Note: This content is part of a paid partnership between Citizens Bank and Her Money Media.
Every part of the student loan process — from figuring out whether you need them, to how to apply for them, to how to start paying them off — can generate countless questions, and the idea of student loan refinancing is no different. What does it mean to refinance your student loans? How do you know whether you should do it? What are the most important need-to-knows before you dive in?
Look no further — HerMoney has the answers. We spoke with Christine Roberts, head of student lending at Citizens Bank, for a complete rundown on all things student loan refinancing.
What does it mean to refinance your loans?
Refinancing a student loan is similar to refinancing a mortgage, an auto loan or any other type of loan. “You are using your good credit and your income and your debt-to-income ratio in order to qualify for lower rates than what was available to you when you were 17 or 18,” says Roberts. “You have definitely grown and changed from 18 to 24, as have your finances.” If you’ve become what the bank deems a “good credit risk,” then you may be able to reduce the amount of money you’re paying in interest on your loans.
It’s also important to know the difference between loan consolidation and refinancing, says Roberts, since at one point, the former was the only option available. Consolidation is essentially combining multiple loans into one, with a single term. The rate for that new loan is determined via a weighted average of your dollars and rate outstanding, says Roberts — and although you won’t save money on your interest rate in this scenario, it’s convenient, and a smart way to stay organized with your bills.
How can I lower my student loan interest rate?
Before you do anything else, Roberts suggests asking yourself: What’s my ultimate financial goal here? If you’re looking to free up more cash every month, then you may want to extend your loan term at a similar (or lower) interest rate. But if you’re looking to pay less over time, then you may be aiming to reduce your interest rate, but with the same loan terms.
“There are a lot of different options out there, so people really should shop around and take a look at what is offered in the marketplace,” says Roberts. Since newer grads typically have thinner credit files (and your income may need bolstering), keep in mind that you may need a parent, guardian or family member to co-sign with you in order to get approved or to get a reduced interest rate. The “upside,” says Roberts, is that the majority of education refinance loans have co-signer release programs (for example, Citizens Bank’s requires 36 on-time payments).
What’s the most important thing to know about refinancing?
It’s vital that you understand which federal benefits you’re giving up when you refinance your loans, says Roberts. One of them is the ability to apply for Income-Driven Repayment (IDR) plans (StudentAid.gov outlines them here). Private lenders in the student loan refinance market don’t offer this option, so it’s important to know the options you’re closing the door on before making the decision.
The other federal benefit you’d be giving up is Public Service Loan Forgiveness (PSLF). If your employer is a government organization (at any level) or a not-for-profit organization — or you volunteer with AmeriCorps or the Peace Corps — then you may qualify, meaning you may want to think twice about refinancing.
How much does it cost to refinance?
It doesn’t need to cost you anything. Before deciding which option you’ll go with, compare multiple — and be sure to ask about any associated fees. Most larger institutions in the refinance market for student loans don’t charge an “origination fee” or a “prepayment fee,” and that’s a good thing: “Those are two things that will just increase either your debt or the amount that you’re paying off,” says Roberts.
Should I refinance my student loans, and how do I know if the time is right?
It never hurts to look at your options and see whether you qualify, especially since most lenders offer quotes on your potential rate, such as the Citizens Bank Online Rate calculator. You can input your information online with the institution you’re interested in — just read the fine print to ensure the lender plans to do a soft credit pull to determine your potential rate, rather than a hard credit pull (the former won’t hurt your credit score).
Once the institution pulls your credit, it’ll notify you about whether you qualify for refinancing or whether you’d need a co-signer. If you get a “yes,” it’s a smart move to consider, given the current interest rate market, says Roberts.
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