Save on fees and interest rates on your student loan debt by switching up your lender.
Our guide walks you through the basics of student loan refinancing to help you decide if it could help you save and what you need to look for in order to find the best deal.
How does student loan refinancing work?
Student loan refinancing works like any other type of refinancing. You take out a loan with lower interest rates and more favourable terms than your current student loan and use the new loan to pay off the old one in full. Then, you repay your new loan according to your new loan terms. It doesn’t reduce the amount of debt you have, but it can reduce the amount you pay in the end.
When done right, refinancing can have you pay less interest in a shorter period of time, which means you’ll save big in the long run.
Should I refinance my student loans?
While refinancing might sound like a great idea, it’s not for everyone. You’ll want to make sure you’re in the right position to get better terms through refinancing before you spend hours researching and comparing lenders.
It’s a good idea to consider refinancing if:
- You have good credit. Good credit means you’re eligible for lower interest rates and fees. If you don’t know your credit score, it’s worth finding out by contacting one of the two credit bureaux – Equifax or TransUnion – or by using a reputable and free online credit score provider. A credit score of 650 or above usually means you’re in good to excellent standing.
- Your income is more than the amount you owe. Your debt-to-income ratio is often a factor lenders consider when calculating interest rates and fees, as well as your ability to repay the loan. A low debt-to-income ratio means you have a higher chance of getting a good deal through refinancing because it shows you can handle the repayments.
- You’re paying high interest rates. The likelihood of finding a better deal through refinancing is higher if your interest rates are high to begin with.
- You have a graduate degree. It’s not always necessary, but some lenders like to see that you achieved your goals and graduated with a degree or diploma.
You might want to hold off considering refinancing if:
- You have bad credit. You may be better off sticking with the interest rate you have if your credit score is less than good. With a score under 650, it can be challenging to find a provider who will refinance your loan with lower interest rates since your credit history shows you are a higher risk lender.
- You’re unemployed. It’s harder to find a better deal if you can’t prove to lenders that you have the ability to pay off your loans with a steady income.
- You owe more than you make. A high debt-to-income ratio could result in higher interest rates and fees, meaning you might have trouble finding a better deal than you already have.
- You’re new to the workforce. Savvy recent grads might want to jump on the refinancing train as soon as they get their degrees, however they probably won’t get the best rates – lenders prefer people who’ve been working for a while and have a steady income.
Do I need a cosigner?
You have a bad deal on your loans but you can’t qualify for a refinancing loan on your own since you have a poor credit score: You can’t afford your lender’s repayment plan and your interest rates are unreasonably high. In this situation, you might want to consider refinancing with a cosigner.
A cosigner is someone with stronger qualifications who takes on partial responsibility for your debt by applying with you and signing on to your loan. The most common cosigners on student loans are a student’s parents or relatives.
The process for applying with a cosigner varies between lenders:
- Some consider your cosigner’s information alone when determining your eligibility and rates.
- Some look at a combination of both you and your cosigner’s information.
- Some lenders only consider your cosigner’s credit to help you lower your rates – you’ll have to meet the basic eligibility requirements on your own.
It’s important to note that not all lenders will accept cosigners, so make sure the lender you choose allows this before starting your application.
Signing a loan as a cosigner can be a risk – they’re taking on a debt load that could potentially hurt their credit score if not paid back on time. It can also damage your relationships if you fall behind on your repayments.
Luckily, many student loan refinancing options come with the opportunity to apply for a cosigner release. A cosigner release allows you take your cosigner’s name off your loan. To qualify, you typically make a couple of years worth of on-time payments and ensure you’re able to meet the lender’s credit requirements on your own. Some lenders let you keep your current rates and terms, while others might adjust them to reflect your own personal creditworthiness.
How much could I save by refinancing?
The answer to this question will depend on a few factors, including:
- Your interest rate
- Your term length
As an example, let’s take a look at how much Mary, a recent graduate from University, could stand to save by refinancing her $40,000 student loan with a lower interest rate and shorter loan term.
Interest rate: 6%
Remaining loan term: 15 years
New interest rate: 3.99%
New loan term: 10 years
|Original loan||New loan||Mary’s savings|
|Term||15 years||10 years||5 years|
Mary would save over $12,000 over the course of her loan, but she would have to pay $67 more each month. Additionally, she would be able to pay off her loan five years faster.
Top reasons to refinance student loans
If done right, refinancing can potentially save you hundreds or even thousands of dollars in interest payments. However, saving money isn’t the only reason you might want to consider refinancing your loan. Here are four other important reasons why people refinance their student loans:
1. Lower your monthly repayments
Perhaps you were in a rush to find financing when you were a student and you’re on the hook for a large sum of money each month now that you’ve graduated. Some lenders generally don’t offer income-based or graduated repayment plans, meaning you’ll have to pay a large amount of money each month as soon as you graduate.
While refinancing might not give you an income-based repayment plan, getting a longer loan term and a lower interest rate can help make your monthly repayments more affordable.
2. Have more flexibility with repayments
Depending on the lender you choose, some will offer more flexible repayment options than others. In addition to working with you to make a suitable and affordable repayment schedule, some lenders will allow you to defer your student loans if you decide to go back to school or change careers. Some lenders even offer support to entrepreneurs.
3. Combine multiple student loans
Many students have more than one student debt spread out over two or more lenders. Keeping track of your loan repayments can feel like a full-time job if you’re not careful.
Refinancing to consolidate your student debt into one loan, hopefully with a more competitive interest rate, can make your repayments a lot easier and cheaper.
4. Take a cosigner off a loan
If your lender doesn’t offer a cosigner release, the only other option you have to take them off your loan is to refinance it in your name. If you’re not sure that you’ll qualify for a loan on your own, you can refinance your loan with a different cosigner if you choose.
What to look for when choosing a refinancing loan
Consider the following factors when looking to refinance your student debt:
- Interest rates. Aside from looking at which lender offers lower rates, pay attention to fixed-rate and variable-rate options and decide which works best for your budget.
- Fees. Read the fine print and contact the customer service team if you have any questions regarding extra fees.
- Loan amount. If you have a large amount of student debt, make sure the lender is willing to work with you. Some lenders have maximum amounts on their refinancing options.
- Cosigner options. Maybe you don’t have the best credit score or make quite enough money to qualify for lower rates. In that case, you’ll want to find a lender that allows you to refinance with a cosigner.
- Term lengths. Even if a lender offers incredibly low interest rates over a short period of time, you might want to choose a different lender if you can’t realistically pay off your loan in the term lengths they offer. You’ll also want to avoid taking on a longer term than you need in order to avoid paying unnecessary interest fees.
- Customer service. Even after all the research and comparing, it’s likely you’ll run into something that leaves you scratching your head. Great customer service not only puts you at ease, but also helps you avoid falling into a cycle of debt if you’re suddenly unable to pay your loans. Contact the lender directly to get a feel for how the company treats their borrowers.
- Perks. Loyalty discounts, unemployment protection and better rates for some professions are a few examples of perks lenders offer. See if you qualify for any of these – and if they mean you’ll end up paying less than you would with other lenders.
Fixed vs variable interest rates
If you’ve already compared different refinancing loans, you’ve probably noticed that lenders list two different types of interest rates: fixed and variable. Let’s take a look at what the difference is.
Fixed interest rates
Fixed rates are what they sound like. You qualify for one interest rate that stays with you throughout the entire life of your loan. Your monthly repayments stay the same and it’s easy to plan your repayments. Fixed rates can be a safer option – there are no surprizes with how much you will pay each month.
Variable interest rates
Variable rates are slightly more complicated. They change once every month or few months, depending on your lender. While they typically start lower, they can often rise to the same level as your highest fixed interest rate.
When you see the range of current variable rates listed on a lender’s website, you might think you’ll always get a rate within that range – but that’s not exactly how it works.
Lenders calculate variable rates by giving borrowers either a smaller fixed rate called a margin rate or a smaller range of set rates – usually between 2% and 10% – and then that gets added to a benchmark rate known as the prime rate. Prime rates change every one to three months to reflect lending market trends, depending on the type of rate your lender uses.
You can usually find the range of margin rates you might qualify for in fine print under the current variable rates, plus information on what type of prime rate it uses. Look for something like this:
*3-month + 2.99% to 9.99%
One last thing you’ll want to consider is the maximum variable rate. Lenders sometimes cap variable rates to protect borrowers from skyrocketing prime rates. You might have to reach out to your lender to find out what the maximum variable rate is and whether it’s offered – usually it’s around the maximum fixed rate or slightly higher.
How to apply for student loan refinancing
Applying for student loan refinancing is usually less complicated than applying for a student loan. Before applying, you’ll need to make sure you meet the eligibility requirements for the loan.
Typical eligibility requirements:
- Many lenders require you to have a steady income and be employed.
- You will likely need to have a good or excellent credit score, which is typically 650 or higher.
- It’s usually necessary to have a few years of credit history behind you.
You can usually apply online by filling out a simple application that often doesn’t take more than a few minutes. Usually the most time consuming part is getting your documents together and waiting for your new lender to reach out to your current lenders in order to refinance the debt.
Documents you might need:
Your lender might ask you to provide some, or all, of the following documents when you apply to refinance your student loans:
- A valid Government-issued ID. You’ll need to provide a valid Government-issued ID, like a passport or driver’s licence, on top of your Social Insurance Number, to prove your identity.
- Recent pay stubs. Your pay stubs serve two purposes: They show how much you make and prove that you’re employed full-time and receive a regular income.
- Statements from your current loan providers. Many lenders ask you to provide a recent statement showing how much you owe on your student debt. The statement will also need to list your current loan provider’s contact information.
- A payoff letter. Some lenders also ask you to reach out to your current lender and ask for a payoff letter, or a written statement that says how much you’ll owe on your loans in 30 days. Some lenders will ask your lender for you.
Federal loans and refinancing
Refinancing is a bit more complicated when it comes to student loans, in part because of the popularity of government student loans. While you can refinance a government student loan with a private lender, you’ll have to consider many more factors than you would when refinancing a personal loan from a private lender.
What am I giving up when I refinance my government student loans?
Government student loans don’t always come with lower interest rates than private loans, which is why many students jump at the idea of refinancing with a private lender.
Still, all government student loans come with unique benefits that you stand to lose, such as:
- Tax deductible loans. Interest rates on government student loans are tax deductible, while loans from private lenders are not.
- Flexible terms. As of July 2018, students who earn less than $25,000 a year don’t have to start paying their student loans back until they earn over that amount.
- Extended terms. With longer loan terms, you’re able to make smaller monthly payments over a longer repayment period if you so wish.
- Income-driven repayment plans. Borrowers who have trouble repaying their monthly amount may be able to have it reduced by contacting the government student loans department. Your payments can often be determined by what you can actually afford.
Refinancing vs consolidation: What's the difference?
Refinancing and consolidating are almost the same except for one key difference: Refinancing involves one debt, while consolidating involves multiple debts. If you have multiple student loans that you want to pay off with one monthly repayment, what you’re looking for is actually a consolidation loan, not a refinancing loan.
So, should you start looking for debt consolidation loans? Not necessarily. Many lenders offer both student loan refinancing and consolidation together, but refer to it using just one term to avoid confusion. Ask lenders if there’s a limit to how many loans can be paid off with a refinancing loan, to be sure you’re eligible before you begin the application process.
If you have student debt, you may want to look into student loan refinancing to see if it will be beneficial for you. Even if you have a government subsidized loan, you can still refinance it with a lender who offers a more competitive exchange rate and better repayment terms.
If you do decide to refinance your loan, make sure you compare all of your options and do your own research before deciding on a lender.