It’s best to think of college loan refinancing in simple terms: “Refinancing” means taking out a new loan in order to pay off your old loan(s). The new loan has new terms, a new interest rate, and a new monthly payment amount. Depending on your circumstances, the new loan – the refinancing loan – may save you a significant amount of money.
For borrowers, the loan repayment process can be broken down into a few important variables. In no particular order they are:
Total amount owed: The the higher the number, the more important it is to understand refinancing options. That’s because larger loans will tend to spend more time in repayment and/or have higher monthly payment amounts.
Type of existing loans: Make sure you know what types of existing loans you have before you start looking into refinancing options. In order to refinance, your existing loans must be “qualifying,” which excludes credit cards. Federal loans and private loans can generally be combined during refinancing but there are special precautions you must take when refinancing federal student loans.
Existing interest rates: The interest rate on your existing/original loan(s) is an important number because refinancing to a lower rate can save you thousands of dollars. Interest rates can vary wildly based on several factors, including the type of the loan and the date of the loan origination. We suggest dropping by www.nslds.ed.gov to look up your existing interest rates on your federal student loans if you aren’t sure what you’re currently paying or scheduled to pay. If you have some non-federal loans, call your loan servicer to find out your current interest rate.
Existing loan term length: This refers to the total amount of time it will take to pay off your existing loan. Loan term length can increase considerably during refinancing, which may reduce your monthly payment but may also increase your total repayment costs.
With a good grasp on the above variables, you’re in an excellent position to consider whether refinancing is the right option for you. Here are some important next steps:
1. Examine your goals.
If you go into a refinancing discussion knowing what you’d like to accomplish, you’ll be better poised to make a good decision. The most common goals for borrowers are to:
- Pay off existing loans faster
- Reduce interest rates
- Reduce monthly payments
- Reduce total repayment
- Reduce total number of monthly bills
2. Take a look at your credit.
You’ll need to undergo a credit check in order to refinance, and many programs will offer interest rates based on your credit (and maybe some additional factors, too.) It’s free (and easy!) to check your credit, which will also give you the opportunity to begin addressing any outstanding problems in your credit history.
Refinancing is often a highly beneficial option, so make sure to arm yourself with as much information as possible so that you can obtain the best terms and meet your goals.
If you have more questions, a good starting point is our refinancing guide, which you can download here.