how to refinance federal student loans

How to Refinance Federal Student Loans at a Lower Interest Rate

Michael Lux Blog, Consolidation, Lower Payments, Student Loans 0 Comments

Refinancing your federal student loans can be a savvy financial move.  The refinancing process allows borrowers to lock in lower interest rates and get debt free faster.  Though there are a few landmines that should be avoided, the refinancing process is relatively simple and painless.

The Refinancing Process

Because the federal government does not refinance loans, borrowers will have to work with a bank, credit union, or student loan refinancing company.

Perhaps the hardest part of a federal student loan refinance is getting qualified.  Where the federal government treats all borrowers the same, the private lenders are looking for lower risk customers.  That means a decent income and credit score are essential.

Once you reach a point of some financial stability, it is time to reach out to a lender.  If you are able to pass the lender’s credit check, the refinance can begin.

The actual refinance should require little to no effort from the borrower (though some lenders are better than others).  The borrower provides a list of all of the student loans that they want refinanced and the new lender gets in contact with all of the existing lenders (in the case of federal loans, it is the federal loan servicers).  The new lender will get payoff quotes and issue payments to the existing lenders such that the loans are paid off in full.

With the old loan(s) paid off in full, the borrower’s old student loans are history, and replaced with a new loan at hopefully a much lower interest rate.

Shopping Around

The key to a successful student loan refinance is shopping around.  Borrowers should be looking for low rates and good customer service.  Our Student Loan Lender Rankings should aid in learning about the different companies in the market, but it is critical to trust your own judgment.  Interacting with different lenders and having direct contact can help any potential borrower get a much better understanding of the lender.

It should be noted that shopping around involves far more than just picking the company with the lowest advertised interest rate.  The key is to find the best rate that you qualify for.  This will vary from person to person and company to company.  Often the lowest advertised rates only apply to the high earners, with high credit scores, who will be paying their loans off quickly.  If you are not getting the lowest advertised rate, it definitely pays to try a few more companies to see where their rates come in.

Before applying with one company, it is a good idea to have a plan in place.  The credit agencies treat multiple applications within 30 days or less to be “shopping around”.  This means that the hit to you credit score for applying only happens once.  The idea behind this policy is to allow customers to find the best deal without suffering any negative consequences.  However, if you apply to a new company every couple of months, you could do some damage to your credit score.  The best practice is to generate of list of lenders that you want to work with, and submit your applications all at once.

Should I refinance?

The decision to refinance federal student loans has major consequences.  On one hand, the lower interest rates are a huge perk.  However, there is a risk to making this move.  Federal loans come with perks, such as payments based upon income and loan forgiveness that private lenders can’t match.  Refinancing your loans with a private lender gives up all of these perks.

Making the decision even more critical is the fact that there is no way to undo a student loan refinance.  Once the old loans have been paid off and the new loan is created, it is permanent.  The federal loans and federal perks are gone forever.  This means that if you choose to refinance, you need to be comfortable with your decision regardless of what the future holds.

When should I refinance?

If you decide the student loan refinancing is right for you, picking the right time to apply is critical.

Ideally, two things are happening at the same time: First, your income and credit score is peaking such that you can qualify for a great interest rate.  You want to be applying from a position of strength, not desperation.  Second, you want to be applying when the market interest rates are low and competition is fierce among lenders.

Fortunately, now is great time to be applying for a student loan refinance.  Interest rates are near all-time lows.  Additionally, the marketplace for lenders has become increasingly crowded.  Lenders are fighting to offer the best rates, and some lenders are even offering a bonus to new customers.  (At the time of this article, SoFi, CommonBond, and Earnest are all offering new customers $150).

That being said, personal finances are a huge part of the equation.  If you are a few months away from eliminating a huge monthly debt, such as paying off a car, it might be in your best interest to wait those few months.  A lower interest rate is far more valuable than a one time bonus.

The Bottom Line

The process of refinancing your student loans is fairly simple.  The key to doing it successfully is to research all of your options and put together a good plan.  If you have specific questions about your situation and your choices, be sure to check out our student loan help center where you can see answers to questions posted by others or ask your own questions.