The Situation: You have private student loans with Discover, and you want to refinance to lower interest rates or monthly payments. (If you are considering refinancing with Discover, you will want to read the Discover Refinance Review.)
Despite the growing popularity of student loan refinancing, there are many misconceptions.
One of the biggest misconceptions is that your current student loan company can impact or limit your refinance options. The truth is that your current student loan company has minimal impact on the refinance process.
Today we will discuss the steps to refinance for borrowers with Discover student loans.
Can you Refinance a Discover Student Loan?
All borrowers are eligible to refinance their Discover student loans, provided that they can pass a credit check.
In a refinance, a refi lender will pay off a borrower’s existing student loans. With the old loan(s) eliminated, the borrower repays on a new loan with the refi lender. Essentially, you are borrowing money to pay off your old loans. You repay the refi lender according to the terms of the refinance deal. Ideally, borrowers can get a lower interest rate or smaller monthly payments.
Discover does not charge any prepayment penalties on its private student loans. Thus, borrowers can refinance without any transaction costs.
Why would I want to Refinance my Student Loans?
As a student, you probably didn’t have a job or a degree. Most students also have limited or non-existent credit histories. Lending to people who fit this description is risky for lenders. When lending is risky, lenders will charge a higher interest rate.
As a graduate with a job, degree, and positive credit history, you are lower risk. People who fit this description qualify for better loan terms.
Most borrowers refinance to accomplish one or both of the following:
Lower Interest Rates – Getting a new loan with a lower interest rate means the total repayment cost will be less. The downside to loans with ultra-low rates is that borrowers must repay the loan in five years. This approach is the quickest and most efficient way to eliminate student loans, but the short repayment period may challenge some borrowers.
Lower Monthly Payments – Some borrowers choose to stretch out the repayment length to 20 or even 25 years. The interest rates on these loans tend to be a little higher, but payments are smaller because they are spread over a long period of time. Borrowers often choose this approach if they are trying to improve their Debt-to-Income ratio to buy a house or because they want to free up some extra cash each month.
Occasionally, borrowers will try to find a middle ground where they pick a 10 or 15-year loan. Selecting a loan with an identical repayment length but a lower interest rate will mean the loan costs less in the long run AND lower monthly payments.
Do I have to Refinance with Discover?
Having student loans with Discover does not obligate the borrower to refinance with Discover.
In fact, taking your business elsewhere could be the best option to find the lowest possible interest rate.
Discover might offer a better refinance rate because they want to keep your business, but an outside lender may offer a better rate because they want a new customer.
Most financial services companies tend to be more aggressive in attracting new customers than keeping their current customers. There could be exceptions, but I would bet that most borrowers will find better refinance rates by shopping around than what they get if they stay with Discover.
Is there a Downside to Refinancing Discover Student Loans?
In the case of refinancing federal student loans, there are significant risks. By refinancing, borrowers lose out on critical federal perks like student loan forgiveness and income-driven repayment plans.
However, Discover only handles private student loans. Thus, the risks are significantly reduced.
For most borrowers, the process is a major benefit. However, changes to the Debt-to-Income ratio could be a downside for the borrowers that choose a shorter repayment length.
How Soon Can I Refinance?
Because there are no prepayment penalties on Discover student loans, borrowers can refinance as soon as they please.
The borrower’s credit profile is the primary factor in determining when refinancing is an option.
It is probably too soon to refinance for the borrowers still in school or who haven’t found a job.
Getting the Lowest Monthly Payment
The interest rates that most lenders advertise tend to be the 5-year refinance loans.
I find the longer loans can be a better option in many circumstances.
On a shorter loan, borrowers are required to make larger payments; on a longer loan, borrowers have the option of making larger payments. The lower monthly payment gives them the flexibility to choose. A lower monthly payment can make it easier to buy a house and free up money to save for retirement.
The downside to the longer loans is that interest rates tend to start a bit higher. At present, the following lenders offer the best interest rates on 20-year, fixed-rate loans:
|Rank||Lender||Lowest Rate||Sherpa Review|
|3||3.53%||Splash Financial Review|
Borrowers looking for other options or a more comprehensive list of lenders should check out our refinance lender rankings and reviews.