What is Student Loan Refinancing?
Student loan refinancing is when you seek a new loan with better terms to have lower monthly payments or a shorter repayment period. It may also allow for a different repayment plan that better fits your financial circumstances, such as income-based repayment. When considering whether it makes sense to refinance student loans, there are numerous factors you should take into account:
Refinancing Federal and Private Student Loans
Generally speaking, only borrowers with very high debt and good credit scores will likely qualify for refinancing their existing student loans. There is no hard rule though regarding who can refinance – borrowers should compare lenders and see what types of options they may be able to get. Even if you cannot find an option to refinance or consolidate your federal student loans, it does not mean you cannot refinance your private student loans.
Refinancing Grad PLUS Loans with Parent PLUS Loans
Borrowers with graduate degrees may have Grad PLUS loans that they plan on consolidating into their parent's name, perhaps by using a Federal Direct Consolidation Loan. The problem with doing so is that the borrower runs the risk of losing access to income-driven repayment plans for the Graduate PLUS loan, which can be very helpful to borrowers who are struggling to repay these types of loans. For many borrowers, it makes more sense to refinance both the Grad PLUS and Parent PLUS loans into one new loan with better terms than consolidate them together via a Federal Direct Consolidation Loan.
Refinancing Parent PLUS Loans with Federal Direct PLUS Loan
Unlike the Grad PLUS loan, there is no "risk" to obtaining a Federal Direct Consolidation Loan in order to consolidate your Parent PLUS loans into one new loan. This refinance option is, therefore, more popular since borrowers can combine their Parent PLUS Loans with their Graduate PLUS loans and Federal Stafford Loans without worrying about whether they will lose access to income-driven repayment plans on the Parent PLUS Loans.
Refinancing Perkins Loans into Private Student Loans
It's not possible to refinance federal Perkins Loans, also known as Campus Based or Institutional Loan, into private student loans.
How Does It Work?
When you apply for student loan refinancing, lenders consider your qualifications (credit score, income, debt-to-income ratio, education, etc.) and offer you a new private student loan with better terms than the ones on your current loans. You can opt to refinance all or part of your student loans. However, refinancing federal student loans into private student loans means giving up many borrower protections that come with federal loans.
Should I Refinance?
The most common reason borrowers seek to refinance their student loans is because they want lower rates. Suppose you have $30,000 in outstanding student loan debt at an 8% interest rate with 10 years left before it's paid off. If you found someone willing to refinance your loan at 6%, you'd save about on student loan interest and reduce your monthly payment by $220.
Refinancing also allows you to take advantage of lower rates that may come with a new or better job. You can refinance into a fixed interest rate, meaning the rate on your new student loan won't change over time – even if you lose your job or encounter another life change that affects the rest of your financial situation. Or, you could refinance into a variable interest rate where the rate fluctuates based on market conditions such as changes in LIBOR. Variable interest rates usually start off lower than fixed interest rates, but they increase more quickly as market conditions shift so it's important to keep this in mind when deciding between these two types of loans.
Does it Lower Monthly Payments?
If you need urgent access to extra funds or lower monthly student loan bill, term refinancing can be an attractive option. You may be able to decrease your monthly payment significantly with this type of refinancing.
Refinancing student loans just means choosing a new private student loan provider instead of keeping the original federal or private student loans you have now. Refinancing doesn't mean you won't make any payments anymore – it just means that instead of making payments to the government (i.e., FFELP) or your current lender, you'll pay off your loans entirely using an existing balance on another credit line, such as a home equity line of credit or a personal bank loan.
Student Loan Refinancing Requirements
The student loan refinancing market is growing quickly. Nationwide, there is over $100 billion worth of outstanding private student loans that could be refinanced to lower rates. While this can save you money in the long run, it's important to understand what lenders take into account when assessing your application.
In general, a bank or credit union will review the following when underwriting your student loan refinance:
1. Your income and employment history to determine if you're able to afford the new monthly payment. As a general rule, they want to see that you're employed full-time in an occupation related to your degree
2. Your credit score will play a role in determining what interest rate you're able to obtain. The higher your score, the lower rate you are likely to qualify for.
3. The type of degree you obtained or are working towards will also play a role in determining what interest rate you can qualify for because there is typically more risk associated with certain degrees than there are others. For example, an applicant with a degree in engineering will typically qualify for a better rate than someone with a degree in art.
4. The remaining term of your current student loans will also impact what refinancing terms you can receive. The more years left on your loans, the more likely it is that you'll be able to obtain lower rates due to less risk associated with your loan.
Student Loan Refinancing Guidelines
With the ever-rising cost of education, it is no wonder that many students are exploring their options when it comes to how they will pay for their school. One such option is student loan refinancing, in which a borrower uses a private lender in place of the government's Federal Direct Loans, and pays off his or her existing federal student loans. With a private lender, a borrower has the opportunity to refinance their loans at a lower interest rate, and change repayment terms as they see fit.
In addition, with refinancing it is possible for borrowers with multiple federal student loans from different periods of study to obtain one loan with an extended repayment term as well as a reduced interest rate. There are many private lenders that offer student loan refinancing, but unfortunately, not all of them are created equal.
There are certain guidelines that each student loan refinancing company must abide by in order for their applications to be considered by the U.S Department of Education. These qualifications help better protect private lenders and borrowers.
The Refinancing Guidelines Include:
1. Each potential lender must work with the borrower to develop a written repayment plan that sets forth the terms of any refinancing, including an estimate of the monthly payment.
2. Lenders cannot require co-borrowers on a federal loan for which they are not legally, contractually obligated to repay.
3. If the lender offers different interest rates for borrowers on the basis of credit score or other factors, they must establish standards that are based on market rates and terms available to borrowers with similar profiles in order to ensure that the interest rate is reasonable.
4. Lenders cannot require the borrower to provide documentation of their income or assets in order to qualify for refinancing; they may only require the borrower to certify that certain information provided is accurate.
The "borrower's ability to combine multiple loans into one loan, streamline repayment periods, and make lower monthly payments" are all important aspects of student loan refinancing. These refinancing guidelines are set forth by the U.S Department of Education in order to "promote transparency within the industry" and provide private lenders with more opportunities for education funding through student loan refinancing.
So, what do you need to know about student loans and refinancing? For one, it's important to understand the different types of loans available. You can refinance Parent PLUS Loans with a Federal Direct Consolidation Loan or consolidate them together via a Federal Direct Consolidation Loan.
However, refinancing federal student loans into private student loans means giving up many borrower protections that come with federal loans. Secondly, borrowers should consider whether they want to lower their interest rates or monthly payments before refinancing. Finally, refinancing can be an excellent way to get access to extra funds or reduce your monthly payment amount significantly – but only if you select the right lender and term for your needs.
“Prequalified rates are based on the information you provide and a soft credit inquiry. Receiving prequalified rates does not guarantee that the Lender will extend you an offer of credit. You are not yet approved for a loan or a specific rate. All credit decisions, including loan approval, if any, are determined by Lenders, in their sole discretion. Rates and terms are subject to change without notice. Rates from Lenders may differ from prequalified rates due to factors which may include, but are not limited to: (i) changes in your personal credit circumstances; (ii) additional information in your hard credit pull and/or additional information you provide (or are unable to provide) to the Lender during the underwriting process; and/or (iii) changes in APRs (e.g., an increase in the rate index between the time of prequalification and the time of application or loan closing. (Or, if the loan option is a variable rate loan, then the interest rate index used to set the APR is subject to increases or decreases at any time). Lenders reserve the right to change or withdraw the prequalified rates at any time.”