Refinancing federal loans means losing out on federal benefits – income-driven repayment plans, deferments if you’re unemployed or facing an economic hardship, subsidized loans, and the potential for loan forgiveness. If you refinance right out of college, you’ll lose your grace period. As with any new loan application, your credit score may drop by a few points as each lender will perform a credit check as part of the application process.
If you are able to reduce your interest rate, refinancing could potentially save money on what you will overall pay for your loans – assuming you don’t extend your payment term to try to reduce your monthly payment. Use our student loan refinance calculator to compare your current loan with a new loan to evaluate. Refinancing a private loan also means you can release a cosigner from the obligation to repay your existing loan. Some private student loan lenders offer a cosigner release, but for those that don’t, refinancing the loan without a cosigner means the cosigner is no longer tied to the loan.
A fixed interest rate means that your interest rate will stay the same for the entire life of the loan until you pay it back. A variable-rate loan means your interest rate can change and increase, as often as monthly.
The requirements for approval for student loan refinancing vary between each lender. Generally, a lender would like to see a debt-to-income ratio under 50%, a minimum credit score of 650 or more, a steady job and consistent income, a minimum loan balance to refinance, loans not currently in default, and that you have completed your degree program. While many lenders require a bachelor’s degree, some allow refinancing with an associate degree or without completing a degree. Some lenders have minimum income requirements as well. Many lenders require the borrower to be either a U.S. citizen or permanent resident to be eligible.
Yes, you can refinance federal student loans into a private loan, but you will then lose all of the perks of federal loans. This includes (depending on your loans) possibly being able to enroll in a payment plan based on your annual income and family size, an option to postpone payments (with an economic hardship deferment or unemployment deferment) and the potential to have your loans forgiven with Public Service Loan Forgiveness or other loan forgiveness options.
Refinancing a student loan means you replace your existing federal or private loans with a new private loan. This new loan will have a new interest rate, loan term, lender and monthly payment, and will no longer offer any federal loan benefits.
A fixed interest rate means the loan’s interest rate stays the same throughout the life of the loan. Variable interest rates can go up and down. Borrowers may be persuaded to choose a variable interest rate because it is initially lower than the fixed interest rate, but keep in mind, this interest rate can increase and eventually exceed the interest rate offered by the fixed rate option.
In general, one of the best ways to take advantage of variable interest rate loans is to repay them as quickly as possible. This lets you receive the benefit of the lower interest rate without leaving much time for the rate to rise.
Fixed-rate loans are often better if you plan to keep the loan for the long-term. If interest rates rise, you get to keep your loan’s lower rate. If interest rates drop significantly, you can try student loan refinancing to reduce your loan’s interest rate.
Most private student loan lenders offer several options for repayment during the in-school and grace periods.
Many lenders give borrowers the option to completely defer, or postpone, payments until after graduation or when enrollment drops below half-time. This lets the borrower avoid paying for the loan while they’re in school, but means that the loan’s interest will accumulate (and possibly compound) until they graduate.
It can often be worthwhile to make small payments or interest-only payments on a loan while you’re in school, even if they aren’t required, to try to reduce the amount of interest that accrues.
Some loans require fixed payments or interest-only payments while the borrower is still in school. Many loans also have a grace period (usually six months) after you graduate or go below half-time. After the grace period is over, you will be required to make full payments.
Some lenders provide discounts, such as small interest-rate reductions, to borrowers who agree to make fixed, interest-only or full payments during the in-school and grace periods.
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What is a cosigner release?
Some private lenders offer an option for a cosigner release. This means that eventually, once specific requirements are met, a cosigner can be released from their obligation to repay the loan.
Often a lender will require a set number of consecutive on-time payments (such as one, two, three or four years) before it will allow a cosigner release. Lenders also check the borrower’s credit before approving the cosigner release, making sure the borrower could qualify for the loan on their own without a cosigner. So, the borrower will need good credit and steady income, not just a good payment history.
Even if a lender offers a cosigner release, there isn’t a guarantee that the borrower will qualify for cosigner release. Most don’t. Cosigners should assume they’ll be cosigners for the life of the loan rather than counting on a cosigner release partway through the loan term.
A cosigner should be a responsible adult with strong credit and consistent income. Anyone who cosigns a student loan should understand how it works and the potential risks.
Cosigners are just as responsible for paying back the debt as the borrower. If the borrower fails to make a payment on their loan, the cosigner is responsible for making that payment. If the borrower stops paying the loan entirely, the cosigner must make the remaining loan payments.
Being a cosigner also has an impact on your credit score as it will increase the debt on your credit reports. Late payments will affect your credit history, not just the student’s credit history. Both your credit history and debt-to-income ratio play a major role in your ability to qualify for loans. If you cosign a large student loan, you may struggle to qualify for other loans.
