Will Refinancing My Student Loans Lower My Payments?

If you’ve done research to try to lower your monthly student loan payments, you’ve undoubtedly come across the option to refinance them. It may sound like a complicated process, but don’t be intimidated; it’s much simpler than you might think and can potentially save you a significant amount of money in the long run.

What is Student Loan Refinance?

Essentially, refinancing is when a borrower takes out a new loan with different terms. The new lender (such as a credit union or bank) pays off the rest of the old loan(s). The borrower will then make payments on the new loan.

How Could Student Loan Refinance Save Me Money?

The first factor that could help save you money is your interest rate.

Borrowers who are in better financial standing than they were when they initially took out their loan(s) could see better rates available, which could save money on interest over the life of the loan. It makes sense that a lender would offer a lower rate when you’re in better financial standing, as it appears less “risky” for the lender.

Here are some important factors that could lower your interest rate:

• Credit Score: This is a big one. Lenders love to see that you’ve improved your credit score since your original loan, and this can help qualify you for lower rates with the institution you’re working with.
• Shorter Repayment Term: Lenders may also give you a lower rate if you can afford to switch to a shorter repayment term. This means that you will be paying more per month, but it could save a substantial amount of money in interest rates over time.
• Proof of Higher Income: Once again, this contributes to a lender’s trust in your ability to make monthly payments and to eventually pay off the loan, which means you could qualify for lower rates.

You’ll also want to look at your repayment term.

Extending your repayment term can lower your monthly required payment (though you’ll still be paying interest for the life of the loan and could pay more out of pocket in the long run). Alternatively, you could choose a shorter repayment term to pay off your loans sooner (see above), though this may also be possible if you make more than your minimum monthly payment on a current loan (assuming there are no pre-payment penalties).

Will Refinancing Student Loans Hurt My Credit Score?

The short answer: probably not. The effect on your credit score is usually negligible, potentially five points or less, and the effect is usually temporary. You will want to make sure you are not submitting numerous applications for sites that do a “hard credit pull,” which can negatively impact your credit score. Fortunately, a lot of lenders offer tools to estimate your rate and payments that do not impact your credit score.

Refinancing, when done correctly, can actually help your credit score, so decide carefully which loans you want to refinance and with whom.

Are There Any Cons to Student Loan Refinancing?

The biggest drawbacks to student loan refinance usually relate to the loss of benefits your current loans may have, particularly federal student loans.¹ These include income-based repayment plans and possible future student loan forgiveness. This is why it’s important to weigh your options – and remember, you don’t have to refinance all your student loans; just the ones where it makes sense.

The Bottom Line

Student loan refinancing seems like a complicated process, but at the end of the day, it is a powerful option for students who have bettered their financial standing and are looking to save money on their monthly repayments or interest rates over time. As long as you do your research and apply for student loan refinancing selectively, the pros will likely outweigh any potential cons. Credit unions are a particularly good choice to work with when it comes to student loan refinancing as they offer personalized customer service and will account for any specific circumstances that may affect your situation.

Still have questions about student loan refinancing? Get personalized support from CommunityAmerica’s free College Planner.