What is Student Loan Refinancing?

Michael Lux Blog, Consolidation, Student Loans 0 Comments

Student loan refinancing is when a borrower has a new lender pay off some or all of the borrower’s existing student loans.  Borrowers usually refinance to secure lower interest rates or lower payments with their new lender.  From the borrower perspective, the process is pretty much transferring your debt from one company to another.  The goal in the transfer is to get better terms with the new lender than with the old one.

The process of refinancing is pretty simple.  Interested borrowers apply for refinancing with a company that offers student loan consolidation or refinancing services.  If the application is approved, the new lender makes contact with the old lender to determine the payoff amount.  Once the new lender pays off the old loan in full, the borrower now has to pay off the new loan under the terms of the new loan.

Who can refinance?

If you have student loan debt, you can refinance.  Where things get tricky is the application process.

When you refinance with a new lender, that new lender assumes the risk that you might not be able to pay back the loan with interest.  As a result, different lenders have different requirements for refinancing applications.  Most lenders will look to see if you have a good credit score and income.  If they don’t think you can afford to make the payments on your new loan, you probably won’t be approved.  Lenders also will look at other factors, such as where you went to school, whether or not you graduated, and your program of study.

Typically the biggest roadblock to refinancing is getting credit approval.

[Further reading: I just got rejected for student loan refinancing… now what?]

Who shouldn’t refinance?

It is important to note that refinancing your loans is not always a good idea.  Even if you lock in lower interest rates, refinancing can still be a mistake.

This is because refinancing creates an entirely new loan with new terms and a new contract.  Brand new terms can later haunt a borrower.  The classic example is refinancing federal student loans with a private lender.  In many cases, borrowers are able to get much lower interest rates on the private market than they could with the federal government.  The danger is that the federal loans have certain perks that have major value to borrowers.  For example, federal loans come with payment plans based upon your income.  Federal loans also have forgiveness programs such as public service student loan forgiveness.  If you think there is a chance that you will take advantage of any of the federal “perks” it may make sense to hold off on refinancing.

[Further reading: Should I consolidate my federal loans with a private lender?]

Where can I refinance my student loans?

There are a large number of companies offering student loan refinancing services.  (Note: if you are applying for consolidation, you are in the right place… consolidation is almost exactly the same thing as refinancing).  The growth of student loan debt in the United States has created a huge market for refinancing companies.  As a result, there are many companies to choose from, and it is very competitive.  Some lenders, such as SoFi and Earnest, even offer a $150 incentive to new customers.

If you are unable to secure refinancing with a company that specializes in student loan refinancing, there may still be other options.  For example, you could get a personal loan through your bank.  The downside of funding loan refinancing with a company that does not specialize in student loans is that interest rates will typically be higher.

No matter where or when you choose to refinance your student loans, the most important thing is to make sure you are getting a good deal.  Shop around to make sure you are getting a good interest rate and fair terms.  It can be a time consuming process, but a 1% difference in interest rate can make a huge difference in your bottom line.  As you shop around, be sure to check our student loan refinancing and reviews page.  We try to put together a review for all of the major lenders in the business and keep track of the latest interest rates, terms, and promotions.