that offers future-income or need-based approval, but you also could end up with a higher interest rate than before.
If you’re in a bind and need to lower your payments as soon as possible, ask your lender about any of its hardship payment relief options. If none are available, make at least the minimum payments to avoid defaulting on your balance. A majority of your credit mix is your payment history, so over time making at least the minimum will help boost your score and increase your creditworthiness.
How to refinance private student loans to federal
Private student loans are owned by private lenders — banks and credit unions — while federal loans are owned by the Education Department. Private loans can’t be refinanced with a federal loan, but federal loans are always refinanced with a private student loan.
Multiple federal loans can also be consolidated into a federal Direct Loan to gain eligibility for federal debt relief and forgiveness programs, like Public Service Loan Forgiveness (PSLF) and income-driven repayment (IDR). However, private student loans aren’t eligible for any form of federal consolidation.
The bottom line
The decision to refinance your private student loans is personal. Your current loan interest rate, personal financial health changes, and budgeting needs can all impact your decision.
Look into the interest rates available to you if you refinance and the cost of refinancing to understand the financial impact it may have. Consider whether your current loans are federal student loans or private student loans. If you refinance federal student loans, you can never go back to this type of loan. Ultimately, the choice to refinance or not is personal. Consider all the factors, as well as your own needs to determine if refinancing private student loans is what you need.