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How Does Student Loan Refinancing Work?

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Anna Davies

Anna Davies

Updated August 6, 2021
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How Does Student Loan Refinancing Work?; With refinancing, a private lender pays off your student loan or loans with one new loan. The goal is a new, lower rate that can save you money.
Student loan refinancing can sound complex, but it’s really quite simple. A private lender pays off your loan debt and creates a new loan. The goal is a lower interest rate, which can potentially save you a lot of money over time.If you refinance multiple student loans, rather than having to keep track of different interest rates and payment dates, you have just one monthly loan payment. Refinancing can also allow borrowers to adjust the length of a loan (shortening a loan term of 10 years to five, for example) and/or loan payment amount.Student loan refinancing can be an option for some, or all, of your student loans. But there are pros and cons to weigh. Here’s what to know when you consider refinancing:

What Is the Downside to Refinancing Student Loans?

Refinancing isn’t the right choice for everyone or all loans. When you refinance, you cancel your old student loan contract. In the case of federal loans, you will lose federal protections and programs, like these:
  • Access to federal deferment and forbearance. During the COVID-19 pandemic, federal student loan payments were paused through executive orders. No interest accrued and no payments were expected. Any other time, federal loans have specific paths to forbearance and deferment, although in most cases, interest accrues. 
  • Access to potential federal student loan forgiveness. Student loan forgiveness has been discussed by politicians, but it’s unclear when or if student loan cancellation will happen or would extend to private loans. (Just months after taking office, President Joe Biden had canceled billions in federal student loans for particular groups.) 
  • Access to income-driven repayment plans. Most federal student loans are eligible for at least one of the four income-driven repayment plans, which set a monthly payment according to income and family size. Any remaining loan balance is forgiven if the loans aren't fully repaid after 20 or 25 years. Private lenders do not offer these programs.
That said, sometimes private lenders offer lower interest rates than the government rates, and weighing the pros and cons of whether to refinance federal student loans depends on the unique financial circumstances and goals of the borrower. 

Is It Worth It to Refinance Student Loans?

Refinancing has become a big topic in the last year or so because interest rates hit record lows. This means there’s a chance the rate you’re offered for refinancing is lower than the rate you’re currently paying, which could result in sizable savings. But before you refinance your student loans, consider these things. 
  • What’s your credit score? Lowest advertised rates are generally available only to people with excellent credit scores. A solid co-signer may come in handy to not only qualify for refinancing but get a better rate than you could on your own. Lenders will collect information from you and your co-signer.
  • Compare rates. Comparing rate estimates from different refi lenders can allow you to choose the most competitive rate. You also may have to decide on a fixed or variable rate. A fixed rate won’t change for the life of the loan. Once you accept the loan terms, the only way to change the interest rate is to refinance. A variable rate fluctuates with the market. Considerations are the loan length, your financial picture, and your comfort level with variability. 
  • Do you want to shorten, keep, or extend your loan term? Choosing a short term of, say, five years may not decrease your monthly payments by much, but your interest savings could be substantial. (Another option is to choose a longer loan term but pay extra when you’re able to.)
  • Which loans do you want to refinance? If you have several loans, you may not want to refinance all of them.
  • Compare any protections and fees. Besides how much you’ll pay during the life of your loan, it’s a good idea to look at the loan terms. Does the lender offer forbearance for borrowers undergoing economic hardship? Are there any late fees? 

What Are the Steps in Refinancing?

Once you’ve chosen a refinance company, there are a few steps to take before the deal is done.Apply to refinance. Checking your rates is a “soft pull” on your credit. This does not affect your credit score and provides an estimated rate. If you apply to refinance, you’ll trigger a hard credit check, which may affect your credit score. The hard check, other application data (you’ll likely need proof of identity, proof of income, such as W2s, and your most recent student loan statement), and any co-signer’s data may lead to an “official” rate, based on new information. Accept the refinancing terms. You have to accept the terms of refinancing and sign documents for the loan to be official. Once you’ve signed, you enter into a three-day right of rescission period, a three-day grace period that allows you to cancel the loan refinance should you change your mind. After those three days, the lender will pay off your old loan or loans.Follow payment instructions for the new loan. You’ll never personally see the funds—the money will go directly to your original lender, and then you will begin making loan payments to the new lender. Look out for any communication from your old lender or new lender during the first few weeks of transition to make sure that your payment methods are in place (if using autopay) and that everything has transitioned smoothly. If in doubt, you can always contact your old or new lender. 

The Takeaway

How does refinancing work for student loans? One new private loan, preferably with a lower interest rate, replaces the previous student loan or consolidates multiple student loans into one loan.Comparing rates and lifetime loan payments can help you assess whether refinancing your student loans makes sense for you.Lantern by SoFi makes it easy to find lenders and compare student loan refinance options
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About the Author

Anna Davies

Anna Davies

Anna Davies specializes in writing for the fintech and startup space. In addition to her personal finance and investing articles for SoFi, she has written for such startups as WeWork, Happy Money, and Haven Life. Fortune 500 finance clients include American Express, Citi, and Chase. Davies has ghostwritten and collaborated on multiple New York Times bestsellers.
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