What is refinancing?
At its core, refinancing is a very simple concept, regardless of the industry. Across the board, from mortgages to car loans, personal loans to student loans, refinancing is simply getting a new loan, at a new interest rate, with new payment terms. Your new lender pays off your old one, satisfying your prior debt, and creates a completely new obligation with your new creditor.
As with other loans, all potential borrowers need to fill out an application and pass a credit check. Unfortunately, not everyone is eligible to refinance his or her student loans, and only those borrowers with the best credit history and score will qualify for the best rates.
Who is eligible to refinance?
Most private lenders have two kinds of eligibility requirements that all potential borrowers need to satisfy. The first kind of guidelines is baseline requirements that every borrower must meet to be considered for a loan. The second kind help the lender determine a potential borrower’s interest rate, and whether or not he or she is a “good risk” for lending purposes.
The baseline requirements for most private lenders are pretty common everywhere you go. These requirements include having all of your current loans in repayment, a minimum loan amount (i.e. $10,000 at Citizen’s Bank), and a minimum amount of full, on-time payments to all the loans you wish to refinance. In many instances, you will also need to provide the lender with proof of graduation. Keep in mind; you need to check with all the institutions you are researching to see what their individual requirements are.
The risk requirements are a little bit different, and they depend on a potential borrower’s creditworthiness, and credit history. While these requirements are related to the baseline ones mentioned above, they exist for an entirely different purpose. The lenders want to protect their money, and the only way they can do that is by lending money to those borrowers that are most likely to make good on their obligations.
As a result, these lenders will look at several types of information. You will need to have a minimum annual income and will also need to possess a reasonably strong credit history. To get the best rates you will need to have at good score, which would be 720 or above, and you will want to avoid having any accounts, regardless of what they are, go to collections. If you don’t have much of a credit history, you will probably want to consider getting a cosigner on the loan. Not only do cosigners help out with borrowers’ lack of credit histories, but their credit scores also can help them get lower interest rates.
How much will it save me?
While some borrowers will consider refinancing to simplify their loan payments, the vast majority will have one goal in mind: saving money. If you can qualify for one of these refinancing programs, you will end up saving a lot of money over the life of the loan.
The average student debt is just under $30,000, so we’ll use this number for illustration purposes. The average interest rate for undergraduate loans is around 4.5%, while the average for graduate loans is right around 7%.
If you are paying back your student loans at 4.5% over 10 years, you will be paying $310.92 per month, and when the loan is paid in full, you will have paid $7,309.83 in interest. On the other hand if you refinance at 3.5% on a fixed rate loan, you will be paying $545.75 per month on a five year loan, or $296.66 per month on a 10 year loan. On the five year loan you will only be paying $2,745.14 in interest, a savings of $4,654.69. With the 10 year loan, after refinancing to 3.5%, you will be paying $5,598.91 in interest, or a savings of $1,710.92. Some lenders even allow you to refinance at 2%.
Now, assuming you have graduate school debt, the savings in interest will look much different. If you have $30,000, and are paying the loan back at 7% interest over 10 years, your monthly payment will $348.33, and at the end of the day you will have paid $11,799.05 in interest alone. That’s a total of $41,799.05! But if you refinance with the same terms as above, a 3.5% fixed rate, for either five or 10 years, your savings on interest will be very high. With a five year loan you will be looking at a savings of $9,053.91, and with the 10 year loan you will save $6,200.14.
As you can see, if you qualify to refinance your student loans, you will be looking at some significant savings. If you’re looking to save some money, refinancing your student loans is an option you need to seriously consider.