The value of outstanding student loans in the United States has reached $1.7 trillion, with the average student loan debt totaling $39,351 in 2020. Moreover, the student loan debt growth rate outpaced the rise in tuition costs by 353.8%.
Tackling student loan debt along with other expenses can get difficult due to multiple payment schedules and interest rates. Depending on your financial circumstances and goals, refinancing your student loans at lower interest rates can be a suitable solution for you.
But, before you settle on a refinancing solution, it is important to understand everything that goes into refinancing student loans – from the available loan term options to how often you can refinance them, how any benefits may be impacted and more.
To help you make an informed decision, this guide will walk you through the basics of refinancing your student loans along with the frequently asked questions.
Student loan refinancing is the process of using a new loan from a lender to pay off your existing federal or private student loan balance, to secure different loan terms (for example, a lower interest rate, longer repayment term or lower monthly payments, etc.).
Before diving into student loan refinancing, it is important to understand the different types of student loans.
There are two types of student loans: federal and private. The federal government offers federal student loans (also known as government loans), whereas private student loans are non-federal loans, made by a lender such as a bank, credit union, state agency or a school.
Funded by the federal government, federal student loans come with terms and conditions set by law and include benefits such as fixed interest rates and income-driven repayment plans.
Types of federal student loans
Direct Subsidized Loans and Direct Unsubsidized Loans
Direct subsidized and unsubsidized loans are federal student loans for eligible students to help cover the cost of higher education at a four-year college or university, community college, or trade, career, or technical school.
The U.S. Department of Education offers eligible students at participating schools Direct Subsidized Loans and Direct Unsubsidized Loans. They may be referred to as Stafford Loans or Direct Stafford Loans. Learn more here.
Direct PLUS Loans (for graduate and professional students)
Direct PLUS Loans are federal loans that graduate or professional students and parents of dependent undergraduate students can use to help pay for college or career school.
It is commonly referred to as a parent PLUS loan when made to a parent, and as a grad PLUS loan when made to a graduate or professional student. Get more information here.
Direct PLUS Parent Loans
Direct PLUS Parent Loans are federal loans that parents of dependent undergraduate students can use to help pay for college or career school. Parents are fully responsible for paying these loans, even though it benefits their children’s education. Follow the link for more information.
Note: Currently, all payments for certain types of federal student loans are suspended until August 31, 2022 per an executive order by the President. Interest will not accrue during this time period (Note updated on 04/29/2022). You can periodically check Federal Student Aid’s forbearance updates for more information.
Funded by private lenders such as banks, credit unions and state-based organizations, private student loans may come with variable or fixed interest rates. Depending on your circumstances, these interest rates may be higher or lower than the rates on federal loans.
Private lenders may use a benchmark index rate such as London Interbank Offered Rate (LIBOR) or U.S. Prime rate to decide their interest rates. Whereas, the federal funds’ rate comes from the 10-year U.S. Treasury notes.
Unlike federal student loans, private student loans often require an established credit record or a cosigner. With a strong credit history, you may get the lowest interest rates offered. However, interest rates may be dependent on your credit history and the terms and conditions set by the private lender.
Although many private lenders do not offer loan forgiveness programs, private student loans from some state agencies may be forgiven in certain circumstances.
Keep in mind; private student loans are often not subsidized. In case of an unsubsidized loan, you will be responsible for all the interest on your private student loan.
Once you understand the different types of student loans, it’s worthwhile to learn about the benefits of refinancing student loans and whether it makes sense for you.
What are the benefits of refinancing my student loans?
Broadly speaking, there are three main benefits of refinancing student loans:
1. Lower interest rates
By refinancing your student loans at a lower fixed interest rate, you may have the opportunity to get out of debt faster.
2. Lower monthly payment
Having lower monthly payments can help you in managing your cash flow.
3. Single monthly payment
You can combine your multiple student loans (both federal and private) into one simple, convenient payment.
Please note: By refinancing student loans, you may permanently be giving up tax and repayment benefits, including forbearance, deferment and forgiveness. Please consider this as you make a decision to refinance student loans and talk to a banker if you have any questions.
While refinancing your student loans at a low interest rate seems to be a straightforward solution, it is important to assess your financial situation first. Student loan refinancing could be an effective strategy if the following situations apply to you –
Excellent credit score: Demonstrating responsible credit management with a FICO score of 750 or above puts you in a better position to qualify for student loan refinancing.
Strong, consistent income: A robust, consistent income is a good signal of your ability to make on-time loan payments, especially when you have significant debt to repay.
Work experience in your industry: A successful record of accomplishment in your current profession is another way to demonstrate your career stability and capacity to meet debt obligations.
Short-term savings: Showing an ability and willingness to save money is a good way to demonstrate responsible money management. Providing evidence of short-term savings with enough liquidity for life’s unexpected expenses is particularly important.
Significant amount of debt: The higher your outstanding student loan balance, the more you could benefit from refinancing.
High interest on your current student loans: Student loan refinancing frees you from your current lender’s loan terms and interest rates, if they are not ideal for you.
Learn more: Should I Refinance My Student Loans?
Once you decide to refinance your student loans, you’ll want to assess the product and lender that’s right for you.
Look for refinancing options with shorter loan repayment terms and a lower interest rate. Shorter terms allow you to pay off your loans quicker and potentially save more in the long run.
Once you choose the student loan refinancing lender that best matches your financial plan, they may perform a soft credit check (also referred to as pre-qualification) before giving you an estimate of the interest rate you are eligible to receive.
A personal loan is money that you borrow from a lender, which you repay in fixed monthly payments over a set time period. If you know you’ll need a large sum of money all at once to cover something necessary that you want to pay over months or years, an affordable personal loan might make sense.
Based on your lender, personal loans may be secured or unsecured.
Since a personal loan is an installment loan, your payments will encompass both principal and interest, and will remain constant each month, though you can pay more to expedite payoff.
Personal loans may also come with additional fees, such as service fees, origination fees or prepayment penalties, which add to the total cost.
Personal line of credit
More than anything when it comes to payment options, we all like some wiggle room. A personal line of credit is a unique option to refinance your student loans that offers a great level of flexibility.
A personal line of credit is a set amount of money from which you can borrow, up to the limit, for a given period of time, referred to as your draw period. It can be a good way to ensure that you have access to funds for anticipated and unanticipated expenses.
With a personal line of credit, you take from the available balance only the amount you need during the draw period, and interest only accumulates on what you borrow.
Like personal loans, a personal line of credit may be secured or unsecured based on the terms and conditions of the lender.
A personal line of credit is revolving, which means that as soon as the debt is repaid, you can borrow up to your credit limit again (during your draw period) without going through another loan approval process.
While there are several ways to refinance your student loans, First Republic’s Personal Line of Credit can be a good option as it offers flexible repayment terms and a two-year interest only draw period.
In addition, you can use a First Republic Personal Line of Credit to buy or refinance a car, pay for minor home improvements, pay current taxes, cover medical/dental expenses and more.
Please note, this is not a student loan and you may be permanently giving up the benefits of a student loan such as certain deferment, forbearance, and forgiveness options.
Learn how a First Republic Personal Line of Credit can help you in paying off your student loans and more. Use this personal line of credit calculator to see your rate options and connect with a banker.
Note: The Personal Line of Credit calculator will need your date of birth and Social Security number to complete a soft credit pull. This will not affect your credit score.
The average interest rates for student loan refinancing are 1.98% - 7.24% APR (fixed).
Comparing this to a First Republic Personal Line of Credit, which offers low fixed interest rates, the opportunity to save more in the long term is very clear.
The impact of refinancing student loans on your credit score is dependent on your payment history and established credit mix. While this varies from case to case, your credit mix may include credit cards, student loans, automobile loans, mortgages, and more.
Keep in mind, your credit score does take a hit each time a lender pulls a hard inquiry into your credit score.
Yes, you can refinance your federal student loans with a loan from a private lender.
Currently, all payments for certain types of federal student loans are suspended until August 31, 2022 per an executive order by the President. Interest will not accrue during this time period.
Since First Republic’s Personal Line of Credit is not a student loan, you may be permanently giving up the benefits of a student loan such as certain deferment, forbearance, and forgiveness options.
Please consider this as you make a decision to refinance your student loans, and connect with a banker if you have any questions.
You can refinance your private and federal student loans as often as you’d like. Learn more about refinancing your student loans multiple times.