This is our seventh article in a series covering student loans. Our goal in this series is to equip you with the knowledge necessary to make efficient and informed decisions regarding your student loans. This post will cover how student loan refinance works. If you missed any of the prior posts, go back and check them out before reading on so that you have the necessary foundation built (Part 1, Part 2, Part 3, Part 4, Part 5, Part 6).
If you aren’t going for student loan forgiveness, your next consideration should be student loan refinance. Many people today pay thousands more in student loan interest than is necessary.
Until recently, there wasn’t much to do about it. But, fortunately, in the past few years, several legitimate lenders have started offering much better deals on your student loans. Before you sign on the dotted line, though, there are a few potential downsides to consider as well. Private lending is like the Wild Wild West compared to federal student loans.
In this post, we are going to cover the following: 1. What Is a Student Loan Refinance? 2. Should You Refinance Your Student Loans? 3. The Actual Refinance Process
What Is A Student Loan Refinance?
Student loan refinance is where you pay off one or more old federal or private student loans with a completely new private loan. This differs from consolidation because you receive entirely new terms that have nothing to do with the underlying loan(s). You typically qualify for refinance based on your financial situation, so you must be considered a good risk to the lender in order to receive a good offer.
Keep in mind you do not have to refinance all of your student loans. It’s easy to pick and choose which loans you want refinanced. The most common reason for refinancing is to lower your interest rate.
Should You Refinance Your Student Loans?
Before you waste any time looking into student loan refinance, take an honest minute to reflect on your finances. If you’re a wreck financially, odds are that private lenders will decline your application. Even if you could find a lender, you probably shouldn’t refinance any federal loans when your finances are weak.
Do you own long term disability and life insurance? Take this into consideration, as many private loans come with weaker protection for disability and/or death than federal loans.
Take a good look at your current loan details. If your loan specifics aren’t in order, review part one in our series to help you get organized. You must fully understand your situation to have good comparison information.
Next, analyze your potential new loans. Find the lenders that are likely the best fit. Learn about a potential lender’s financial standards, loan options and terms. And read the promissory note – this document will outline the terms and conditions.
Run through various worst case scenarios and determine how the loans compare in each. Consider situations such as a job loss, early loan repayment, death, disability, or another major financial hardship. Federal student loans, for example, typically offer flexible options during financial hardship (forbearance, etc). Private lenders generally aren’t as generous with these types of benefits. If you were in a bad spot financially, could you keep up with the refinanced student loans payments?
Be especially cautious about forfeiting Public Service Loan Forgiveness (PSLF) eligibility with federal student loans. Once you refinance, this option is eliminated. If there is any chance that you may be eligible for loan forgiveness, you should avoid refinance. If you aren’t familiar with how forgiveness and PSLF works, check out part five and six in this series.
Student loan refinance most commonly provides value when you have an existing student loan that can be refinanced into a new loan with the same terms, no closing costs, and a significantly lower interest rate. This refinance becomes an instant financial benefit.
Also, medical residents who plan to work in for-profit employment should put much consideration into refinancing their student loans. There are new programs available from DRB and LinkCapital that allow medical residents to refinance and make very low payments while in training (similar to income-driven repayment).
Finally, anyone who will not receive a forgiveness benefit from a government program, has above market rates on their loans, and does not need the other federal loan protections, should definitely be looking into refinance.
The Refinance Process
So you’ve done all your homework and feel great about refinancing your student loans! What’s next?
The Typical Application Process
It’s important that you come into this process organized, otherwise it could take considerable time and effort to complete. Here are two resources to help you get organized:
- Part one of the series has tips on getting your ducks in a row.
- Check out this organizer spreadsheet and instructions for obtaining accurate federal loan info.
The Initial Phase
- Fill out an online or paper application (typically asks about financial, personal and professional information).
- The loan company will run a credit check. You should already know your credit info before they check – if you don’t, here are a few free resources: Annualcreditreport.com, Quizzle.com and Creditkarma.com
- Some companies provide tentative offers once they see your initial information. Don’t count solely on this initial quote when making decisions, though, as it’s subject to change.
Additional Info Often Requested:
- Photo ID
- Copies of recent pay stubs
- Proof of graduation (official transcript, diploma, degree verification, certificate of completion, etc.)
- Loan statements indicating your 30 day payoff amount. It can be a BIG pain to get this information. We have a resource with directions for obtaining 30 day payoff info. from each loan servicer if needed.
- Often, medical professionals must provide a license to practice and proof of malpractice insurance.
- After reviewing your information, the lender provides a formal offer.
- If you accept the terms of the loan, the lender will send you a final disclosure and promissory note. You then sign and return that promissory note. Review these document before signing!!!
- The new lender will then send checks to your current lender(s) to pay off your student loans.
- The lender may also open a checking account if you request this (often comes with a .25% rate reduction).
- Your first payment is typically due in 30 days.
Have you had any positive or negative experiences refinancing your student loans? How did you decide to move forward with it? What was the most challenging part of the process? Please share with us!
Don’t forget to check out our other posts in the series below: Part 1: Student Loans & Your Situation Part 2: Student Loan Interest Part 3: Student Loan Consolidation Part 4: Student Loan Repayment Plans Part 5: Student Loan Forgiveness Part 6: Qualifying for Public Service Loan Forgiveness Part 7: Student Loan Refinance Part 8: Student Loan Refinance Reviews Part 9: Student Loan Tax Considerations Part 10: Student Loan Resources