Refinancing is the process of paying off existing loans with a new loan, which will typically have a lower interest rate or a lower monthly payment (in some cases, both). Repayment periods can vary from 5 years to 30 years, and monthly payments are typically level (though they may change on a variable-interest rate loan). In recent years, many refinancers have added benefits previously only associated with federal loans, such as pausing payments in the event of job loss. However, federal loans still have more protections and flexibility of payment options.
- All loans qualify
- Borrowers must typically have at least good credit, a job or job offer, and at least $5,000 in loans to be approved
Fixed on Loans with a Fixed Interest Rate
Maybe Variable on Loans with a Variable Interest Rate
|Required Payment Minimum|
Payments must cover interest
|Required Payment Cap|
Generally between 5 – 30 Years
To change repayment terms, you may need to refinance again.
- Borrowers who would likely be approved (at least good credit score, job or job offer, at least $5k in loans) and who have moderate-to-high interest loans
- Interest rates on variable-interest rates loans are generally lower than interest rates on fixed-interest loans. However, if base interest rates (typically the London Inter-bank Offered Rate or LIBOR) change, so will the interest rate on the loan. Since current interest rates are at historic lows, payments on a variable-interest rate loan are expected to increase in the future.
- While many lenders now allow borrowers to pause their payments while unemployed or in school, interest still accrues and is often capitalized. This is not unlike unsubsidized loans, but subsidized loans in Deferment do not accrue interest. This may be an important difference if the borrower plans to attend school or expects an unstable income-stream.
- Borrowers should ideally compare rates across several institutions to ensure they are getting the best rate. (Note, checking multiple rates within a 30-day period will not affect the borrower’s credit score.)
- Many lenders can now provide a quote without impacting a borrower’s credit score. However, when a borrower is ready to accept an offer, an official credit inquiry will likely be made. The drop is typically very small and temporary, and the process of paying off a new loan has a significantly higher impact on improving a borrower’s credit score.