Should You Refinance Your Student Loan?

By Dan Rafter on 9 December 2015 0 comments

If you're struggling to pay back your student loan debt, you're far from alone. Earlier this year, Edvisors reported that members of the class of 2015 graduated from college owing an average of more than $35,000 in student loans. That's the highest this average has been.

You can refinance your existing student loans to ones with lower interest rates. This can help you manage this debt. If your interest rate is lower, your monthly payment will be lower, too. You'll also pay less over the life of your loans, thanks to the lower interest rates.

But there may be costs, too. If you're refinancing federal student loans into private loans — those originated by private banks and financial institutions — you'll lose the protections and programs that government-sponsored student loans provide. And that can end up hurting you in the long run, even if you lower the interest rates and monthly payments on these loans. Federal loans offer loan forgiveness, deferment, and income-based repayment protections. Most private student loans don't come with these protections.

Loan Forgiveness

If you are employed full-time in an eligible public service or non-profit job and you've made at least 120 on-time payments on your federal student loan, the government will forgive the remainder of your student-loan debt.

The Consumer Financial Protection Bureau says that one-fourth of U.S. workers can qualify either for loan forgiveness programs or income-based repayment plans. Consider whether you'd be eligible for loan forgiveness before refinancing with a private lender. (See also: 8 Ways to Get Student Loan Debt Forgiveness)


Federal student loans also come with deferment options, which give you more time before you have to start paying them back.

You normally have six months after graduation before you have to start paying on your student-loan debt. But under federal programs, you can apply for additional deferments if you are unemployed, facing economic hardships, or are serving in the U.S. Armed Forces.

Some private loans do offer ways to pause payments as well, but be sure you understand all the terms before making the switch. (See also: 3 Private Lenders That Can Really Save Money On Your Student Loans)

Income-Based Repayment

The income-based repayment plan that the government offers for federal student loans can provide immediate relief if you are employed but not earning a high salary. If you are a new borrower on or after July 1 of 2014 who has no balance on a previous federal student loan, your loan payments will be capped at a maximum of 10 percent of what the government calls your discretionary income, the difference between your income and 150 percent of the poverty guideline for your family size and the state in which you live.

Those borrowers with especially low incomes might not have to make any student-loan payments at all.

If you make these lower payments for 25 years, and you still haven't paid off your student-loan debt, the government will forgive the remainder of what you owe.

For more information about these and other assistance programs – they are too complex to completely sum up in this story – visit the Department of Education. (See also: Which Student Loan Repayment Plan Saves You the Most?)


If you are interested in refinancing your federal student loans, you will have to follow certain steps.

As with any loan application, you'll need to prove that you can afford your new monthly payments, even though they'll be lower than your current ones. Usually that means providing lenders with proof of income as well as bank statements.

You'll also need a good credit score if you want to qualify for interest rates that are low enough to make refinancing worthwhile. Your credit score will be low if you've missed or been late on payments or if you have run up loads of credit-card debt. You'll struggle to qualify for a refinance if your credit score is under 640 on the FICO scale.

Here are some places to consider if you'd like to apply for a refinance.

LendKey: Fixed rates start at 2.95% APR and variable rates start at 1.90% APR. LendKey has no origination fees and their loans are funded by community lenders like credit unions and community banks.

SoFi: Fixed rates start at 2.99% (with AutoPay) and variable rates start at 2.25% (with AutoPay)*. Loan terms are from five years to 20 years. SoFi offers additional resources and benefits, including unemployment protection and career support.

CommonBond: Fixed rates range from 2.59% APR to 6.74% APR (with AutoPay) and variable rates range from 2.51% APR to 6.86% APR (with AutoPay). Loan terms start at five years and go up to 20 years. They also allow a temporary pause in payments if you lose your job. In addition to student loans for grads, they also offer refinancing for parents with PLUS loans, and even loans for getting your MBA.

Earnest: Fixed rates start at 2.98% APR and variable rates start at 1.99% APR. Earnest allows a lot of flexibility for borrowers, even allowing them to change between fixed and variable rates at no charge. Earnest also looks at additional factors beyond the traditional credit scores and income — including education, employment history and other details to get a better picture of the borrower.

*Student Loan Refinance Disclaimer: 1. Fixed rates from 2.99% APR to 6.88% APR (with AutoPay). Variable rates from 2.25% APR to 6.43% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.13% plus 2.37% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The discount will not reduce the monthly payment; instead, the interest savings are applied to the principal loan balance, which may help pay the loan down faster. Enrolling in autopay is not required to receive a loan from SoFi. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score.Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE

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