Student Loan Refinancing Guide 2016

Paying back your student loans is a process that can be done in a variety of ways. If you have student loan debt or loans with high or variable interest rates, you may want to look into student loan relief options.

Student loan debt relief options can help you manage your debt better and reduce the financial strain. On the other hand, some programs allow you to put your loans on hold, which can seem beneficial at first, but it could cost you more money and prolong your payment plan in the long run.

One of the best student loan relief options that won't hold you back from paying off your debt is student loan refinancing.

What is Refinancing?

Student loan refinancing involves combining all your federal and/or private loans into one new loan with a lower interest rate. When you refinance, you ultimately take out a brand new loan to pay all of your student loans off. But with a lower interest rate, you could save money during the repayment process.

Refinancing can only be achieved through a private lender like a bank or one of the lenders found through our refinancing student loans search tool.

Refinancing can be a great option for anyone who may feel trapped or overwhelmed with student loan debt. However, if you have federal loans and plan to use any student loan relief programs, like forgiveness or deferment, you won't be eligible if you refinance since you'll have a new private lender.

What Refinancing Rates Look Like

The main and sometimes sole reason why people refinance their student loans is to take advantage of lower interest rates. You can choose to refinance your loans with a fixed or variable rate.

At the time of this writing, variable rates are as low as 2.13 percent. Since variable rates are subject to change as the market changes, your minimum payment amounts may look different over time. However, by taking this risk, you can enjoy the benefits of having more of your payment going toward the actual principal balance and not just interest. Since student loan interest rates are at an all time low, they are likely to increase, but no one knows when.

Fixed student loan refinancing rates will always be a little higher than variable rates, but that's because you have the security that comes from locking in a specific rate. With a fixed rate, you know what your interest rate will be over the life of your repayment term and it will never change unless you choose to refinance again.

How Does Refinancing Differ from Consolidation?

If you're not familiar with certain terminology used to describe student loan repayment and relief options, it may be easy to confuse refinancing with consolidation. While both are somewhat similar, they also have some distinct differences.

Consolidation involves combining multiple student loans into one single loan in order to simplify your debt so you can make payments to one balance each month instead of several on each of your loans. The interest rate is a weighted average of your loans. If you have federal student loans, consolidation is an option since the government can consolidate most types of federal loans. However, if you have both federal and private loans, you won't be able to consolidate them together unless you turn to a private lender.

When you consolidate your loans with a private lender, instead of the lender using an average of all your loans to determine the interest rate, the lender will run your credit to determine your new interest rate.

Some benefits of consolidation include:

  • Having fewer loan payments to keep track of since you'll just pay one
  • Potentially lower monthly payments

Refinancing, on the other hand, can only be done through a private lender and it offers most of the same benefits consolidation does – only it can reduce the time it takes to pay back your loan and can lower your interest rate by providing you with the option of a variable or fixed rate.

While consolidation can lower your monthly payments by extending your term, you will ultimately pay more over the life of your loan as a result. With refinancing, your new interest rate will not be a weighted average of all your student loans and you'll be able to pay off your loans quicker with a lower rate.

Consolidation is intended to simplify the debt payment process for you while refinancing is intended to save you money by reducing your interest rate and giving you a brand new loan.

How Much Can Refinancing Help You Save?

There is no definite answer as to how much you can save by refinancing your student loans, but before you decide to refinance, you should determine how much you would potentially save depending on your unique situation. Generally, reducing the interest on your debt should help you save money on your current and future payments, but there are plenty of other factors to be considered, like the types of loans you have, how long your term is, the current rate of your student loans without refinancing, and so on.

To estimate how much refinancing your student loans could potentially save you, check out our user-friendly Student Loan Refinance Calculator tool to help you calculate your savings. All you need to do is enter basic information like the balance on your student loans, your current interest rate, the interest rate you would receive after refinancing and your monthly payment amount. Then, our calculator will generate a savings report detailing how much you will save on your monthly payment and over the life of your loan.

The Best Time to Refinance

If you're wondering when the best time would be to refinance your student loans, there are a lot of scenarios and life changes that could prompt you to refinance. Ideally, you should have a good credit score at the time you choose to refinance so you can qualify for a low interest rate. Some other times when you might want to decide to refinance include:

  • If you're in a hurry to pay back your student loans
  • You've recently landed a high-paying job or increased your income through other means and want to maximize your student loan payments
  • You are struggling to pay back your private loans
  • You are going back to school and want to minimize the interest your current student loans may generate while you are in school

Finding Help with Refinancing

If you are considering refinancing your student loans or would like to learn more so you can make an educated decision as to whether or not this option is right for you, there are plenty of qualified lenders and financial professionals who can assess your situation and introduce some suitable offers.

With the national student loan debt total surpassing $1.3 trillion and student loan refinancing rates being so low, it may be beneficial to look into some offers and utilize our calculator tool to see if it will help you save money, improve your situation, and eliminate your student loan debt.

Get loan offers customized for you today.