If you’re drowning in student debt, you might benefit from consolidating or refinancing your student loans. This could involve combining your federal, provincial and private loans into one easy payment, or taking out a new loan at a lower interest rate to pay off your existing debts. Getting lower interest rates on your student loans can be tricky business depending on how much you owe and what type of loans you need to pay back. But this guide is designed to give you the information you need to make an informed decision, so that you can save money and repay your loans in as little time as possible.
Whether or not you should consider refinancing your student loan will depend on what type of loan you have. Government-issued loans typically come with more benefits than private loans, and can be difficult to refinance with better terms.
Federal loans. These are federal government loans offered through the Canada Student Loan Program (CSLP). They come with fixed or variable interest rates tied to the prime rate.
Provincial/territorial loans. Provincial/territorial loans are specific to each province or territory, and interest rates vary. Some provinces offer interest-free loans while others charge the prime rate plus a percentage.
Private loans. Private funding through bank loans or alternative lenders is available to students who aren’t able to qualify for the full amount they need through government funding. In most circumstances, these loans come with higher interest rates than federal and provincial loans.
Refinancing vs. consolidating your student loan debt
Before we delve into the specifics of student loans, it might help to clear up any confusion around the difference between refinancing and consolidating your student debts.
Debt refinancing. Refinancing deals with paying off one single loan with a new loan to get a lower interest rate or better terms.
Debt consolidation. Debt consolidation involves combining multiple loan types into one affordable and easy-to-manage payment, in addition to refinancing for better terms.
While these terms are often used interchangeably, they represent slightly different loan repayment strategies. That said, most refinancing loans can also be used for the purpose of consolidation. To simplify this post, we’ll use the term ‘refinancing’ to encompass both strategies.
How does student loan refinancing work?
Student loan refinancing works just like any other type of refinancing. It involves taking out a private loan with lower interest rates or more favourable terms to wipe out your current debt. Then, you can begin making repayments on your new loan with a clean slate.
Your ability to get a better deal on your new loan will depend on your creditworthiness and financial history. Factors that lenders will typically consider when processing your eligibility for a new loan can include your credit score, income, job history and educational background.
This information will typically dictate how much you’ll be required to pay in interest when you refinance.
Loan types for refinancing student debt
There are several types of loans you may be able to qualify for as a recent graduate. Take some time to figure out which type best suits your needs.
Secured loans. If you own any assets (like a house or vehicle) you should be able to take out a secured loan. These loans often offer lower rates and better terms but they also come with the risk of losing your asset if you can’t make your repayments on time.
Unsecured loans. Lenders rely on your credit score to see if you’re eligible, so it’s important to have a good credit score and financial history (which you’ll be much more likely to have if you pay back your debts and credit cards on time).
Bad credit loans. If your credit history needs work, you may be able to qualify for a bad credit loan to refinance your debts. These loans typically come with higher interest rates, so be careful about taking them out to refinance your student loans.
Guarantor loans. If you want low interest rates but you don’t have a good enough credit history, then you might be able to ask family or friends to cosign your loan. This should bring your interest rates down and you may even be able to qualify for a larger amounts.
Compare personal loans
Before applying for a personal loan, contact the lender to see if they allow you to refinance the specific type of student loan that you have (federal, provincial and/or private).
What to look for when choosing a refinancing loan
Interest rates. Look at which lender offers the best rates and determine whether a fixed rate or variable rate would work 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. Figure out how much you can borrow with a private loan as some lenders may have caps on how much they’re willing to lend for debt refinancing.
Term length. Aim for a shorter term to get lower interest rates but make sure that you can still meet your minimum monthly payments.
Cosigner options. Look for a lender that will let you refinance with a cosigner if you can’t meet the qualifications needed to get the best rates on your own.
Customer service. Check out online reviews and contact private lenders directly to get a feel for how they treat their borrowers.
Other perks. Find out if you can qualify for additional perks like loan insurance and unemployment protection.
Fixed vs variable interest rates
If you want to refinance your loan, you’ll need to choose between a fixed or variable interest rate. The difference between the two is outlined below, but you can check out a more comprehensive overview here.
Fixed interest rates. Fixed rates stay the same for the whole term of your loan, which makes it easier to budget for repayments. This means that your rates won’t change or go up unexpectedly.
Variable interest rates. Variable rates are tied to prime rates, and will fluctuate depending on what the market is doing. While they typically start lower, they can often rise to the same level as your highest fixed interest rate.
How much could I save by refinancing?
The answer to this question will depend on a few factors including the interest rate and loan term that you’re offered, as well as your current interest rate and term. 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 a shorter loan term.
Balance: $40,000 Interest rate: 6% Remaining loan term: 15 years
New interest rate: 3.99% New loan term: 10 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.
When should I refinance my student loans?
Whether or not you should refinance your student loans depends on a number of factors. You might like to consider refinancing (or not refinancing) your student loans in the following scenarios.
It’s a good idea to consider refinancing if:
You have good credit. You can usually get lower interest rates on private loans if your credit score is over 650. Apply to get your credit score with credit bureaus like Equifax and TransUnion.
Your income exceeds the amount you owe. You’ll typically get better rates if you have a low debt-to-income ratio because it shows that you have enough income to make repayments.
You don’t have government-issued student loans. If you funded your post-secondary education through private loans, it’s often easier to negotiate better rates.
You have a job and a steady source of income. You’re more likely to be approved for better terms if you can show that you have a steady stream of money coming in to meet your minimum payments.
You might want to hold off on refinancing if:
You have bad credit. If your credit score falls below 650, you might have trouble securing a loan with better rates and terms. It will likely make more sense for you to make minimum payments on your current loan until you’re in a better financial position.
You owe more than you make. If you’re carrying a high debt load, most lenders will charge higher interest rates on your loan to make up for the risk they take on by financing you.
You have government issued loans. The majority of government-issued loans come with the best rates and terms on the market. You might be hard-pressed to find a private lender willing to match or exceed your current terms.
You’re unemployed or new to the workforce. Most providers are unlikely to negotiate better terms or give you low interest rates on a new loan if you can’t show adequate proof of a steady, long-term income.
Pros and cons of refinancing your loans
Before you consider refinancing your loan, be sure to weigh the pros and cons carefully.
Lower interest rates. You may be able to negotiate lower interest rates on your loan if you refinance it through a private lender.
Longer terms. With the right refinancing loan, you may find it easier to extend your terms for repayment and secure lower minimum monthly payments.
Easy payments. Refinancing loans can be used to consolidate several loans into one easy and affordable payment to help you better manage your debt load.
Improved credit rating. If you have a negative credit report, refinancing can help you get back on track and repair your bad credit.
Higher interest rates. Depending on your financial history, the interest charged on a private loan may be higher than what you’re currently paying.
No repayment assistance. You won’t be able to qualify for repayment assistance or reduced payments if you earn a low income when you refinance your government loan with a private loan.
No tax-deductible interest. Unlike government loans, you can’t deduct the interest you pay on private student loans off your taxes.
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.
Good to excellent credit. You’ll usually need to have a credit score that sits above 650 to qualify for better terms on your loan.
Steady income. Many lenders require you to have a steady income and be gainfully employed over a long period.
Credit history. You’ll usually need to have a decent amount of credit history under your belt to demonstrate that you’re capable of paying back loans on time.
You may be asked to supply some of the following documentation when you apply for a loan. From there, you’ll usually have to wait for your new lender to coordinate with your current lenders to refinance the debt.
Government-issued ID. You’ll have to show proof of ID like your driver’s license or passport.
Proof of income. You’ll be required to submit documents like pay stubs and letters of employment to verify how much money you make.
Loan statements. You may need to provide a recent loan statement showing how much you currently owe on your student debt. This should also list your current provider’s contact info.
Payoff letter. Some lenders might require you to get a payoff letter or written statement from your current lender stating how much you’ll owe on your loans in 30 days.
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 that 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 research before deciding on a provider.
Frequently asked questions
It depends on what your current interest rates are and if you can find a private loan offering better rates. You should also think about whether you can stand to lose the benefits that a government student loan provides. These include tax-deductible interest rates and loan repayment assistance.
You can refinance your loans as many times as you like. However, it’s not likely that you’ll get a great deal after the first few times unless you start out with astronomically high interest rates.
Debt consolidation bundles multiple student loans into one loan, so that you don’t have to make multiple repayments to different lenders. Consolidating your loans can often mean you can seek out a better interest rate and more favourable loan terms.
Refinancing, on the other hand, generally means you’re looking for a better loan offer on one loan only. Refinancing allows you to get a better interest rate based on your personal financial situation. When looking at private lenders, you’ll frequently come across refinancing options that include loan consolidation.
Claire Horwood is a writer at Finder, specializing in credit cards, loans and other financial products. She has a Bachelor of Arts in Gender Studies from the University of Victoria, along with an Associate's Degree in Science from Camosun College. Much of Claire's coursework has focused on writing and statistics, with a healthy dose of social and cultural analysis mixed in for good measure. She has also worked extensively in the field of "Blended Finance" with the Canadian government. In her spare time, Claire loves rock climbing, travelling and drinking inordinate amounts of coffee.
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