Student Loan Refinance - Physician on FIRE (2024)

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What is Student Loan Refinancing?

Student Loan Refinancing replaces one or more existing student loans with a new loan that typically offers better terms and conditions. The goal of student loan refinancing is that the new loan you receive – from a private lender – will result in lower monthly payments and a lower lifetime cost – something we can all undoubtedly get behind.

Student loan refinancing is helpful because students typically take out various loans, from federal to private loans, to complete their education. These loans have different terms and payment plans that can be unfavorable or challenging to track. As a result, consolidating them under one loan with one interest rate and payment can save money and time.

Student loan refinancing also allows you to leverage your current income and credit score to replace some or all of your student loans with better terms. Even if interest rates didn’t change, this could save you money on your monthly payments and the lifetime cost of your student loans.

Should I Refinance?

Although refinancing your student loans can simplify repayment and save you money in the long run,every situation is unique. Depending on your current situation, student loan refinancing might or might not be a good option for you. Here are some things to consider before deciding if you should refinance:

How Does Student Loan Refinancing Work?

Student loan refinancing involves applying for a new loan to cover all or some of your full student loan balance.

Once approved, your new lender will pay off your loan from your previous up to the specified amount. After that transition, your new student loan balance is held with your new lender at the new rate. Moving forward, you will make payments to your new lender following the approved payment plan and interest rate.

Who Can Refinance Student Loans?

Anyone who meets a lender’s borrowing criteria can apply to refinance their student loans. The specific requirements vary depending on the lender, but there are some key areas that all lenders look at, which include:

• Credit Score
• Income
• Debt-to-income ratio (DTI)
• Eligible Student loans
• Completed Degree (specific lenders require completion of your degree while others do not)

Is There an Alternative to Student Loan Refinancing?

Yes, an alternative to student loan refinancing is student loan consolidation.

Much like consolidating your loans with a private lender, you can consolidate all of your federal student loans into one. Your new consolidated loan will have a fixed interest rate equal to the weighted average of your previous federal student loans.

Student Loan Refinancing vs. Student Loan Consolidation?

The primary goal of student loan refinancing is to save money by improving the terms of your loans. This means lower monthly payments, a lower interest rate, and a lower lifetime student loan cost.

However, the primary goal of student loan consolidation is not to save money. The goal of student loan consolidation is convenience through a single loan with one payment and one interest rate.

Interest Rates

With student loan refinancing, the main goal is almost always to get better rates than you currently have. If you can get better payment terms or consolidate loans simultaneously, that’s great, but the biggest money saver is securing a lower interest rate.

With student loan consolidation, you will not end up with better terms. After consolidating, half of your loan balance will likely receive a better interest rate, and the other half will receive a higher interest rate. Still, your overall interest expense will remain unchanged.

For example, if you have four loans of equal balances and two have an interest rate of 4% and the other two have an interest rate of 6%, your consolidated interest rate will be 5%. Two of your loans will experience an increase in interest rate, while the other two will experience a decrease in interest rates.

Payments

Student loan refinancing and student loan consolidation are similar in that after the process, you will end up with fewer loans and payments.

For student loan consolidation, all of your federal and private loans are combined to create a single payment. However, the federal government does not consolidate private student loans, so you must seek a private lender if you have a mix.
For student loan refinancing, all the loans you refinanced will also be under one loan and one payment plan, but they will (likely) have a new overall interest rate, not just a weighted average. Any loans you did not refinance will still have their terms and payment plans.

In either case, both should result in fewer monthly payments, making it easier to track and manage your payments.

Lenders

There are a number of differences between the two kinds of lenders (federal and private) that are worth diving into. First, the U.S. Department of Education offers federal student loans, while private banks, credit unions, and other financial institutions provide private student loans. While this isn’t always a crucial distinction, knowing the entity you’re paying and working with is worth it.

Next, federal student loans frequently offer loan forgiveness programs, such as Public Service Loan Forgiveness (PSLF), for borrowers who work in qualifying public service jobs. Private student loans rarely offer loan forgiveness options. If the federal government forgives your loan, you should refrain from refinancing for better terms with a private lender, but it remains a valuable consideration.

What Types of Student Loans Are Eligible for Student Loan Refinancing?

All student loans, including federal and private student loans, are eligible for refinancing. Loan issuers can’t stop you from refinancing your private or student loans. There are also no restrictions on how often you can refinance your student loans.

It is important to note that lenders can determine which types of federal student loans they are willing to refinance. For example, not all private lenders will refinance PLUS Federal Student Loans or Parent PLUS Federal Student Loans.

How Do I Qualify for Student Loan Refinancing?

The specific qualifications will vary depending on the lender you decide to apply with and your student loan situation. When applying to refinance your student loans, lenders will look at the following criteria:

• Credit Score (Typically requires Good to Excellent credit score to improve rates)
• Income
• Debt Levels (including debt-to-income ratio)
• Payment History

To qualify for student loan refinancing and improve your student loan rates compared to your current rates, you must have Good or Excellent credit, generally in the mid-600s at the minimum. The higher your credit score, the lower your rates will be.

You also want to show that you have a stable recurring income and can easily meet your payment plan obligations. Another thing that lenders look at is your debt-to-income ratio. Ideally, lenders want a low to moderate debt-to-income ratio. While there isn’t a specific ratio lenders look for, a good rule of thumb is to stay below 50% and ideally below 35% for the best rates.

When is the Best Time to Apply to Refinance my Student Loans?

It’s not always the right time to refinance your student loans, so it’s essential to consider your circ*mstances before you decide to refinance. There are three key elements you should have before applying to refinance your student loans:

• Consistent Income
• Good Credit Score
• Low-Interest Rate Environment

Consistent Income

The first thing you should have before applying to refinance your student loans is a steady income. Lenders typically want to ensure that you have sufficient income to cover your monthly payments. A steady income (and a high income) will help lower your debt-to-income ratio. A lower debt-to-income ratio is also a criterion lenders look at favorably when deciding on student loans.

Good Credit Score

Your credit score is a crucial factor in determining the interest rate a lender will give you. You should have a good or excellent credit score before applying to refinance your student loans. Without a good credit score, it’s likely that you will be able to get a lower interest rate than what you currently have.

While the ideal credit score can vary based on the lender, ideally, you want a credit score in the mid-600s. Naturally, the higher your credit score, the better, but a score in that range gives you a better chance of getting a lower interest rate.

Current Interest Rate Environment

The current interest rate environment is also very important to consider before applying to refinance your loans. However, you should also consider any interest rates you have and whether they’re fixed or variable.

For example, if interest rates have risen over the last several months, it’s likely not a good time to refinance your student loans. In this scenario, you are unlikely to get a lower rate than your current rate(s) as interest rates for all loans have increased. However, if you have a variable-rate and interest rates are expected to continue even higher, refinancing for a fixed-rate loan may be a good choice.
On the other hand, if interest rates have been on the decline for many months, refinancing to a fixed-rate loan could be wise. Ideally, you should lock in the lowest rate possible before rates head higher. Spending too much time forecasting interest rates is not recommended, but if rates are low, refinance.

If rates are high but you can still get more favorable terms, it’s still worth considering. Generally speaking, fixed-rate loans are preferred because of their predictability, but getting a variable rate while rates are high can lower your payments if and when they come down. That said, you’ll want to consult with a professional before deciding.

Will Student Loan Refinancing Reduce My Interest Rate?

How Much Does it Cost to Refinance Student Loans?

Fortunately, unlike refinancing mortgage loans or other high-value loans, which can cost several thousands of dollars, refinancing student loans is free.

The entire process should be completely free for most reputable lenders, including submitting your application. Any lenders that charge an application fee or origination fee of any kind are typically considered non-reputable and you should stay away from them.

Below is a list of some of our reputable student loan refinancing partners that have no application or origination fees:

How Much Can You Save by Refinancing Your Student Loans?

How much you save through refinancing will depend on your specific situation. Your savings could be substantial if your income and credit score have markedly improved since the loan origination or interest rates have come down significantly.

However, if your income and credit score are mostly the same since originating the loan(s) or interest rates have increased, your savings may be much smaller.

Can I Refinance My Student Loans When I Am in School?

Yes, it is possible to refinance your student loans while you’re in school, but it depends on the lender you are working with. While some lenders will allow you to refinance your student loans during school, others might have restrictions.

For example, some lenders require that you graduate within a quarter or semester to qualify for student loan refinancing. However, it’s extremely important to note that you will typically have to begin making payments 30-45 days after refinancing when the new loan is issued.

Before you decide to refinance your student loans while in school, it’s essential to understand the impact this will have. In most cases, federal student loan payments don’t begin until after you graduate or stop going to school. Still, if you refinance your federal student loans, you will lose this benefit.

How Does Refinancing Student Loans Affect Taxes?

Borrowers who meet specific criteria may be eligible to deduct up to $2,500 of the interest paid on their qualified student loans. This deduction is known as the student loan interest deduction (SLID). However, there are specific requirements and limitations associated with claiming this deduction.

Unfortunately, this tax deduction is phased out for high-income earners. The $2,500 deduction is available to those with a modified adjusted gross income of $70,000. The deduction is completely phased out for those with a modified adjusted gross income of $85,000 or higher.