Everything You Need to Know Before Refinancing Your Student Loans

worried man and woman staring at a bill, text reads everything you need to know before refinancing your student loans

Student loans can be stressful, especially if you have a mix of federal and private loans as well as multiple lenders or loan servicers you make payments to each month. Adding to the challenge is that each loan can have a different interest rate and a different type of rate, like variable rates that change every month or quarter in comparison to fixed rates that don’t change. That’s a lot of information to keep track of month after month.

By now you’ve probably heard about student loan refinancing, but is it the right option for you?

What is student loan refinancing? How does it work?

When you refinance your student loans, you receive a new private loan with a new interest rate and a new repayment term to pay off your existing student loans. This is a great option for people who have private and federal student loans, but you can also refinance if you have just one or the other. Refinancing allows you to gather all or some of these loans into one new loan, often at a lower interest rate that will save you money or a longer repayment term that will lower your payment.

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What is the difference between refinancing and consolidation?

These two words are frequently used interchangeably but refinancing and consolidation are different. Consolidation typically refers to combining all your federal student loans into one new federal loan. It does not necessarily lower your interest rate as your current rates will be averaged and rounded into one new rate. Consolidation makes is easier to manage multiple federal payments. Learn more about federal loan consolidation from Federal Student Aid.

Should I refinance my student loans?

There are generally three main reasons people consider refinancing their student loans. The biggest draw to refinancing is to lower the interest rate you’re currently paying and thus save money. The other two reasons you may want to consider refinancing are to lower your monthly payment amount to help with other debt obligations or living expenses and to simply bring all your student loans together so that you only have to make one monthly student loan payment.

It’s important to note that not everyone with student loans can save money. Before jumping into refinancing, spend some time determining if you can lower your interest rate and how much money you could actually save.

Because private student loans are not guaranteed by the government, private loan lenders take on more risk, so they typically look for candidates with good credit. If you’re a working adult with a decent income and pay your loans and other bills on time every month, you should consider refinancing. Look at lenders who are upfront with their loan details. At Iowa Student Loan, we’ll provide the different interest rates and options you’re eligible for based on your credit score and you don’t have to complete a full application to learn that.

You can pre-qualify in less than a minute with no impact to your credit score and no obligation to apply.

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What is a good student loan interest rate?

It can be difficult to tell if you’re getting a good rate on your student loans. The rates you’re eligible for will always vary based on your credit score and the terms of the loan. Typically, rates between 3.00% and 7.00% are good rates in today’s market. If you have a student loans with interest rates higher than 7.00%, you should definitely consider refinancing to see if you can receive better rates. Even if your current loans have rates between 5.00% and 7.00%, it may still makes sense for you to look into your refinancing options. Simply lowering your rate from around 5.50% to closer to 3.50% can make a significant difference in the amount you repay over the life of your loan.

How much student loan debt can I refinance?

This varies depending on the lender. Iowa Student Loan will refinance up to $200,000 in education debt. Be sure to research this before you choose a lender.

Is refinancing worth it? What are the risks?

Refinancing can help you save money and simplify student loan repayment, but there are some risks to consider before refinancing. The biggest risk to keep in mind is if you choose to refinance federal loans into a private loan, you will lose the federal loan benefits. It’s important to understand these benefits before you make any decisions regarding your federal loans.

What does this mean? Federal student loans come with more options for repayment, such as income-driven repayment plans, which use a borrower’s income and family size to determine the minimum monthly payment amount. Federal student loans also include more deferment and forbearance options as well as loan forgiveness programs for certain borrowers. These vary depending on the specific loan, but if you choose to refinance federal loans into a private loan, you will forfeit the federal benefits. If you do not foresee any difficulty paying your minimum payments, then refinancing is a viable option. It’s important to note that if you have federal PLUS Loans for parents, those loans do not offer the same federal benefits as federal loans made to student borrowers.

How do I refinance my student loans?

If you determine that you’re a good candidate for refinancing, you should shop around for the best refinancing option. Many lenders will ask you for some personal information (like your name, address and Social Security number) to give you an idea of the rates you’re eligible for and to pre-qualify you for their loan. After you’ve chosen the best fit, you will submit an application to officially be approved for refinancing.

graphic with text that reads credit score, income and debt-to-income ratio

Lenders look at a few main factors when you apply to refinance. As with most loans, they consider your credit score, income and your debt-to-income ratio. Before refinancing, you may want to look at your credit score to see if you are eligible for better rates. But understand that your credit score varies by different rating agencies and the calculation that is used, so they credit score you see from one source may not match the one the lender uses. It is also a good idea to limit other debt, such as credit cards, if possible. Lenders want to know you will be able to repay your new loan.

Will refinancing my student loans hurt my credit score?

Refinancing your student loans will not hurt your credit score, as long as you don’t refinance multiple times in a short period. When you apply to refinance your student loans, the lender will perform a hard credit inquiry to view your credit history and score. This shows up on your credit score and multiple inquiries close together can have a negative impact.

However, this does not mean you shouldn’t look around and compare different rates. Getting pre-qualified for student loan refinancing to see potential rates typically does not involve a hard credit inquiry. Lenders typically do what is called a soft credit inquiry to get an idea of your credit history and those do not impact your credit score.

What else, besides interest rates, should I consider when refinancing?

Student loan interest rates are important, but they’re not the only consideration. You’ll want to understand the repayment terms and consider the services each lender offers, such as ways they accept payment and if assistance, should you need it, is an option. If a lender has a reputation for being difficult to communicate with, this can be a major deterrent even if their rates are competitive.

Can I refinance my loans with Iowa Student Loan?

If you’re a good candidate for refinancing, we want to help you save money. Complete our pre-qualification process to see what rates you can receive. There’s no credit impact to pre-qualify, and you only have to answer nine quick questions to reset your student loans and reduce your stress!

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By: Iowa Student Loan