Student Loan Refinance Guide

Smart student loan shoppers read the fine print, compare interest rates and repayment options until they find a loan that suits their current needs. But there may come a time when students find more favorable loan options in the marketplace, even when they’ve already taken out a loan. These students may be interested in refinance options.

Financial Aid


What Is It?

When most people think of refinancing a loan, they think of the home loan marketplace. It’s not surprising, given the number of people who choose to refinance each year.

Homeowners who refinance replace their original loan with another loan that has different terms. Often, homeowners refinance when interest rates drop. Taking out a new loan could mean saving a significant amount of money on interest payments.

Students might be interested in the same kind of product, as they may have loans with incredibly high interest rates. Loans in the private marketplace, for example, are usually disbursed based on a student’s credit history. Many students haven’t had the time to build up a strong credit history by the time they apply for a private loan, so it can be challenging to get approved for a private loan, at least without a credit-worthy cosigner.

For these students, interest rates will be high, leading to large interest payments (and likely large monthly payments) down the road. The more money a recent graduate has to budget for loan payments generally means the longer it will take for them to start working towards longer-term savings goals.

Source: http://www.huffingtonpost.com/2013/06/24/student-loan-refinance_n_3492566.html

student loan interest rates

Why Refinancing Works

In a refinancing program, students could ditch these high-rate loans in favor of other loans that have lower interest rates. Dropping just a few percentage points could, in some cases, help students save money over the life of the loan, if they manage their payments wisely. It’s a good option for certain borrowers, but some students sign up for refinancing programs with a completely different goal in mind.

Citizens Bank Federal and Private Student Loan Refinancing
  • Citizens Bank customers have saved an average of $127/month
  • No application, origination, or disbursement fees
  • Fixed and variable rate options available
  • Potential to save up to 0.50 percentage points off your interest rate with available discounts

For students struggling with finances, a smaller monthly payment can seem like a blessing. Refinancing a student loan generally involves extending repayment over a longer period of time so that the monthly payment is smaller and more manageable. Borrowers who consolidate will have more wiggle room to balance their budgets, if they have a smaller financial responsibility each month, and they might be less likely to default as a result.


Drawbacks to Refinancing

Thoughts on RefinanceThe specifics of refinancing plans can vary dramatically, depending on where the loans originate, whether they are federal or private, the credit rating of the borrower and the amount of money to be consolidated. Sometimes, however, consolidation loans come with subtle shifts that could cost consumers a great deal of money.

The higher interest rate could translate into tens of thousands of dollars over the life of the loan, so obtaining a lower interest rate through refinancing can be very beneficial. Of course, refinancing or consolidating your student loans can extend the life of the loans, which can, in turn, result in paying more in the long run. After consolidating, then, it’s best to try to accelerate payments when possible, in order to not fall victim to the longer lifespan of the loan.

In addition, it can be somewhat difficult to find a lender that provides refinance options for student loans. These loans are typically considered “unsecured,” as there is no collateral to take back if the student chooses to stop making payments. Some banks balk at providing this kind of loan.


Possible Solutions

Since refinancing comes with so many benefits, some state and federal officials are looking into programs that could make the process a little easier for student borrowers. The Consumer Financial Protection Bureau provides this solution: Use the Federal Financing Bank or another governmental funding source to give lenders access to capital.
A shift in consumer behavior might encourage more banks to enter the refinance market, and that might drive up competition and drive down interest rates.

Similarly, a bill proposed in 2013 in Wisconsin would create a new state entity that would allow students to refinance expensive student loans at a lower interest rate. According to the The Cap Times, this program could save students in the state a significant amount of money.

  Old interest rate New interest rate Monthly savings Yearly savings
$27,000 loan 6.8% 4% $40 $500
Lower your monthly payment by refinancing

This is a significant savings, and if the bill passes, it’s reasonable to expect that many students would take part. But bills like this don’t always pass, and they can’t help students who live in other states.



Repayment Options

Other Ideas

Students who can’t take advantage of innovative new plans and who can’t find a lender willing to offer a good deal on refinancing aren’t doomed to live with high debt and crushing bills. In fact, there are a number of different things students can do in order to manage the loans they have.

Students with federal loans who are experiencing severe financial difficulties can apply for either deferment or forbearance options, which allow them to stop making loan payments for a specific period of time, until their financial situation improves. Many people choose to take advantage of this option each year.



Federal Loan Borrowers

Federal Loan Borrowers

Some students even find that they’re eligible for federal programs that could allow them to attach their monthly payments to their take-home pay. The Income-Based Repayment Plan is designed for students who:

But not all students need to beg for mercy in order to deal with their loan balances. In fact, making just a few small adjustments could make the debt so manageable that no refinancing is required. Good steps include:

Being proactive with payments is the best way to tackle student loan debt. Even applying $10 or $15 extra per month can save as much as several thousand dollars, depending on the interest rate and life of the loan. If it’s possible to repay aggressively, it absolutely pays to do so. A combination of good planning and persistence can result in getting debt-free well before the repayment period is set to end.


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