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5 Things You Need to Know About Refinancing Your Student Loans

What you'll learn: What you need to know to refinance your student loans


by Thea Mason

A petition to cancel student loan debt has already received over a million signatures. There has also been talk of extending student loan relief or issuing additional stimulus payments. But banking on student loan forgiveness is not a sound financial strategy. In this environment of unprecedented low-interest rates, refinancing your student loans may be a better bet.

A low-interest rate translates into lower monthly payments and a lower overall payment throughout the course of the loan, which is why financial institutions have seen a surge in refinancing queries. For example, a student with a 10-year $5,500 loan at last year’s interest rates will pay over $500 more in total interest than a student taking out the same loan today.
Americans hold about $1.6 trillion in student loan debt. The CARES Act paused all payments on federal student loans until September 30, 2020, but with the Fed Funds Rate at 0.25% right now and many Americans working from home (with more time and flexibility to do the research), now is an ideal time to consider your refinancing options.

Here are five things to know:

  1. Student loan refinancing can benefit borrowers of all ages, in all stages of their careers. You can refinance your student loans, whether you’re a recent college graduate or have been working for 20 years. Typically, you need a degree, good credit, and an income that allows you to be able to make debt payments.
  2. Make sure you know what kinds of loans you have. Do you have a private student loan, a federal student loan, or a combination of the two? Know what type of loan you have, who issued the loan, the rate you’re paying, and the term of the loan. Keep in mind that when you refinance, you might not only get a lower interest rate but also a longer term, which could reduce your payment burden and make it more manageable.

    If you refinance a federal student loan with a private lender, you will have to start making payments on this new loan, regardless of whether the CARES Act is extended. But refinancing also allows you to consolidate private and federal loans into one monthly payment, so the amount of money you’re saving and the ease of only having one payment could be worth it.
  3. Compare multiple financial institutions. Make sure you research several different financial institutions before you decide to refinance. This could include traditional banks, online lenders, and credit unions. Consider the term each institution is offering, the rate, and the customer reviews for each. Credit unions, for example, tend to offer competitive interest rates because they are member-owned, and they also have customer service benefits. At PenFed, for example, if a borrower has a hardship circumstance that is making it difficult to make payments, we will work with that borrower to find a customized plan that accommodates their circumstance. Look for stories like these on online reviews.
  4. Get your paperwork in order. Regardless of whether you’re ready to apply for a new loan or prefer to wait a few months, I recommend starting the process now to get a quote, make sure you’re qualified, and understand your rate. To do this, put together your current loan paperwork so that you have all your current information ready. You will need your loan number, the name of your lender, your rate, and term.

    Getting a quote does not have to involve a hard pull of your credit. For example, when someone uses our “Find My Rate” tool, we do a soft pull that does not affect your credit but instead gives you an estimated rate and payment, so you can compare what you’re currently paying to what you would pay. Keep in mind that once you get a quote, it expires after a certain amount of time, so you may have to get a new quote if you wait too long.
  5. Spouses can refinance together. Consider refinancing with your spouse, because you could get a lower rate. This is becoming a much more common practice. In 2019, two-thirds of PenFed’s student loan refinances were spousal loans. We evaluate a couple based on their combined income, and shared debts, like mortgages, are counted only once. This is an especially appealing option if one spouse is a stay-at-home parent and can’t get a lower rate while applying alone.

Even if you haven’t thought about refinancing before now, this summer is a good time to review your options. You could end up saving thousands of dollars throughout the course of your loan.

You should review the benefits of your federal student loan; it may offer specific benefits that a private refinance/consolidation loan may not offer. If you work in the private sector, are in the military or taking advantage of a federal department relief program, such as income-based repayment or public service forgiveness, you may not want to refinance, as these benefits do not transfer to private refinance/consolidation loans.

Thea Mason is vice president and head of consumer deposits and student lending at PenFed Credit Union. PenFed was recently named a Best Student Loan Refinance Company of 2020 by Money and a Best Student Loan Refinance Company of November 2020 by Nerdwallet. PenFed is federally insured by NCUA.

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