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By Kaitlin Mulhere
Updated: November 12, 2020 10:30 AM ET
Janice Chang for Money

A decade ago, it was nearly impossible to get new terms on a student loan after you’d signed on the dotted line. You were stuck with the loan length and interest rates that you originally agreed to.

Today, though, refinancing student loans is a big, and growing, business — estimated at about $50 billion, according to analysts with DBRS Morningstar. Several fintech start ups and traditional banks offer student borrowers the chance to replace their existing loans with a new one, typically with a lower interest rate or longer repayment term.

The practice makes a lot of sense in theory. Borrowers regularly refinance other types of debt, like mortgages, when interest rates drop. Plus, when you’re enrolling in college, you may not have a long credit history or any steady income. That makes you a risky bet for lenders. Of course, the federal government — which issues 90% of the country’s student loans — lends to students regardless of their credit history. But once you’ve graduated and established yourself financially, there’s a chance you may be able to qualify for better terms on the private market.

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Still, refinancing isn’t a possible, or smart, move for every borrower. Here’s what to know about how to refinance student loans, who qualifies, what repayment options exist, and how much you could save.

Can You Refinance Federal Student Loans?

The most important thing to know about refinancing student loans is that there is currently no option to refinance within the federal lending system. That means you will be trading in your federal student loan (or loans) for a new, private one.

When you refinance student loans, you may be able to qualify for a lower interest rate than you’re paying in the federal system, which could save you hundreds or thousands of dollars a year. But there are a lot of downsides when refinancing federal student loan debt.

All federal borrowers have access to multiple repayment options, including ones that will stretch out your repayment term to 20 years (and therefore lower your monthly payments), and ones that will set your monthly payment based on your earnings. There’s also more options for forbearance and deferment, as well as benefits that, frankly, may be hard to predict.

One current example? Most federal student loan borrowers have been in an interest-free forbearance since March as a result of the pandemic. If you had refinanced your federal loans with a private company, you would have not been able to access that.

When is the potential savings worth the risk of giving up enhanced consumer protections?

Different experts have different rules about helping borrowers decide whether refinancing their federal loans is a smart move. But in general, you want to be sure that you aren’t interested in pursuing any of the government’s forgiveness programs, including Public Service Loan Forgiveness and the forgiveness possible through income-driven repayment. You also want to be sure that you have a secure job — again, if you lose your job or your salary gets reduced, it is much easier to lower or pause your monthly payments if you still have federal student loans. Finally, you want to be sure you have built up a solid emergency fund. If you do refinance and then lose your job, a large pot of savings will help you continue affording loan payments until you find work again.

The other thing to consider is the type of federal loans you have. With undergraduate loans, the interest rate has been at or under 5% for the past seven years. It’s harder for the private market to undercut those relatively low fixed rates.

If you have graduate debt or Parent PLUS loans, though, your interest rates are likely above 6%, so there’s more room for you to save money on interest each month via refinancing.

The closest thing to refinance that exists in the federal system is consolidation. But consolidating your student loan debt and refinancing it are two different things. With federal consolidation, you can combine multiple loans into a single loan. If you have loans with fixed interest rates, consolidating them won’t actually lower your rates — your new interest rate will be the weighted average of your existing rates. But if you have variable rate loans, you can convert the variable interest rate into a fixed rate.

What to Know About Refinancing a Private Student Loan to Another Private Student Loan

If you took out private loans to go to college, there is little downside to refinancing. You’ll simply be replacing one private loan with a new private loan, so you’re not giving up any special protections like you would be when you refinance student loans owned by the government. And unlike refinancing a mortgage, there shouldn’t be any fees associated with refinancing student loan debt, so any reduction in your interest rate is automatic savings.

Refinancing a private student loan makes sense if interest rates have dropped or you (and/or your co-signer) are more financially secure than when you first took out the loan. Refinancing is also an option to remove a co-signer, if your credit history and earnings are strong enough to hold the debt in your name alone.

Finally, if you’re struggling to afford your monthly payments on your current private loan, but you still have a high credit score, it’s possible you could refinance into a longer term to lower your monthly payments. (If you have federal debt and you want to lower your payments, there are better options for that within the federal system.)

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Student Loan Refinancing: What Credit Score and Salary Are Required to Qualify?

Just because you’ve decided refinancing makes sense for the type of student loans you have doesn’t mean you’ll actually get better terms by refinancing. Most lenders have strict requirements for who they’ll let into their club, though it’s easier to get approved today than it was when refinancing first came on the scene.

To start, you have to be a U.S. citizen and typically you need to have completed a degree at an accredited college or university.

You’ll also need a comfortable salary to drive down your debt-to-income ratio, an on-time payment history, and a strong credit score. Lenders minimum required credit scores range from 650 to 680 — but that’s only to get approved, not to qualify for the best rates.

Many lenders focus their refinancing efforts on graduates of law, MBA and medical programs. That gives the lenders a population of borrowers with excessive debt but high salaries and solid job prospects.

Key Bank, for example, said last year that the typical client at refinancing company Laurel Road, which Key Bank now owns, is 33, with an average FICO score of 760 and salary of $185,000. About 90% of Laurel Road’s clients are doctors, dentists, lawyers or MBA-holders.

Officials with Citizens Bank have said on recent earnings calls that customers in their student loan refinance portfolio “make six-figure income(s),” have an average of six years of work experience, and that about 50% of them have advanced degrees.

But it’s not impossible to get approved for refinancing with a lower salary. Some lenders say they’ll consider borrowers with incomes as low as $24,000. LendKey, which is a marketplace through which borrowers can refinance their loans with 300 partner credit unions and smaller community banks, reports that the average salary of a borrower who refinances through its platform is $69,000.

In fact, what may be most important isn’t your salary on its own, but your salary compared to your debt load. The Student Loan Planner, which advises borrowers on refinancing student loan debt, recommends refinancing if you’re earning enough so that less than about one-third of your income is going to debt payments.

How Much Money Can Borrowers Save by Refinancing?

When refinancing first started gaining traction, lenders bragged about how borrowers could easily see five-figures’ worth of savings. Now lenders are a little more cautious or at least, detailed, with their claims, in part because federal trade officials are keeping a watch.

In 2018, SoFi, one of the original lenders in the space, settled a lawsuit with the Federal Trade Commission, which alleged that the lender “inflated the actual average savings — sometimes even doubling it — by excluding large categories of consumers.” One ad, for example, said average monthly savings were $292, according to the FTC. In a letter to other lenders, the FTC warned them to review their ads to ensure they’re not making deceptive claims and burying important disclosures in the fine print.

So how much can you save? That really depends on the interest rate on your existing loan, your loan amount, your credit history and the length of the new loan you select. In general, the shorter the repayment term, the lower the interest rate.

Here’s a simplified example: if you had $50,000 worth of debt from graduate school with an interest rate of 7%, and you’re currently on track to pay it off in 10 years, you’ll be able to save $50 monthly and more than $6,000 over the life of the loan if you can qualify for a fixed rate of 5% by refinancing into another 10-year term. If, however, you can afford to pay more each month, you may be able to qualify for a lower rate. If you paid a 4.5% rate for a 7-year term, then you’d save $11,200 over the long run. You can usually shave an additional .25 percentage points off your given interest rate by enrolling in autopay.

On that note, be careful comparing loans with different repayment terms. A loan with a longer repayment term will lower your monthly payment, so you’ll feel as if you’re saving money each month. But it will actually cost you in the long term, since you’ll be paying interest on your debt for a longer period of time.

An analysis of borrowers on Credible’s marketplace found that those who refinanced student loans into a shorter repayment term saved more than $17,000 on average, the result of paying off the debt quicker and reducing their interest rates by an average 2.1 percentage points. On the other hand, borrowers who refinanced into a longer term loan saved about $200 a month, by reducing their interest rate by an average of 1.8 percentage points. But they ended up paying $5,000 more over the life of the loan.

The good news for borrowers is that available refinance rates have been near historic lows for most of 2020, with fixed interest rates starting around 3% and variable interest rates at 2%. Plus, they are likely to remain low while the economy recovers.

How to Refinance Your Student Loans: Step by Step

Step 1: Check your credit score

The higher your credit score, the better off you’ll be when looking at refinance offers. A handful of banks and credit cards will now provide a monthly snapshot of your FICO score, but you can also get a full credit report for free from AnnualCreditReport.com. Again, you need a minimum of about 650 to qualify, but a score above 740 will put you in better standing.

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Step 2: Weigh your long-term plans

Thinking about your long-term goals with refinancing will prepare you to better evaluate different lenders’ loan repayment options. Are you trying to pay off your student loan debt as quickly as possible or reduce your monthly payments? Or is your primary goal to consolidate your private loans and federal loans into a single payment?

Once you have your goal, you can think more about the terms to look for. Most lenders offer repayment lengths between 5 and 20 years, for example. You’ll also have to decide whether you want a fixed interest rate that’s locked in for the life of the loan, or whether you have a game plan to pay your debt off quickly enough to justify taking a variable rate loan. Variable interest rates start lower than fixed rates but they can change frequently over your loan term and will rise as benchmark interest rates rise, so they’re typically only recommended if you’re able to pay your debt off quickly.

Step 3: Shop around

All lenders have slightly different underwriting rules, and it’s not uncommon for borrowers to be rejected by one lender and accepted by another. Marketplaces like Credible allow you to see offers from several larger lenders at once, while companies like Splash and LendKey will connect you with refinance offers from smaller banks and credit unions. In all cases, you can provide some basic information including your loan amount and credit score to get a pre-qualified rate offer.

Unfortunately, there’s no one website where you can search all the major refinance companies at once, so you may have to visit multiple marketplaces.

You’ll also want to weigh different lenders to make sure you’re getting the best terms and benefits for your personal situation. Earnest, for example, has a unique repayment platform where you can select a term in months instead of years. The Rhode Island Student Loan Authority (RISLA) offers struggling borrowers an income-based repayment plan. SoFi offers career coaching to its borrowers, while CommonBond and Laurel Road will allow borrowers to transfer federal Parent PLUS loans into the student’s name.

Step 4: Consider a co-signer

Not seeing terms that you like? You could ask for a raise or work on improving your credit score, but both of those are long-term solutions. Another option would be to find a credit-worthy co-signer. Bear in mind that asking someone to co-sign on your loan means you’re tying them to your financial outcomes with this specific debt. Also note that lenders aren’t required to grant you co-signer release.

Step 4: Fill out the paperwork

Once you’ve chosen a lender, you’ll have to submit a full application. You’ll need a Social Security number or government ID, proof of income such as pay stubs or a job offer letter, and statements with all your student loans.

Step 5: Read the fine print

Before you finalize the refinance agreement, make sure you understand the lender’s policy on forbearance or deferment periods — for example, if you lose your job, what kind of protections do you have? You should also look for information on the co-signer release policy and confirm that there are no origination or prepayment fees. (These are both uncommon in this space. None of the major lenders have them.)

Step 6: Keep making your payments

When you refinance a loan, your new lender pays off your old lender. It may take a little while for the paperwork to go through, so be prepared to continue making your payments until you’ve received notice from the new lender that the debt transfer is complete. Once the process is complete, remember to set up autopay to chip a little more off your interest rate.

This story has been updated to remove a reference to LendEdu, which doesn’t offer users an actual marketplace to shop for pre-qualified rates on refinanced loans.

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Why Private Student Loan Borrowers Should Refinance Right Now

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