Should I refinance my private or federal student loans? If so, how? 

By Gina Gallagher | Citizens Contributor

The lessons you learned in college will last you a lifetime. What shouldn’t last forever are those high monthly payments on your student loans. However, there may be a way to get some relief: refinancing your student loans. But is refinancing your student loan debt a smart idea for you?

To answer that, you need to do a little homework (yep — that again!) by reading on to see what refinancing is all about.

When you refinance your education loans, you’re using funds from one private lender to pay off higher-interest loans you have with other lenders. The result is having one new loan that offers a lower interest rate.

The loans you pay off could be private student loans with other financial institutions or even federal loans you have with the government. They also could be from a federal parent PLUS Loan. Keep in mind, though, that refinancing federal loans with a private lender could result in forfeiting some of the benefits available with federal loans. (More on that later.)

When it comes to getting a refinance loan, you have lots of options, including banks, credit unions, and other lending institutions. Interest rates will vary by lender. To start the process and determine your rate, you'll be asked about existing education loans in your name and those for which you have cosigned. The rates you'll receive are based on your credit and may include a combination of variable and fixed rates. Keep in mind that variable rates are subject to change and may be tied to SOFR, a benchmark interest rate. When you actually apply with a lender, a hard inquiry will be made on your credit report, which could impact your credit score. Note that some lenders will offer rate quotes based on a “soft" credit pull, which will not impact your score, but you'll need to complete an application in order to receive a rate offer.

If you’ve heard a lot of buzz about refinancing student loans, there’s a good reason why: It could potentially save you a lot of money. For example, suppose you have $25,000 in private student loans at an interest rate of 7% with a 10-year repayment period. Your monthly payments would be $290. If, however, you refinanced that loan at a fixed interest rate of 4% for the 10-year term, your monthly payment would drop to $253, saving you $37 a month. While that may not seem like a huge savings, you would save quite a bit over the life of the loan — $4,459.

There are other ways refinancing can save you money. You won’t have to pay origination fees to get the loan or prepayment fees if you want to make extra payments. Plus, you can enjoy other benefits:

• Converting variable-rate loans to a fixed rate. A lot of education loans offer variable interest rates that are subject to change if interest rates rise. Those higher rates mean higher monthly payments for you. Refinancing to a fixed-rate loan offers the peace of mind and predictability of fixed monthly payments, making it easier to budget.
• One loan payment. If you have multiple existing loans with multiple lenders, consolidating them into one loan can make your life a little easier. Instead of making multiple payments to multiple lenders each month, you’ll only have to make one single monthly payment to your loan servicer. You can even sign up for automatic payment to make paying even more convenient.
• Faster repayment options. With an interest rate reduction, you may be able to lower the repayment term while still paying the same amount, since more of your payment will go toward the principal.
• The opportunity to remove a cosigner. If you have a cosigner on your student loans and don’t have the option for a cosigner release, refinancing could allow you to remove your cosigner when you become eligible, thereby allowing you to build up your credit score and gain financial independence. Keep in mind, however, that if your cosigner has a better credit report than you and you refinance on your own, you’ll likely end up paying a higher interest rate.

To refinance your education loans, you’ll need to meet certain criteria:

• Good credit history: In general, private lenders will require you to have a FICO score in the high 600s or 700s. You could, however, still refinance with a cosigner who has a good credit score.
• Sufficient income: Lenders have a fancy term to determine that: your debt-to-income (DTI) ratio, which is basically the percentage of debt you owe relative to your income. In general, lenders will require a debt-to-income ratio of 50% or lower. If your DTI ratio is 20%, they’ll love you even more.
• A solid payment history: When you lend money to someone, you want to know they have a history of paying back their debt. Lenders think the same way. So if you have a history of not paying student debt on time, you likely won’t be granted your refinancing request.

In addition, some lenders may require you to be a U.S. citizen.

When you refinance or consolidate your private student loans, you’ll do so with a private lender. That lender will allow you to consolidate all your private loans as well as your federal loans. But while having just one loan payment offers many benefits, it may not make sense for you to refinance and consolidate your federal loans. The reason? Federal loans come with some attractive benefits — and refinancing them to a private loan could result in forfeiting them.

One such benefit includes income-driven repayment plans. Say, for example, you decide to make a career change and expect your income to drop. If you have a federal loan, you may be able to have your current loan payments reduced. If you were to refinance your federal loan to a private loan, you would lose that opportunity.

Another federal loan benefit you could lose is loan forgiveness. If you work in certain types of public service jobs, you could be entitled to have portions of your federal loans forgiven. You won’t have that forgiveness if you consolidate your student loans with a private loan.

The chart below highlights some of the benefits available with federal loans. Make sure you understand them before you consider refinancing your federal loans with a private loan.

If these benefits are important to you, the federal government offers the Direct Consolidation Loan for consolidating federal loans. Student loan consolidation could allow you to maintain some of the federal benefits, though the rate you would receive would not be lower.

On the other hand, when it comes to refinancing private loans, you really have little to lose. In most cases, it costs nothing to refinance. Plus, you could potentially save thousands of dollars in interest payments and lower your debt-to-income ratio, which will be important when you need to apply for other loans in the future (such as a mortgage).

Think you’ve learned a little more about refinancing? Take out your figurative No. 2 pencil and answer the following frequently asked questions:

What if you could save thousands of dollars each year by refinancing your student loans? It’s possible with the Citizens Education Refinance Loan. You can get a personalized rate in less than two minutes.