A guide to student loan refinancing

You can often get a lower interest rate on your student loans by refinancing them, which could save more than $20,000 over the term of the loan. The refinancing process generally begins with the consolidation of existing loans into a single new loan that may include loans from both private and government lenders. Each lender has its own underwriting criteria for refinancing student loans, but there are some general rules to follow that can improve your chances for success.

When should I refinance my student loans?

The best time to refinance your student loans is when interest rates drop below the rates of your original loans. This can occur as a result of a general drop in rates, or if you become a better credit risk, for example by building a solid job or credit history. Your credit score will typically increase after you graduate and begin working, so you should compare the rates from multiple lenders once this happens. You should also explore refinancing each time there is a positive change in your financial situation. Refinancing can lower your monthly payments, freeing up funds that can be used to pay off additional debt or meet other financial obligations.

What types of student loans can I refinance?

You can refinance virtually any student loan, regardless of the lender. Private loans such as Citizens One Student Loans and federal loans such as GradPLUS, ParentPLUS and Stafford are all eligible for refinancing. However, you can’t include other types of credit such as credit card or mortgage debt when refinancing your student loans, even if you used those types of borrowing to help pay for your education.

You may even be able to refinance a student loan that had been consolidated into a single loan previously. Depending on the servicer of the original loan, lenders vary greatly in the student loans they will refinance. They may need to review your application before making decisions regarding specific student loans.

What credit score do I need to refinance my student loans?

Your credit score is a general indicator of your ability to repay loans. Lenders usually consider your score carefully when evaluating your application. The underlying reasons for your credit score are also important factors in getting your loan approved. Forbes reports that top lenders want to see a credit score in the mid- to high 600s before agreeing to refinance your student loan. Others, though, don’t even have a minimum requirement. In general, the higher the score, the higher your chances of getting approved for a great rate.

What is the best way to refinance my student loans?

Applying to multiple lenders is one of the best strategies for success in refinancing your student loan. Not only do lenders have different refinancing requirements, but their range of rates will provide you a good comparison. Credit-scoring algorithms typically treat credit inquiries from multiple lenders as a single inquiry if they occur within a 30-day window, minimizing damage--usually temporary--to your credit score. It’s also important to review your credit report for errors. Credit reports are available through AnnualCreditReport.com at no charge.

Avoid any refinancing that is structured as an income-repayment plan, since the interest on these loans can increase over time. If additional income is needed to qualify for a refinanced loan, consider negotiating a raise or getting a side job. In some cases, you may need a cosigner to qualify for refinancing your student loans. Your cosigner will need a high credit rating and be willing to take equal responsibility for your refinanced student loan. Many lenders offer releases for cosigners that relieve them of financial responsibility when certain conditions are met.

How often can I refinance my student loans?

There is theoretically no limit to the number of times you can refinance your student loans, provided you can find a lender willing to do so. In practice, you need to consider the effect that the credit inquiries will have on your credit rating. You probably will find, though, that the long-term savings from a lower interest rate will easily be worth the temporary loss of a few points on your credit score.

Can parents refinance their children's student loans?

Parents can refinance their children’s student loans in several ways. They can consolidate multiple student loans by taking out a new loan directly, or they can cosign for a new loan taken out by one of their children. Parents can also consolidate student loans for more than one child.

Home equity is a popular method of refinancing student loans, since parents often have a significant amount of equity in their home by the time their children graduate from college. This strategy includes both home equity loans and Home Equity Lines of Credit (HELOCs), both of which use home equity as collateral for the loan. The main difference between the two is that a home equity loan pays the borrower the entire amount of the loan up front, while a HELOC provides the borrower with a line of credit up to the maximum loan value. Note that Figure’s Home Equity Line funds the entire amount of the loan up front and offers a fixed interest rate¹ for repayment. Additional draws are also allowed once some of the principal has been repaid.

Can I refinance my student loans after I consolidate them?

You can consolidate existing student loans into a single loan during refinancing. This strategy simplifies repayment by giving you a single monthly payment instead of multiple payments. However, you should refinance a consolidated student loan only if you can get better terms than those of the original loans. The Federal Direct Consolidation Loan program consolidates federal loans, but you’ll need a private lender to combine private and government loans into a consolidated loan package.

Can I refinance my student loans while still in school?

You can generally apply to refinance your student loans before you graduate, although many lenders require that you not be currently enrolled in school. Lenders will generally require that you be making regular payments on your current student loans before they will consider refinancing them.

¹The Figure Home Equity Line is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw.