Wondering if you should refinance private student loans? Thankfully, it’s easier to get a clearer yes or no answer with private student loans than with federal student loan refinancing.
Private student loans don’t qualify for federal benefits like Income-Driven Repayment or Public Service Loan Forgiveness, so refinancing private loans won’t cause you to lose federal benefits. You can’t lose something that you never had in the first place.
Having that big concern out of the way makes it a lot easier to determine when refinancing private loans is the right move — and when it’s not.
When should you refinance private student loans?
Here are five solid reasons to consider private student loan refinancing or a private student loan consolidation:
1. You notice that interest rates have gone down
Interest rates can swing up and down for various reasons. But, in general, when the Fed drops its interest rate, refinancing rates tend to drop as well. If the average interest rate has gone down since you originally took out your student loans, refinancing could save you a lot of money.
For example, let’s say that you have $100,000 in private student loans with an average interest rate of 6%. Over 10 years, you’d pay $33,225 in interest on those loans.
But what if in today’s interest rate environment, you could qualify for a new 10-year loan at a rate of 3.5%? In that case, you’d reduce your overall interest cost to $18,663. That’s a savings of $14,562.
It’s clear that refinancing to a lower interest rate can make a big difference in how much you pay overall. And by using one of Student Loan Planner’s referral links, you could also earn an additional $100 to $775 cash bonus.
2. Your credit score has gone up
Like other lending products, the interest rate that borrowers are quoted for students loans is determined by their credit rating. All lenders publish interest rate ranges on their loans. For example, a lender may publish an interest rate range of 3.12% to 6.15% for their fixed-rate loans.
The lowest interest rates are reserved for borrowers with the best credit. But borrowers with less attractive scores may only qualify for rates closer to the high end of the lender’s range.
If your credit score has improved since you took out your student loans, you may qualify for a lower rate today — even if the interest rate climate hasn’t dropped significantly.
A change of only a few points won’t make a major difference, but moving from an average credit score (650+) to an excellent score (750+), could really move the needle. If you’ve raised your credit score by 50 points or more since you took out your private student loans, you owe it to yourself to check on your eligibility for a lower rate.
3. You want more customer service or borrower protections
In addition to lowering your interest rate, refinancing private student loans gives you the chance to pick the lender of your choice. And not all lenders are created equal.
For example, some student loan companies offer very few borrower protections like hardship forbearance, academic deferment, or death and disability forgiveness. But many of Student Loan Planner’s top refinancing lenders do offer these benefits.
Also, while some lenders offload their loan servicing to third parties, others have dedicated in-house customer service teams. If you’ve been dealing with billing errors or slow complaint response times, it might be time to jump ship for a lender that will better handle your business.
4. You want to change your repayment terms
When you refinance private student loans, you also get the opportunity to choose your loan terms. For instance if you have a 10-year loan, you could switch to a five- or seven-year loan. Or, you could pick a longer term, like 15 or 20 years.
Refinancing to a shorter term could help you save the most money overall. But before you choose a much more aggressive payment schedule, make sure you’ve built up an emergency fund of at least six months’s worth of expenses.
On the other end of the spectrum, refinancing to a longer term could help you secure a lower monthly payment. You’ll generally pay more interest overall if you extend your repayment schedule, but, if your budget is tight, lowering your payments could provide some much-needed cash flow.
5. You want to simplify your payments
Did you take out more than one private student loan during college? If so, you can consolidate all those loans into one new loan with private student loan refinancing.
Private student loan consolidation could make it a lot easier to manage your student loan payments. But, in general, you should only consolidate private student loans if your new loan would have a lower interest rate than the average rate of each individual loan.
Misconceptions about private student loan refinancing
If the opposite of any of the points listed above applies to you, you may want to avoid refinancing your private student loans. For example, if the average interest has gone up since you took out your loan or your credit score has gone down, you may want to hold off on refinancing.
But there are also a few misconceptions about refinancing that could keep you from refinancing your private student loans. Here are a few refinancing myths to be aware of:
Myth: Refinancing my private student loans damages my credit score.
Many people avoid applying for any form of financing because of the fear that it will damage their credit score. But the fact of the matter is that hard credit inquiries are one of the least influential credit score factors.
Also, multiple inquiries with a short time period for the same type of loan are generally viewed by the credit reporting agencies as a single inquiry. In other words, the scoring models don’t penalize you for shopping around.
Finally, many lenders can give you a rate quote with only a soft credit pull. If you like what you see, you can move forward with a full application (and hard credit inquiry). But, until then, your credit score would not be affected at all.
Refinancing your private student loans won’t wreck your credit score. Don’t let that myth hold you back from shopping for a better loan.
Myth: It takes a lot of work to refinance private student loans.
If you’ve been through the process of buying a home, you know how difficult the underwriting process can be. And you may think that all types of loans require that amount of time, hassle and documentation.
But refinancing student loans is not the same as buying a home for the first time. First, you don’t need to worry about home inspections and appraisal. Second, you’re not trying to add new debt to your life; you’re just trying to get a better rate or more attractive terms on debt you already have. All of these factors can help to speed up the underwriting process.
Many of the top refinancing lenders have also built applications that are designed to save you time and hassle. In many cases, you’ll be able to upload your and e-sign documents online.
Myth: I’ve already refinanced my private student loans once, so now I’m stuck.
In a 2019 Student Loan Planner survey, 49% of readers didn’t know that student loans can be refinanced more than once. In reality, you can refinance your student loans as many times as you’d like.
In fact, at Student Loan Planner, we recommend a strategy called the “refinancing ladder.” With this strategy, you could start out with a longer term, like 20 years, for maximum flexibility. But the goal would be to make extra payments toward the principal each month and then refinance to shorter terms (and lower rates) as your balance drops.
Following the refinance ladder model, you could refinance from a 20-year loan to a 15-year, then to a 10-year, and finally to a five-year loan. You could even refinance from a five-year fixed loan to a five-year variable-rate loan if you really want to maximize the laddering strategy.
Should you refinance private student loans if it will only result in modest savings?
What if you only qualify for a small interest rate reduction, such as 0.25%. Would it still be a good idea to refinance private student loans. Actually, the answer could still be “yes,” if you’re able to earn a nice cash bonus in the process.
In a recent Student Loan Planner survey, 7 out 10 respondents said they’d be willing to refinance loans to another loan with the same rate if they’d receive a $500 cash bonus. And that’s not too surprising. If the lender you’re refinancing with has a solid reputation and isn’t going to charge you any origination fees, why not go after the free money?
Think refinancing is right for you? If so, check out our refinancing guide in which we compare the top 12 refinancing lenders on the market today.