As student loans have mounted in the last decade, refinancing of those loans has become a hot topic. Most students refinance their loans through a private lender, paying off loans that may be from either a private or federal lender. Traditional banks historically have dominated the refinancing market for student loans, but new players such as technology companies and peer-to-peer lenders have been disrupting the market. Heavy advertising by leading lenders may influence college graduates and current graduate students to consider refinancing their student loans, but there are a number of factors for them to consider to determine if it makes sense in their particular case.

Reasons for refinancing

The most compelling reason to refinance your student loan is to get better terms than those of your current loan. This almost always means a lower interest rate, but other favorable terms from refinancing might include getting a fixed interest rate to make your monthly expenditures more predictable and extending the repayment period. Lenders usually charge an origination fee and other administrative costs, so you’ll need to ensure that you don’t pay more in fees than the amount you’ll save from a reduced interest rate. It’s particularly important to check the fine print on student loans, as many lenders offer perks such as forgiveness, formally known as forbearance. Make sure you consider all these potential benefits when comparing the loan terms offered by lenders.

Federal student loans

It’s almost always possible to find a private lender offering a lower interest rate than a government lender. The biggest advantages of federal student loans are that they offer more flexible repayment terms than private loans, especially forbearance. Government lenders don’t refinance student loans, so you’ll lose these benefits if you refinance. Consequently, you probably shouldn’t refinance your student loans if you think you’ll need to extend your repayment term to lower your monthly payment or if you plan to enter a public service field that’s eligible for loan forgiveness.

The option to defer loan payments while you’re in graduate school is a major benefit of federal student loans and many private loans. Even though interest on the loan continues to accrue, you don’t need to make any payments. Graduate students will need to ensure that their new loan also will defer payments until they graduate. It’s also important to understand any limits on the term of deferment. Some federal student loans are subsidized, meaning the government pays the interest during the deferment period. However, all graduate student loans are unsubsidized as of 2012, which eliminates subsidies as a reason for graduate students to stay with a government loan.

Graduate school

Refinancing a graduate student loan on favorable terms requires a good income and good credit. If you meet these criteria, you have a high probability of repaying your debt, which is generally the most important consideration for any private lender. Some lenders base their approval of a refinancing application on specific minimums for income and credit scores, while others take a more subjective view of a borrower and debt.

Meeting income requirements will typically be the biggest challenge for graduate students, whether the lender is looking primarily for high income or for a low debt-to-income ratio. Graduate students often have high debt and low income from their stipend, so they’ll typically need to get a job after graduation before they can qualify for refinancing. However, some lenders may have low salary requirements or offer pre-approvals for loans to graduate students.

What to look for in a lender

Besides the interest rate, you should look at other factors when selecting a lender to refinance your graduate student loan. For example, lenders can vary greatly in the difficulty of the application process. Traditional lenders often take days to process an application. As part of their manual verification of income and assets, they may require you to provide individual paperwork such as pay stubs, which can take time to locate.

Look for lenders that offer online applications that can be completed quickly, often within minutes. The ability to link to your financial accounts in your online application eliminates the need to gather paperwork. You should also consider lenders who don’t charge prepayment penalties or origination fees. Some lenders offer discounts if you use autopay. A long forbearance period is another feature to look for when shopping for a lender.

A lender’s application process can have an adverse effect on your credit score, so you need to know what is likely to happen before you apply. Some lenders will just do a soft pull of your credit during their pre-approval to determine the interest rate you would receive. This has little impact on your credit score. Other lenders might do a more extensive hard-pull credit inquiry that will reduce your credit score in the short term. It will be beneficial for you if the lender does a hard pull only after you’ve applied for a loan. Don’t be concerned if you’ve applied for a loan from multiple lenders, because multiple credit inquiries usually count against your credit only once if they occur within a short period, typically 30 days.

Some lenders specialize in graduate student loans, allowing them to offer better terms than lenders who do not cater to that market. Common requirements for graduate student loans include U.S. citizenship or permanent residency and graduation from a Title IV school in the U.S. The amounts of these loans range from $5K to $250K, with terms between five and 20 years.

Summary

Refinancing your graduate student loan at a lower interest rate is likely to be beneficial to your bottom line, but you need to consider other factors to ensure you get the best possible deal. In some cases, refinancing at a similar interest rate may be worth it if it allows you to consolidate multiple loans into a single loan with one monthly payment. In any event, obtaining a good job soon after graduation is a key factor in realizing long-term savings when refinancing your student loan.