Refinancing your student loan is the process of obtaining a new loan with different repayment terms (interest rate, loan term, minimum payment). You can refinance federal and/or private student loans by getting a new loan from a different lender to pay off your old student loan.
Nav.It translation: Refinancing means that you, as the borrower, are now responsible to repay the new lender and hopefully, at a better interest rate.
Why would you want to refinance your student loan?
Refinancing allows you to adjust your repayment terms with a new lender, which means the interest rate, loan term, and minimum monthly payment requirement may change. The biggest advantage of refinancing your loan is getting a lower interest rate because that can save you a lot of money in the long-term!
Let’s examine the following scenario:
Let’s say you have a student loan of $20,000 with an 8% fixed interest rate, 10-year loan term, and a minimum monthly payment of $242.66.
Utilizing the nav.it APR calculator, you will see that by paying this loan off in 10 years under the current repayment plans, you will pay an additional $9,118.62 of just interest. From the initial $20,000 you initially borrowed, you will have paid a total of $29,118.62 ($20,000 + $9,118.62) at the end of the 10-year term.
However, let’s assume you refinance to lower your interest rate and/or minimum monthly payment. You find a lender that pre-approves you for the following new loan terms: $20,000 with a 4% fixed interest rate, 10-year loan term, and $202.49 minimum monthly payment.
Again, let’s plug new data into the calculator. Under this new lender that is offering you a 4% fixed interest rate, you will only be paying $4,298.83 in interest over the 10-year loan term.
This means you will pay a total of $24,298.83 under this new lender if you were to refinance the loan. Hence, this would save you $4,819.79 ($29,118.62 – $24,298.83).
Let’s look at the above scenario again, but assume, you want to lock in the 4% fixed interest rate and target paying the loan off in 5 years instead of 10 years because you can afford to make more than the minimum monthly payments. By refinancing and paying the loan off in 5 years, you will only be paying a total of $22,099.83, which is still saving you money!
Should you refinance your student loan?
When thinking about refinancing your student loan, there are many factors you will want to consider before moving forward.
First, ask yourself the following questions:
What is your total student loan balance?
What kind of student loans do you have (unsubsidized, subsidized, parent plus loan, private)?
What is your interest rate and is it fixed or variable?
What is your loan term?
What is your minimum monthly payment?
Do you want to refinance to lower your interest rate and/or minimum monthly payment?
Next, do your research on which lenders you can refinance with as they all have different requirements (minimum FICO credit score, co-signer, loan types). You can try checking out nav.it’s partner Juno.
After doing your research on the different lenders, start getting quotes. This pre-approval process only takes about 10 minutes and does not impact your credit score! During this process, it will ask you for your basic personal information and how much you’re looking to refinance. From there, it will populate a few loan options for you to choose from if you were to move forward with the process. If you do choose to move forward with one lender over the other, then you would simply finish the application process with them, and this is when it would be a hard inquiry on your credit score.
What is the downside to refinancing your student loan?
Refinancing federal student loans (this includes parent plus loans) means you have to give up your federal student loan protections, which include income-driven repayment (IDR) plans, public service forgiveness, and deferment and forbearance.
However, if you initially took out private loans to fund your college education, then refinancing with another private lender makes this decision to refinance a bit easier. Remember, those protections mentioned above only refer to federal student loans. I would suggest that if you already have private loans and have ridiculously high interest rates, then definitely look into refinancing to get a lower interest rate.
Refinancing your student loans can save you a lot of money. However, you must analyze your current student loan situation in its entirety before making this decision. I decided to refinance my parent plus loan to lower the interest rate and by doing that along with paying more than the minimum payments, I did manage to save myself nearly $30,000 in interest.
On the other hand, I was not able to benefit from the COVID-19 temporary relief to suspend loan payments, stop collections, and waive interest. I was fortunate to still have my job and be able to continue making payments.
So again, weigh your options and ask yourself what your ultimate end goal is with tackling your student loans. If it’s to pay them off as quickly as possible, then refinancing to get that lower interest rate may be an option you should consider.
Sofie is a 24-year-old, first-gen Latina raised in Stockton, CA. She went to a private university in Philadelphia for her undergrad degree in Accounting, accumulating a six-figure debt. With minimal financial awareness around student debt, Sofie began her journey with extensive research on how to repay her massive student loans in the most cost-effective way. She managed to repay it in 26 months and is now on a mission to educate others on the importance of personal finance. Now, Sofie works as an Early Talent Recruiter for a bank in New York City. When she is not working, she enjoys cooking, exercising, and exploring new bakeries and restaurants.