The process of refinancing sounds complicated. For many borrowers, just getting their student loan company to properly process a payment can be a challenge. Moving student loans, getting lower interest rate, and finding a lender sounds significantly more difficult. Skeptical borrowers may be concerned that there are costs and fees associated with the process.
The good news is that refinancing student loans at a lower interest rate is a legitimately free — and fairly simple — process. The bad news is that the borrowers who desperately need lower interest rates and lower payments will likely not be able to qualify.
The Costs and Fees of Student Loan Refinancing
The idea that a borrower can get a lower interest rate on their student loans without getting beat up by fees or transaction costs sounds too good to be true. In some ways, this sentiment is right… there is a catch.
Borrowers should look at themselves more as the product than the consumer of services. All borrowers are obligated to repay their student debt at a certain interest rate. Some borrowers are highly likely to repay their debt and are viewed by banks and lenders as reliable sources of income. Other borrowers are more of a risky bet. They may have a poor credit history or limited income.
To the banks and lenders, the idea behind refinancing is to steal good borrowers away from other lenders. The student loan refinance company pays off a borrowers existing student loan and then the borrower becomes their customer. That borrower now has to pay back the refinance lender… with interest. This is a good deal for the lender because they have a new customer that they think is a good bet to pay off the loan. It is a good deal for the borrower, because the interest rate with the new lender is lower than the old interest rate. The losers in the deal are the old lenders who are no longer profiting off of reliable customers.
From this perspective, it makes sense that the student loan refinance companies don’t charge any fees or costs for refinancing. In fact, because their industry is so competitive, they often offer borrowers a refinance bonus for signing up.
Why is student loan refinancing free when refinancing a house is expensive?
Whether you are refinancing a house or student loans, the process is generally the same. Apply with a new lender. New lender pays off the old loan. Repay the new lender.
The big difference between refinancing a house and a student loan is the complications that go with a house. The new lender first needs to determine the value of the house. This requires an appraisal. Someone has to inspect the house to make sure it is still in good shape. They need to check the value of other homes that recently sold in the area to get an understanding of the real estate market. Title companies need to verify that no other party has an interest in the property. Recording fees need to be paid to register the new lender with the local government. Spending thousands of dollars to refinance a house is fairly common.
With student loans, this information is straightforward. The current value of the loan is easy to determine, and there is significantly less government oversight on the student loan industry. The only cost is printing the checks and mailing them out to the old lenders.
How do I refinance my student loans?
The key to a successful student loan refinance is to find the best lender. Lenders use different formulas to determine the “good borrowers” from the bad. As a result, shopping around is the ideal way to find the lowest interest rate possible. We have previously reviewed and ranked the lenders offering student loan refinancing and offered tips on choosing a lender.
Once a lender approves an application, the refinance process is simple. The borrower uploads information about their existing loans to the new lender. The new lender mails checks out to the old lenders, and repayment to the new lender can begin.
Refinancing a student loan should be a process free of fees and costs. Anyone charging for such services should be viewed very skeptically.
Borrowers that realize they are the product rather than the customer can leverage their position into low interest rates and faster student debt elimination.