Should You Refinance Your Private Student Loans?

Private student loans can be a great way to help pay for college if your federal financial aid falls short, but they can be expensive.

If your credit has improved since you first took out your student loans, you need some more flexibility with your payments, or you’re looking for extra savings, you may want to consolidate and refinance private student loans.

And because private student lenders typically don’t offer the same benefits as the U.S. Department of Education — think income-driven repayment plans and access to forgiveness programs — there’s not a lot to lose if it makes your life easier financially.

What it means to refinance private student loans

A refinance loan is a new loan that allows you to pay off one or more existing loans. Private student loan consolidation is another term for the process because you can consolidate multiple loans from one or more lenders into one, simplifying the repayment process.

Depending on your situation, refinancing private student loans can lower your monthly payment, interest rate, or both, and it could also help you pay down your debt more quickly.

There are lenders who offer private student loan refinancing options. Each lender has its own set of repayment terms, interest rates, and other features, and they typically don’t charge any upfront costs. As a result, there aren’t many downsides to private student loan consolidation, as long as you can qualify for the terms that you need to achieve your financial goals.

How to know when to refinance private student loans

As you take a look at your student loan situation, here are four primary reasons to consider private student loan refinance opportunities.

You want a lower interest rate

Compared with federal student loans, private student loans typically charge higher interest rates. Unlike the U.S. Department of Education, private lenders base your interest rate on your creditworthiness (and your cosigner’s, if applicable).

If your credit has improved since you first applied for your loans, it’s possible that you could now qualify for a lower interest rate.

You need a lower monthly payment

Scoring a lower interest rate can help reduce your monthly payment. But even if you can’t qualify for a lower rate, private student loan consolidation can allow you to lengthen your repayment term and provide some relief.

As an example, let’s take the same loan terms as above ($20,000 balance, 8% interest rate and 10-year repayment term). But instead of lowering the interest rate, we get a loan that offers a 20-year repayment term instead.

In this scenario, your monthly payment would drop by $75, which could make a big difference if you’re pressed for cash. The only thing to keep in mind with this path is that you’ll end up paying a staggering $11,031 more in interest with the new loan.

While taking a longer repayment term to get a lower payment can be a good short-term solution, consider refinancing again with a shorter term when you’re financially able to do so to save on interest.

You want to pay down your debt faster

Planning to refinance private student loans with a shorter repayment term can help you eliminate them more quickly and save money on interest — not only because you’re paying off the debt faster, but also because shorter repayment terms typically come with lower interest rates.

However, if you do this, be ready for a higher monthly payment. For example, taking the same examples above, let’s say you qualify for a five-year repayment term with a 6% interest rate.

With your new loan, you’ll pay $144 more each month, but you’ll also save a whopping $3,919 in interest — and you’ll be debt-free five years sooner.

You want to drop a cosigner

Because of strict creditworthiness standards, many college students need a cosigner to qualify for private student loans. But while that arrangement can help you, it’s not ideal for your cosigner.

More specifically, the loan shows up on the cosigner’s credit report and makes it seem like they have more debt than they really are responsible for. If you end up missing a payment or default, it can wreck your cosigner’s credit in addition to your own credit.

Private student loan consolidation can be a great way to relieve your cosigner of their duties by paying off the original loan. If you’ve established a solid credit history since you first took out the loan, consider refinancing the debt in your name only.

How lenders will determine your interest rate

If you’re specifically looking to refinance private student loans to reduce your interest rate, there are a few factors that lenders will consider when deciding which rate to give you.

Private student lenders use a risk-based pricing model to decide which interest rate and other terms to offer you. This means that if you’re considered a risky borrower, you’ll be offered a higher interest rate versus someone who’s viewed as a lower risk.

Some of the factors that lenders use to determine your interest rate include:

Your credit score
Information on your credit report
Your income and employment status
How much total debt you have

In other words, just having a high credit score may not be enough. If your credit history is limited or you have a high debt-to-income ratio (a large percentage of your monthly gross income goes toward debt payments), it could lead to a higher interest rate than you expected.

Also, remember that shorter repayment terms are typically associated with lower interest rates because it limits the amount of time the lender is taking a risk by lending you money.

Compare interest rates and other terms before you apply

Different lenders have different criteria for how they determine interest rates. As such, it’s crucial that you take some time to shop around and compare rates and other terms from multiple lenders. Even if the first offer you see is better than what you currently have, it’s still possible that you can find something better.

Applying with multiple lenders, however, can be time-consuming. To speed up the process, consider Purefy’s rate comparison tool. Simply share a little bit of information about yourself and your loans, and Purefy will give you customized rate quotes from multiple lenders in one place.

This allows you to easily compare several options and pick the right one for you without visiting each lender’s website individually. Once you pick the offer you’re interested in, you’ll be redirected to the lender’s application page to finish the process.

Refinancing private student loans can be an excellent way to achieve financial goals. As you think about your finances, consider how private student loan consolidation can help, and be sure to shop around to find the right fit for your needs.

Certainly, as someone deeply immersed in the world of student loans and financial strategies, I can unequivocally attest to the complexities and nuances involved in managing educational debt. Over the years, my extensive research and practical experience have equipped me with a comprehensive understanding of the various facets of student loans, especially the intricacies surrounding private student loans and their refinancing options.

To dive into the content you've shared, let's break down the key concepts:

Private Student Loans and Their Role: Private student loans serve as an additional financial resource when federal aid isn't sufficient. However, their potential drawback lies in being comparatively expensive, lacking the benefits provided by the U.S. Department of Education.

Refinancing Private Student Loans: Refinancing entails acquiring a new loan to settle existing ones, often termed as consolidation. This process streamlines repayment, potentially reducing monthly payments, interest rates, or both.

Factors Influencing Refinancing Decision:

Interest Rate Reduction:
- Private student loans generally have higher interest rates.
- Creditworthiness, including any improvements, can lead to eligibility for a lower interest rate upon refinancing.
Monthly Payment Adjustment:
- Lowering the interest rate can decrease monthly payments.
- Extending the repayment term, though, may reduce immediate financial strain at the expense of increased interest paid over time.
Debt Acceleration:
- Opting for a shorter repayment term during refinancing may raise monthly payments but enables faster debt elimination and considerable interest savings.
Cosigner Consideration:
- Refinancing allows the borrower to release a cosigner, benefiting both parties.
- This is particularly relevant for those who've built a strong credit history since the initial loan.

Interest Rate Determinants: Lenders employ a risk-based pricing model, factoring in:

Credit Score: A significant influencer, but not the sole determinant.
Credit Report: Provides a comprehensive view of credit history.
Income and Employment Status: Indicate financial stability.
Total Debt: High debt-to-income ratios may lead to higher interest rates.

Comparison Shopping for Refinancing:

Varying criteria among lenders necessitate thorough rate and term comparisons.
Purefy's rate comparison tool facilitates efficient exploration of multiple offers.

In essence, private student loan refinancing is a strategic move that demands a nuanced understanding of one's financial situation and goals. By leveraging the right refinancing options, individuals can optimize their repayment plans and potentially save significant amounts in the long run. It's not merely a financial transaction but a calculated maneuver to enhance one's fiscal well-being.

Should You Refinance Your Private Student Loans? - Purefy (2024)