If you owe a significant amount in student loans – whether federal or private – and your interest rates are high, you should explore the cost savings if you refinance your student loans. Not every circumstance is a fit for a refinance and once done, it can’t be undone, so it’s important that you know what you’re getting into. Also understand that refinancing is quite different from a loan consolidation.
In a federal student loan consolidation, your individual loans are combined into one larger one and the interest rates are weighted so that your effective overall interest rate will be virtually identical to what you’re paying now on the individual loans. In contrast, a refinance will leave you with a totally different interest rate – preferably a lower rate. There’s not much reason to refinance to a higher rate.
Consolidation vs Refinance
Federal consolidations can only include federal loans, whereas private refinancing can encompass both federal and private student loans. Both refinancing and consolidations pay off all of your old loans and replace them with one new one – that’s why once you sign, the bell cannot be un-rung. You should also know that if you convert federal loans to private in a refinance, you will lose the protections that come with federal loans, such as eligibility for income based repayment (IBR) and the ability to have outstanding balances forgiven after 25 years of regular payments.
Pluses of Student Loan Refinancing
But for those that have a good job and are earning a healthy wage with a high likelihood of job security such that you don’t need these fallback measures, refinancing to get a lower interest rate is smart. Also know that you don’t have to include all of your loans in a refinance. For instance, if you owe $10,000 at 3.6%, $15,000 at 6% and $5,000 at 7% and are offered a refinance at a rate of 4%, only the two loans at interest rates higher than that amount should be included in the refinance.
Student Loan Refinance by the Numbers
To know how much you can save if you refinance, you need to do the math. Let’s crunch some numbers to show you how much you can save under different scenarios.
Scenario 1 – Simple refinance
Assume a $15,000 balance at 6.8% with a refinance offer at 3.5%.
See the math above? Although a savings of $25 a month may not seem significant, it is. When your student loans are all done, you’ll have saved $2,800 in interest – that’s more than a 50% decrease in interest paid. This is a refinance scenario that’s worth your while.
Scenario 2 – Multiple Loans
Assume three loans: $15,000 at 6.8%, $10,000 at 7.5% and $5,000 at 3.86%, and a refinance offer at 4.2%.
The debt scenarios are endless, but are relatively simple to figure out for yourself. You can use a basic student loan calculator to see what the ultimate cost of your current student loans is and then based on your refinance percentage offered, run the calculations again at the new rate. This will allow you to see which loans are advantageous for the refinance and to identify those that you may or may not want to wrap up in the new loan.
As with any financial transaction, the better your credit, the lower your interest rate offers will be. You may be able to get a better rate if you have a co-signer with good credit, but may not want to ask anyone to commit to your debt. Some private refinance programs will lower your interest rates after a period of on-time, in-full payments and others will release your co-signer after a period of consistent payments.
Who Should You Refinance With?
If you have private student loans now, your lender may offer you an advantageous refinance offer. Federal student loans do not currently have a refinance mechanism – you’ll have to convert the loans to private to obtain a refi. Here are two student loan refinance programs that we think are worth your consideration:
SoFi is a social finance start-up that matches almuni with students. It’s available only for alumnus of law, medical, dental, engineering or MBA programs. Rates range between 2.92-4.99%. Click here for more information.
CommonBond refinances only MBA loans from a specific roster of universities. Interest rates offered are as low as 5.99%. Very good credit is required. For each degree they fund, CommonBond pays for one year of education for an in-need international student. Click for more info.
Optimizing Your Student Loan Debt
Whether you stick with your existing loans or explore a refinance option, Tuition.io can help you deal with your debt adroitly. Our free student loan tool helps you keep track of all of your debt, even if you have a blend of federal and private loans. You can see all of your loans in one easy-to-read dashboard, see how making extra payments can save you interest and how different repayment plans will impact your monthly payments and long-term outcome.