Most student loan borrowers expect to pay off their student loan debt in six years or less. Meanwhile, statistics tell us that the average borrower is spending 21.1 years paying off their student loans.
Regardless of how long it takes YOU to pay off your student loans, one of the most expensive aspects of your student loans will be the student loan interest you pay over the life of the loan.
Thanks to increasing law school tuition, lawyers graduate with big loan balances and can expect to pay a lot of interest over repayment. If you borrowed $200,000 at 6.5% and pay it off in 10 years, you can still expect to pay $72,515 in interest. That’s a lot of lost wealth.
Most lawyers put together a student loan refinance plan to reduce the total amount of interest paid, which often involves getting a lower rate, consolidating and refinancing the existing loans and saving a bunch of money.
If you knock down the interest rate to 4.5% and still pay off the loan in 10 years, you’ll save $23,783. That’s a free car.
What most people forget is that you can refinance your student loans over and over and over again. There are no origination fees, prepayment penalties or closing costs associated with student loan refinancing. If you can find a lower rate, there’s no transaction costs (other than your time).
On a $200,000 loan, every 0.10% that you shave off your interest rate results in ~$1,000 of interest saved over the life of the loan. That’s a deal worth taking every time.
What happens when you refinance your student loans?
What does it mean to refinance your student loans? Basically, you take out a new loan with a private lender that has a new interest rate and use the new loan to pay off your current student debt.
Most people graduate with more than one student loan since students have to apply for a new loan for each semester. The first time they refinance, they also typically consolidate all their loans into one.
Keep in mind that when you refinance to a private student loan, you lose the protections that the federal student loans afford you. If you think that you may need income-driven repayment terms or may qualify for federal loan forgiveness, refinancing is not be the best option for you. Often, these more complicated situations require seeking student loan advice to make sure you’re making an optimal decision.
If you already have a private loan, refinancing has fewer downsides. Nearly any time a better rate pops up, it’s worth it to take advantage of it.
To that end, you can be vigilante about checking out what you qualify for often. Usually, you’ll switch from one lender to another, but not always. Sometimes the same lender is offering better terms than what you currently have and you can open a new loan with the new terms.
Why should you refinance?
The right time to refinance your loans is when doing so will save you money. This usually means that you can find a loan that offers a lower interest rate than what you’re currently paying.
Refinancing terms are based on your credit score and income, which means that the second time you refinance you may get better terms since you’re likely to have better credit and be progressing in your career.
Other reasons for student loan refinancing include:
- You want to release a co-signer
- You are unhappy with your loan servicer and want to switch
- You have a better debt-to-income ratio (i.e. you’ve paid off credit cards or other education loans).
- Interest rates have gone down
When should you refinance?
As you might imagine, refinancing isn’t for everyone. Some people are in situations where it doesn’t make sense to refinance their loans. For example, if there’s a good possibility they will need those federal protections in the future.
Let’s look at a few scenarios when refinancing your student loans is a good idea.
When your credit score improves
Lenders offer better rates to those who have good credit. If you’ve been working on your credit and seen an increase on your credit report, that’s a good time to look into refinancing your student loans. Even if you don’t yet qualify for the best rate, a better rate can save you money while you’re working on getting your score up high enough for that coveted lowest rate.
In order to refinance, most lenders will require that you have a score at least in the upper 600s. If your score isn’t up to par, spend a few months working on repairing your credit. You’d be surprised how small changes can actually push your score up just enough to get a better rate.
Another method of qualifying is by finding a co-signer with excellent credit. They promise to pay the loan if you default, giving the lender the assurance necessary to offer you a loan. In most cases, I’d avoid a co-signer since you’re burdening the other party with the debt but if we’re talking about savings tens of thousands of dollars in interest over the life of your loan, then it might be a conversation worth having.
When interest rates are lower
Another situation in which refinancing will probably benefit you is if interest rates are moving lower. Typically, you’ll get the lowest rate if you’re willing to accept a variable-rate loan. Nobody knows what will happen to interest rates in the future. If you’re going to pay off your loans quickly (for example, in less than 5 years), a variable rate will save you money in the long run. If you think you’ll take 20 years to repay your loan, you may prefer a fixed rate. Either way, when interest rates move lower, you should explore whether you can lower your current rate. Sometimes the easiest way to do this is through a marketplace like Credible where you can check your rates across a group of lenders quickly.
Anytime you can save money
If you’ve already refinanced to a private loan and have lost your federal protections, it makes sense to refinance any time you would qualify for a better rate. Unlike with refinancing home mortgages, student loan refinancing lenders (or at least, the partners on our site) do not charge fees to refinance student loans so you don’t have anything to lose.
Does refinancing affect your credit?
That’s nice that lenders don’t charge fees for refinancing student loans. But there must be somewhere you’ll take a hit. What does refinancing do to your credit?
Surprisingly, not much.
Soft vs hard inquiries
To find out what you qualify for, most lenders will do a ‘soft’ inquiry into your credit history. This type of inquiry doesn’t show up on your report and has no impact. This allows you to shop around and find out what different lenders have to offer without affecting your score.
Once you apply for a loan, the lender will do a ‘hard’ inquiry which will show up on your report. This will typically drop your score by a few points. Looking to borrow more money is considered a semi-negative credit behavior.
The effect is minimal — unless you accumulate a number of hard inquiries on your report. Keep in mind that you are allowed to shop around for loans. All hard inquiries made within a short period (usually 14 days) will count as only 1 inquiry.
A hard inquiry stays on your report for about 2 years, but typically only affects your score for 1 year.
Average age of accounts
The average age of your accounts contributes to about 15% of your score and older is better.
Since refinancing your student loans involves taking out a new one, the average age of your accounts will drop. How much it affects your score depends on how many other accounts you have and how old they are, but the effect is usually minimal.
Potential downsides of refinancing
Unfortunately, refinancing your student loans isn’t all rainbows and unicorns. You still have to actually repay your loans.
Lower payments, longer repayment
The main problem that you can run into is refinancing for a lower monthly payment by extending the repayment plan period. If you are struggling to make your payments, it’s a good option. It’s better to make smaller payments and not go into default.
However, a lower monthly payment with a longer repayment period means you’ll pay more in the long run. For example, let’s look at that $30,000 loan at 5% interest that we mentioned earlier.
You’ll pay $8,183.59 in interest over a 10-year repayment period. That same $30,000 loan at 5% when repaid over 15 years, while reducing your monthly payment by $80.96, will result in you spending $12,702.86 in interest — a $4,519.27 increase.
Losing federal benefits
As mentioned earlier, if this is your first time refinancing from government loans, you’ll lose the benefits of those programs such as income-based repayment or other repayment options. Although, once you’ve refinanced tp a private lender, these concerns are no longer an issue.
Refinancing your loans will affect your credit in the ways we’ve already discussed, but the effect is minimal. If you refinance too often, however, you run the risk of damaging your credit.
Generally, wait at least two years between refinances. This will allow the hard inquiry to drop off your credit and keep those from accumulating.
So, how often can you refinance student loans?
After all this great discussion, we come back to our original question. How often you can refinance your student loans?
The answer is simple — as often as you can.
As long as it makes sense for your situation and you will be saving money, go for it.
Joshua Holt is a practicing private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He is always negotiating better student loan refinancing bonuses for readers of the site or finding honest companies that provide student loan advice for a fair price.