Written by Kristyn Pilgrim

Guide to Student Loan Refinancing: Interest Rates and Best Options in 2020

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    Guide to Student Loan Refinancing: Interest Rates and Best Options in 2020

    Written by Kristyn Pilgrim

    Refinancing your existing student loans could potentially save you money over time. Besides the cost savings, people may also refinance their student loans to consolidate payments, giving them more “breathing room” if they incur major financial issues. Here’s what you need to know to get the best refinancing deal for you in 2020.

    A possible benefit of refinancing student loans is the ability to save money. This occurs if you can lower your interest rate, or even shorten the amount of time you have to pay off the loan. This could mean thousands of dollars less in interest payments.

    The latest research shows that  nearly two-thirds of seniors that graduated from either a private or public college in 2018 had some form of student loan debt. The average was slightly over $29,000, a two percent increase over the previous year. 

    After graduation, most loan terms provide a grace period before you must begin making payments. For some, the terms you agreed to may no longer fit into your budget. 

    People usually refinance student loans for a few reasons:

    • Cost savings: Lowering the interest rate can potentially save you money over time or lower your monthly payment.
    • Improve loan terms: You may want to reduce or lengthen the term of your loan, or you may desire to move from a variable to a fixed rate loan or vice versa, depending on your situation or market conditions.
    • Remove a co-signer: Did your parents or another individual co-sign your original loan? If so, you may desire to remove them from any future obligation.

    Depending on market conditions and your situation, there are several factors to think about when considering if refinancing is your best option.

    In this guide, we’ll explain:

    • The benefits of refinancing student loans
    • The drawbacks to refinancing student loans
    • When to refinance student loans
    • How to refinance student loans
    • What to look for in a loan company
    • Organizations that refinance student loans

    The Benefits of Refinancing Student Loans

    To get the best deal when refinancing your student loans, you’ll need to do some research to understand your options. For starters, you must understand the details about your existing loans. Next, you should research refinancing offers from multiple loan companies. The process will most likely involve online loan applications and the need to gather loan payoff details on your existing loans. The lender you select for refinancing your student loans should offer some guidance for this process.

    Regardless of why you’re considering refinancing, understanding the terms of your existing and new loan is important. For example, are there any repayment penalties or origination costs? 

    Some of your student loans may carry higher interest rates. This applies to both federal and private student loans. When you took out these loans, you probably didn’t have much of a credit history. Lenders (including the federal government) offset taking a risk on borrowers with little or no credit history by charging a higher rate of interest. 

    However, after graduation and once you are gainfully employed, it’s much more likely that loan underwriters are able and willing to offer better terms, especially if you have built and maintained a good credit history.  

    Let’s say you have $80,000 left on your current student loan at a variable interest rate of 6.75% for eight years. If you refinance and convert this loan to a fixed rate of 5% and for the same length of time, you’ll save approximately $6,525.00. 

    Keep in mind that because your existing loan has a variable rate, the potential savings may vary depending on market conditions. 

    Lenders have gotten into big trouble for promising cost savings, which is another reason to understand the terms of any loan. 

    You won’t see detailed outlines of how much consumers save on loan websites, but you might find loan calculators that help make the impact clear. 

    To recap, how much you could save is based on many variables, including your:

    • Loan amount
    • New interest rate
    • Credit score

    The Drawbacks to Refinancing Student Loans 

    Two college students standing in corridor and chatting after their class. Two female college students talking and laughing after lecture.

    While there are several advantages to refinancing your student loans, there may be a few reasons refinancing isn’t the best option now.  

    You should think hard before you refinance student loans if you:

    • Have federal student loans: Products that come from the U.S. Department of Education come with plenty of perks. You can change your payment schedule fairly easily; you can enroll in programs that pause your obligation when you’re in financial distress; and you can even tie your payments to your income. If you refinance these loans, you lose these benefits.

    • Work in the public sector: The Public Service Loan Forgiveness (PSLF) program will forgive your federal student loan debt after you’ve kept your job for a specific period and have made 120 qualifying monthly payments. It’s incredibly rare for private companies to do anything like this. Refinancing a loan when you work in this industry means keeping a debt you might give away easily.

    • Have poor credit: To save money, you’ll need a new loan with better terms and conditions. For example, if you’ve made poor financial decisions and are considered a risky borrower, it’s extremely unlikely you’ll secure better loan terms. In fact, having poor credit is one of the primary reasons  individuals are unable to refinance. Other reasons include a high debt-to-income ration, employment history, and the students enrollment status.

    • Are still in school or didn’t graduate: Most private lenders want proof that you’re in a successful career or enrolled in graduate school. If you’re still working on your bachelor’s degree or you dropped out, you’ll find fewer refinancing options (if any).

    • Can’t find a good deal: You don’t have to refinance student loans. You can stick with what you have and chip away at your debt. Don’t be pressured into making the wrong decision. If the numbers don’t make sense, don’t take the deal. 

    You may not know if these categories apply to you until you start digging. That’s perfectly fine. Companies that refinance student loans want your business. They expect some applications that don’t meet their criteria.

    They also work with people every day who aren’t sure what to do about their finances. Take the time to do your research. 

    When to Refinance Student Loans

    Unlike taking out loans during school – when there’s a set due date for tuition payments – refinancing student loans doesn’t come with a hard deadline. You can apply whenever it makes sense to do so. There are two main factors to assess before you start your search. 

    First: Your credit history. Experts say you start building a record with creditors within about six months of making your first financial transaction, but it can take years for you to develop a robust score. Make a mistake, and you’ll see your score dip.

    Common financial blunders include:

    • Consistently making late payments
    • Skipping payments altogether
    • Walking away from your debts or declaring bankruptcy 
    • Opening too many accounts (e.g., credit cards)

    Every time something like this happens, your credit score will suffer. You’ll need to have periods (maybe even long periods) of keeping your credit performance strong to repair the damage. If you know your credit is lousy, wait before you think about refinancing. 

    To refinance student loans, a borrower typically needs a credit score in the high 600’s ; to get the best rate refinancing your student loans, you’ll need a credit score in the mid- to high-700s. That’s what’s known as “prime” or even “super prime” credit. Refinancing student loans involves a relatively steep hurdle for approval. 

    Next, underwriters will evaluate your “debt-to-income ratio.” As the term implies, this is a function of your salary and total debt payments. This is calculated as a ratio of your total monthly loan payments to your gross monthly income. We talked about loans in the first point above in terms of whether you have responsibly used credit. Here, the potential lender is interested in your total debt payments. 

    A lower total is better, of course. The income side is pretty straightforward: You want to have more than enough income to cover those debt payments. Lenders typically want to see a debt-to-income ratio that is no more than 30%, including payments on your refinanced student loans. 

    In addition to your income, lenders are also interested in your employment situation. Experts say it takes college graduates up to six months to find a job, and your first position may come with long hours and low pay. Loan companies want to see substantial paychecks, steady work, and opportunities for growth. These benefits usually come with career-track jobs, not temporary gigs. If you’ve just landed a position, and you get the sense you’ll be moving on to a better opportunity soon, consider waiting before you apply. 

    How to Refinance Student Loans 

    You’re not sure if you should refinance student loans, and just thinking about all your debt and the details makes your head hurt. A methodical approach can help you determine if you should move forward. 

    Prepare to refinance student loans by assessing your debt. Find out:

    • Your balance: How much do you owe right now? Remember, you probably have more than one loan – maybe several. Compile details on each of these loans.  Keep in mind that it is not necessary to refinance all your student loans. If you have a loan that carries an especially low interest rate or is about to be repaid in full, you might want to exclude that loan from your refinancing.
    • Your loan length: When will you be done paying off your loan? If your current student loans will be fully repaid in a short period, refinancing might not make sense.
    • Your interest rate: What are the interest rates on your existing loans?
    • Are there any prepayment penalties? Some loans contain language that states if you pay off your loan ahead of schedule, you will incur additional costs. Make certain that if you refinance, your new loan contains no prepayment penalty.  

    Then, gather your identifying information. You’ll need to tell loan companies your name, address, Social Security number, and other personal data. Some companies also ask interesting questions about your rental history, grocery bill, and seemingly unrelated issues. 

    With your data gathered, you’re ready to research loan companies.

    What to Look for in a Loan Company

    Think of the student loan refinancing lender you select as your partner for the next several years. You’ll want to make the best decision you can, so you’re not unhappy in the partnership. 

    As you assess each company:

    • Dig deep into interest rate types: Federal loans are fixed rate loans. That means interest rates don’t change throughout the life of the loan.

      Private loans may be fixed or variable rate loans. They can shift up or down depending on market conditions.

      If your new loan term is different – say switching from a fixed rate on your existing loan to a variable rate on your refinanced student loan – you’ll want to consider the trade-offs of switching loan types.

    • Scrutinize interest rate figures: Think of the U.S. Department of Education as the low bar. The fixed interest rate for undergraduates in the 2019-20 school year was 4.53%. Can lenders offer a rate that meets or improves on federal versions?

    • Determine flexibility options: Can you choose how long the loan lasts? Can you pause your payments if you run into trouble? Can you swap rates and terms if you need to?

    • Look for perks: Companies offer cash rewards, financial planning, interest rate reductions, and even more to some borrowers. What will you get with your new loan?

    • Reject fees: The student loan refinancing space is competitive. Companies are fighting for your money. Hidden origination fees or costs for getting checks or making payments can chip away at your profits. Look for companies that won’t do that to you.

    Organizations That Refinance Student Loans

    There are literally dozens of options when it comes to refinancing your student loans. Run a search on the internet, and you’ll get hit with a screenful of organizations all begging you to visit. But some are better than others. 

    These are a few of the companies you could consider:

    • Earnest: This company offers one of the lowest fixed interest rates we’ve seen at 2.94% APR. Earnest also offers a large number of repayment options, so you can look for a schedule that fits into your budget.

      Sign up online. If your credit score is low, you’ll need a co-signer to help you.

    • PenFed: This company offers an equally low fixed interest rate starting at 3.23% APR. The company protects consumers from unnecessary fees.

      You can combine all your loans into one, including federal versions, or focus on the one that comes with the highest costs.

    • Laurel Road: This company gets high marks from consumers for speedy loan processing and helpful customer service. Fixed interest rates are closely tied to loan length: The shorter the time frame, the lower the rate.

      That’s a bit unusual, but it could be a good deal if you have a small loan that you’re willing to pay back fast.

    • CommonBond: Fixed interest rates begin at 3.12%, but they peak at 5.95%. Some companies don’t offer a complete range like this, and it’s reassuring for some borrowers to know where the ceiling is.

      CommonBond provides 24 months of forbearance over the life of the loan, so you can step away from repayment if you need to. And you’ll pay no fees or hidden costs. 

    Do Your Research

    In many cases, student loan debt can have a significant impact on your overall financial health. If you think refinancing may be right for you, but are unsure where to start, our experts at College Finance can help point you in the right direction. Browse our latest articles and guides for answers to any questions you may have about financing your college career.

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