Refinance a student loan

If you’re drowning in student debt, you might benefit refinancing your student loans. This means 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. 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.

How do you refinance a student loan?

Student loan refinancing works just like any other type of refinancing. You take out a new, 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 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.

Types of student loans in Canada

Refinancing vs. consolidating your student loan

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.

• Student loan refinancing. Refinancing deals with paying off a loan with a new loan to get a lower interest rate or better terms.
• Student loan 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. 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.

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 the lowest 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. These loans don’t require you to put up any kind of collateral. 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.

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.

• 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 my student loan?

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 Kendall, 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.

	Original loan	New loan	Mary’s savings
Total interest	$20,758.00	$8,575.00	$12,183.00
Monthly payment	$338.00	$405	-$67
Interest rate	6%	3.99%	2.01%
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.

Compare personal loans to refinance your student loan

Compare loan offers from reputable online lenders below. 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).

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.

Pros and cons of refinancing your loans

Before you consider refinancing your loan, be sure to weigh the pros and cons carefully.

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

  • 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.

• Required documents

  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.

Bottom line

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

• Does it make sense to refinance government-issued student loans?

  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.

• Can I refinance a student loan that I've already refinanced?

  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.

• What's the difference between refinancing and consolidating my student loans?

  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.