Should I Refinance My Student Loans?

First Republic Bank
October 27, 2020

If you’re currently managing your student loan debt, you’ve probably heard about the option to refinance your student loans. Perhaps you have friends who’ve done it themselves, or your financial institution has included refinancing among a growing list of options that can help you tackle your debt more effectively. All this talk about potential savings, simplifying your loans and other benefits has piqued your interest, but how do you know if student loan student loan refinancing is right for you?

This is a unique time for Americans with student loan debt. The CARES Act, which was passed on March 27, 2020, suspended all payments for certain types of federal student loans, and an August 8 Presidential Memorandum extended the interest-free freeze on federally backed student loan debt through the end of the year. While interest will not accrue on federal student loans during this time period, this suspension does not apply to private student loans. Because student loan interest rates have fluctuated in the last few years, refinancing at a lower fixed interest rate could be an attractive option.

If all of the following seven situations apply to you, refinancing your student loans could be an effective strategy for paying off your student loans and focusing on your other financial goals.

1. You have excellent credit

Demonstrating responsible credit management with a FICO score of 750 or above puts you in a better position to qualify for student loan student loan refinancing. It’s also essential that your current student loans are in good standing and not in deferment or forbearance. Lenders often use credit history as an indicator of a dependable borrower, so having good credit, a low debt-to-income ratio and a solid credit score should make it easier for you to refinance your student loans.

2. Plus a strong salary

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. For most refinancing applications, you’ll need to submit a copy of last year’s tax information, such as a W-2 form, and a recent pay stub. If you are self-employed or have other sources of income, you may need to provide additional documents.

3. And work experience in your industry

A track record of success in your current profession is another way to demonstrate your career stability and capacity to meet debt obligations. But this doesn’t mean full-time medical interns, medical residents and other borrowers taking smart steps to advance their career should avoid refinancing. Checking with individual lenders is the best way to see how your current career experience compares with what is needed for a student loan refinance.

4. You have some money saved up

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. Some lenders may ask to see a current checking or savings account balance before extending credit. You can prepare for refinancing by having a nest egg, which is also great practice for establishing a healthy financial future. Many financial advisors recommend having enough savings to cover 6 to 12 months of expenses.

5. You also have a significant amount of debt

The higher your outstanding student loan balance, the more you could benefit from refinancing. Potentially lowering your interest rate can result in substantial savings in interest payments when you owe more than $60,000. For example, say a borrower has a $147,000 balance over a 10-year term, with a 7.21% Annual Percentage Rate (APR). Refinancing to a lower rate of 3.50% APR could save $32,000[1] in interest over the life of the loan. It’s worthwhile to plug your own loan terms into an APR calculator to see how much money you could save by refinancing.

6. With high interest rates on your student loans

Many professionals who completed graduate school in the last decade took out student loans at rates above 6%. If this is true for you, you have something to gain by getting a lower interest rate.

One option for lowering the interest rate on your student loans is taking out a personal line of credit. Similar to traditional loan refinancing, a personal line of credit allows you to strategically combine multiple student loan payments into one monthly payment and potentially save you money by lowering the overall interest rate.

A personal line of credit, however, has additional advantages. For instance, the flexibility of a personal line of credit allows you to refinance your debt — like student loans or car loans — at a lower interest rate, while maintaining access to funds for additional financial needs, such as covering household expenses or planning for your family’s future.

Learn more about how a personal line of credit works, and how it might help you lower your overall student loan costs. If you’re interested in learning more about a Personal Line of Credit from First Republic and how it might help you achieve your own financial goals, see your rate using this personal line of credit calculator.

7. Finally, you don’t plan on using the features of your current loan

Choosing to refinance means you’re likely to lose some features associated with your existing student loans. But if you don’t expect to take advantage of deferment options, income-based repayment or loan forgiveness provisions, you might not miss having them.

Student loan debt can be daunting in itself, and the amount of options for refinancing, consolidating or finding other means to efficiently pay back those loans can be equally overwhelming. The key is to gather a full picture of your financial situation, future needs and goals — and let that be your guide to determining your ideal option.

Everyone’s finances are different, and it’s important to carefully weigh all your options before committing to any new financial product. However, if the above situations ring true for you, financing via a personal line of credit could be a good way to lower your interest rate and pay less over the life of your student loan — so you can move on to your next career milestone.

First Republic’s Personal Line of Credit – access funds with fixed rates from 2.25% APR (with discounts).

[1] Assumes an original loan amount of $147,000, 10-year term, and a rate of 7.21% APR, refinanced to 3.50% APR. Total savings over the 10-year term would be $32,294.98. Loan amount reflects all customers who refinanced their student loans with First Republic Bank between 1/1/2015 and 9/1/2017. 7.21% was the Direct Plus Student Loan Program rate effective 7/1/2014 to 6/30/2015. Actual savings may vary based on the interest rates, balances and remaining repayment term of the loans being refinanced.

Personal Line of Credit consists of a two-year, interest-only, revolving draw period followed by a fully amortizing repayment period of the remainder of the term. Draws are not permitted during the repayment period. Full terms of 7, 10 and 15 years available.

This product can only be used for personal, family or household purposes. It cannot be used for the following (among other prohibitions): to refinance or pay any First Republic loans or lines of credit, to purchase securities or investment products (including margin stock), for speculative purposes, for business or commercial uses, or for the direct payment of post-secondary educational expenses. This product cannot be used to pay off credit card debt at origination.

The terms of this product may differ from terms of your current loan(s) that are being paid off, including but not limited to student loans. By repaying such loans, you may permanently be giving up tax and repayment benefits, including forbearance, deferment and forgiveness, and you may not be able to reobtain such benefits if this loan is refinanced with another lender in the future.

Borrower must open a First Republic ATM Rebate Checking account (“Account”). Terms and conditions apply to the Account.

Contact your legal, tax and financial advisors for advice on deciding whether this is the right product for you. Terms and conditions apply.

Product is not available in all markets. For a complete list of locations, visit firstrepublic.com/locations. Applicants must meet a First Republic banker to open account. This is not a commitment to lend; all lending is subject to First Republic’s underwriting standards. Applicants should discuss line of credit terms, conditions and account details with their banker.

The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document.

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