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The amount of interest that accrues on your student loans plays a significant role in how much you end up paying overall. Therefore, it’s not surprising that borrowers are always looking for ways to lower their interest rates. One of the most common methods for lowering interest rates on student loans is refinancing your student loans. In this article, you’ll learn about how refinancing federal student loans works and whether or not you’re a good candidate for it.

Why This Matters

Refinancing means consolidating your existing student loans into a single, new loan, with a different interest rate and repayment term. The goal is that you will have a lower interest rate and lower monthly payment, so that your loan is easier to pay off.

You can refinance both federal and private student loans, although there are some reasons, which we will cover below, why you may not want to refinance federal student loans.

If you are looking for ways to lower your student loan interest rates and monthly payments, read on to see if you meet any of the criteria that makes refinancing a wise decision.

You should refinance your student loans If…

  • You qualify for a lower interest rate: Since this is the primary purpose of refinancing, it only makes sense to refinance if your interest rates will go down. Do some quick research to find out what current interest rates are for refinanced student loans. These rates fluctuate based on market trends, so even if they are currently low, that could change at any time.In your research, you will see that most lenders advertise a range of interest rates. This is because the interest rates vary based on the individual borrower. The rate you receive is based on your application, although most lenders will let you check what your new interest rate will be prior to submitting a full application.

Student Loan Refinancing Application Materials

You will need these items to apply for most student loan refinancing plans:
  • Proof of citizenship (social security number or government-issued ID number)
  • Valid ID number (driver’s license or state-issued ID)
  • Proof of income (pay stubs or a job offer letter)
  • Official statement for all federal and private loans

Once you confirm the new interest rate and repayment terms, use a student loan interest calculator to make sure you will save money by refinancing. If you will, then you’re good to go.

  • You want a single monthly payment: Having multiple loans through multiple lenders means keeping track of several payments throughout the month. When you refinance, you consolidate multiple existing loans into a single new loan with one monthly payment, so you have a few less bills to worry about paying each month.
  • You want to switch from a fixed to a variable interest rate, or vice versa: Private loans come with either fixed or variable interest rates. A fixed interest rate stays the same throughout the life of the loan, regardless of how overall interest rates fluctuate. A variable interest rate changes with market trends, meaning it can increase or decrease from the rate at which you initially borrow the loan.Both types of interest rates have their advantages and disadvantages, and one type of loan may have suited you better at a different point in time. If you want to switch from a fixed to a variable interest rate, or vice versa, refinancing will allow you to do so.
  • You want to change your loan repayment term: Similar to how refinancing lets you change the type of interest rates you are charged, the process also allows you to change your repayment terms, or the amount of time you have to repay the loan.Repayment terms for student loans typically range from five to 20 years. Longer repayment terms mean your monthly payments are less, but that you pay more in interest over the whole course of the loan. Refinancing gives you the option to choose the repayment term that works best for you.
  • You have a stable monthly income: This primarily applies to individuals who want to refinance federal student loans, which are eligible for income-driven repayment plans. However, when you refinance a federal loan with a private lender, you are no longer eligible for these repayment options and will be locked into a set minimum monthly payment.If you don’t anticipate needing to adjust your loan payments based on your income, refinancing is a viable option for lowering your interest rate.
  • You want to switch loan servicers: The entity that lends you the money for your loan is your loan servicer. When you refinance, you can switch to a different loan servicer that may offer better customer service, local branches, or other perks.

You should not refinance your student loans if…

  • Your interest rate won’t change, or will increase: If the math doesn’t check out, and your interest rate won’t decrease (or will actually increase), keep your loans as they are. Continue to check on interest rates to see if more favorable terms become available.
  • You are on an income-driven repayment plan: As mentioned above, only federal student loans are eligible for income-driven repayment plans that calculate your monthly payment as a percentage of your discretionary income. Once you refinance loans with a private lender, you can no longer enroll in an IDR plan (you cannot refinance loans through the federal government).
  • You are enrolled in a loan forgiveness program: Federal student loans are also eligible for plans like the Public Service Loan Forgiveness program and the Teacher Loan Forgiveness program. However, loans refinanced through private lenders are no longer eligible for these programs either.
  • You have a low credit score: In order to be eligible for refinancing, borrowers typically have to have a credit score of 650 or higher.

If your credit score is below 650, you can apply to refinance your student loans if you have a cosigner with a high credit score. You can still research refinancing options without high credit or a cosigner, but be prepared to build up your credit score in order to get interest rates that are really worth your while.

  • You’ve defaulted on your student loans or other debts: As part of the application process, the lender will dig into your financial history. This includes a credit check, which will reveal if you have defaulted on any loans or debts, or have a history of missing payments. These situations can make you ineligible for refinancing.
  • You’ve already paid off a significant amount of your student loans: While a 20-year repayment term with significantly lower interest than your current loan can sound tempting, consider how far along you are in your current repayment plan. Even if your refinanced loan has a lower interest rate, if you extend your repayment term, you could end up paying more in the long run than if you stick with your current loan terms.

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