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If you have student loans, you've likely come across the term "refinance" before. When you refinance your student loans, you essentially trade in your existing loan(s) for one new loan through a private lender, such as a bank.
In the best case scenario, refinancing allows a borrower sign up for a lower interest rate, which can lower their monthly payments and save them money over time. But just how much money borrowers can save by refinancing depends on a number of factors pertinent to their specific situation. Those factors include: the size of the loan they want to refinance, their current and new refinanced interest rate and — arguably most significant — the repayment term they choose.
Assuming you qualify for a lower interest rate when refinancing, choosing a shorter repayment term typically means that your monthly payments may be higher but you'll maximize your overall savings because it will take less time to pay off your loan.
On the other hand, choosing a longer repayment term means that you may end up paying more over the life of your loan since you're extending the amount of time it takes you to pay it off. But you'll reduce your monthly payments, which could make your day-to-day better right now.
To help you understand the impact that refinancing can have on your finances, Select breaks down how much money the average borrower can save using both repayment strategies. We also compare our calculation to benchmark data we found from private student loan lenders that ran their own numbers.
To illustrate how refinancing can save you money on your student loans, we use the below hypothetical scenario.
- Student loan amount: $36,406 (the average federal student loan debt per borrower)
- Months remaining in repayment: 120 months, or 10 years
- Interest rate: 4.66% (the average federal student loan interest rate for undergraduates from 2006 through 2021)
- Monthly student loan payment: $380.12 (we estimated using Bankrate's student loan calculator)
With these numbers above, the borrower would end up paying $9,208.42 in interest alone on their student loans. This comes out to paying a total of $45,614.42 ($36,406 + $9,208.42) on their student loans over 10 years.
Refinancing this student loan debt allows for more savings. Here are two repayment examples, using the above numbers, of what that savings might look like. We use a fixed refinancing rate on the lower end, 2.59%. (APRs on refinanced student loans currently range from 2.59% to 7.63% fixed and 1.99% to 6.86% variable.)
- Choosing a shorter repayment term: If the borrower were to refinance their debt for a 5-year loan (cutting their repayment term in half) at 2.59% interest, their monthly payments would increase from $380.12 to $647.56. But they would end up paying just $2,447.37 in total interest over the course of their loan repayment — a savings of $6,761.05.
- Choosing a longer repayment term: If the borrower kept the same 10-year repayment term at 2.59% interest, their monthly payments would decrease from $380.12 to $344.69 — a savings of $35.43 each month. Over the course of their loan repayment, they would end up paying $4,956.92 in total interest, which is still $4,251.50 less than if they didn't refinance at all.
In our research, we found that some private student loan lenders advertised how much their own customers save. For example, in 2020, the average savings for customers refinancing with Education Loan Finance was $272 per month — and $13,940 in total average savings in interest costs over the life of the loan.
Loan marketplace Credible, which borrowers can visit to compare lenders, looked at their own data of users who refinanced student loans through their website. A recent analysis found that Credible users who chose to refinance an average loan balance of $67,142 into a shorter repayment term (reducing their term length by 41 months on average) lowered their interest rate by an average of 2.29 percentage points. Though their monthly payments averaged $100 more, they saved an average of $16,943 over the life of their new refinanced loan.
On the other hand, Credible users who chose to refinance an average loan balance of $70,163 into a longer repayment term (extending their term length by 53 months on average) lowered their interest rate by an average 2.05 percentage points. Though they ended up paying an average $663 more over the life of their new loan, they saw a reduction in their monthly payments by an average of $253 per month.
Loans with shorter repayment terms typically come with lower interest rates than longer repayment terms. Also, your savings from refinancing may be proportionally less if you have considerably less student loan debt than the average borrower.
Although both federal and private student loan borrowers are able to refinance their loans, most financial experts don't recommend refinancing your federal student loans at this time.
With the current suspension of federal student loan payments and interest through at least Sept. 2021, you obviously won't find a lower interest rate. Federal loan borrowers should also keep in mind that refinancing with a private lender means they lose access to any government protections, such as income-driven repayment plans and student loan forgiveness programs.
Now may be a good time for private student loan borrowers to refinance if their interest rate is high, especially if their credit score is better than when they applied for their last loan. Check to see what protections private lenders offer as you shop around.
If you decide you want to refinance with a private lender, look for one that has zero application or origination fees, as well as no penalties for prepayment. This way, you're likely to see the most savings from refinancing.
Select analyzed and compared private student loan funding from national banks, credit unions and online lenders to rank your best options that offer all the above. We found the top student loan refinance companies are as follows:
- Best overall: SoFi Student Loan Refinancing
- Best for having a co-signer: CommonBond Student Loan Refinancing
- Best for fair credit score: Earnest Student Loan Refinancing
- Best for parent loan refinancing: Education Loan Finance Student Loan Refinancing (ELFI)
- Best for medical school loan refinancing: Laurel Road Student Loan Refinancing
To see how much you could potentially save by refinancing your student loans, use a student loan refinancing calculator like this one from ELFI. You'll have to enter your current loan information, including the loan amount, monthly payment and interest rate or the months remaining in your term. You can test different loan terms (5, 7, 10, 15, 20 years) to see whether a shorter or longer repayment term works better for your financial situation.
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