When you refinance your private student loan, you take out a new loan from another private lender that replaces your original loan. Although refinancing can save you money in the long run, it’s usually only worth it if you get a better rate or more favorable terms.
You should consider refinancing your private student loans if:
- You have high interest rates
- Lender offers prequalification
- You want to change your repayment schedule
You have high interest rates
Interest capitalization occurs when unpaid interest on your loans accumulates and adds to your principal balance. Compounding usually happens when you have multiple high-interest student loans and can add years to your repayment schedule.
Interest rates on private loans tend to fall around 12-14% on the high end and are usually between 2-3% for the most creditworthy borrowers. Rates will vary depending on whether the loans are fixed or variable and on your financial health.
Variable interest rate or fixed rate
Variable rates are subject to change and fluctuate with market activity. Fixed rates remain the same from the time you are approved until the day you pay off your entire balance.
The Federal Reserve raised interest rates to historic lows in an attempt to calm the overinflated economy. As a result, any new private loans will see increased interest, as well as existing private loans with variable interest rates.
Before you refinance, review your initial 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 case the Fed raises interest rates again in the near future.
The rates offered to you are based on your creditworthiness and overall financial health. If you currently have a debt-to-equity ratio below 30%, have a positive payment history on your debts, and have a good credit score (between 670 and 800), you might have a good chance of getting a lower rate.
Lender offers prequalification
Prequalification is a tool offered by most private lenders that allows you to see your eligibility scores and expected interest rate without impacting your credit score.
If a lender offers prequalification, the tool will be featured on their website and is an online process. Many lenders advertise a simple application process that takes minutes so you can easily compare lenders. Plus, it can help you avoid failed applications and rigorous credit checks.
If you are financially sound but the lender does not offer prequalification, it may be best to shop around. With high interest rates, you may end up with higher rates and less favorable terms.
You want to change your payment term
If you’re having trouble making your loan payments, refinancing can help make your monthly payments more manageable by changing the repayment period.
With most lenders, you can choose to extend your repayment term to lower your monthly payment requirements. Although this method provides short-term financial relief, keep in mind that you will end up paying more interest over the life of your loan.
How to Refinance Private Student Loans
The refinance process will vary from lender to lender, but will generally work the same as the private student loan application process. The first thing you’ll need to do is compare lenders to find the best rate available, then complete the application process once you find a lender that meets your needs.
The lender will then contact you regarding the status of your loan and the repayment term. Keep paying your original loans during the application process so you don’t fall behind and be on the lookout for 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 hire a financially sound co-signer or trustworthy person who also takes legal responsibility for the loan. Creditworthy co-signers increase your chances of approval and can help you get a better interest rate. But it’s important to consider your ability to make the payments and the potential negative implications co-signing could have on your relationship before you ask.
There are also lenders who cater primarily to low-income people and those with less than stellar financial histories, but most lenders require a good credit score at a minimum and often offer higher rates. You’re more likely to qualify with a lender that offers approval based on future income or need, but you could also 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 one of their hardship payment relief options. If none are available, make at least the minimum payments to avoid defaulting on your balance. The majority of your credit mix is your payment history, so over time doing at least the minimum will help boost your score and increase your creditworthiness.
How to Refinance Private Student Loans in the Federal Government
Private student loans are owned by private lenders – banks and credit unions – while federal loans are owned by the Department of Education. Private loans cannot 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 one federal direct loan to qualify for federal debt relief and cancellation programs, such as Public Service Loan Forgiveness (PSLF) and income-contingent repayment (RID). However, private student loans are not eligible for any form of federal consolidation.