5 things to know before refinancing your student loans

Arm yourself with the facts before deciding.

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Key takeaways

  • Refinancing student loans with a private lender may lower your monthly payments and interest rate.
  • Refinancing federal loans with a private lender eliminates benefits such as income-driven repayment or public service loan forgiveness.
  • The higher your credit score, the more favorable interest rate you can get.

Whether you're overwhelmed by college debt or simply in the market for a lower interest rate, refinancing your student loans could make financial sense. Here are five essential things you need to know before refinancing your student loans with a private lender.

Your credit score matters

Private lenders will check your credit before they'll give you a new loan. Your FICO credit score is comprised of these factors: Payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%). If you've missed payments, let your student loans go into default or maxed out a credit card, these events can subsequently lower your credit score and make you a less desirable candidate for refinancing.

FICO scores range from 300 to 850, and the higher your credit score, the more likely you are to qualify for refinancing at a lower interest rate. Lenders typically look for credit scores of 700 or above. If your credit score falls below that number, you may want to work on boosting your score before seeking to refinance.

Beware of longer loan terms

You can often secure a lower monthly payment simply by stretching out your student loans into a longer repayment term. If you're three years away from paying off your loan and you take out a new 10-year loan, you'll actually pay more overall because you're stretching out the payments and accruing interest over a longer time frame. Ideally, you should look for a loan with a lower interest rate and a shorter term—you'll accrue less interest over time and pay the loan off in less time. And once your student loans are paid off, you can earmark that money for achieving other financial goals.

Private and federal loans are handled differently

Before you refinance, find out if your loans are federal, private, or a combination of the two.

While there are no refinancing options offered by the federal government, federal loans can be refinanced with a private lender. You can also take out a Federal Direct Consolidation Loan, which combines multiple federal loans into one. For private student loans, you can refinance from your private lender to another private lender.

That said... choose your private lender carefully

Before you refinance, weigh the benefits of a lower interest rate against the federal benefits you might lose—the ability to defer payments, for example, or the option to switch to a more flexible, income-driven repayment plan.

If you’re offered a much lower interest rate or are reasonably sure you wouldn’t use those benefits anyway, then refinancing with a private lender might make sense.

Consider consolidation loans

If you have multiple federal loans, a Federal Direct Consolidation Loan could help you stay organized and avoid missing payments. The interest rate on the new loan is a weighted average of the interest rates on your existing loans—which means private lenders may offer you a lower interest rate than what you would receive from a Federal Direct Consolidation Loan.

However, a Federal Direct Consolidation Loan would allow you to keep benefits like income-driven repayment or public service loan forgiveness while simplifying into one monthly loan payment. You may not pay off your loans faster or more cheaply, but many prefer managing one loan instead of many.

For those who research all the potential implications and look before they leap, refinancing with a private lender can prove a smart move for some student loan borrowers. Arm yourself with the facts and this option could substantially brighten your personal financial picture.

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The statements and opinions expressed in this article are those of the author. Neither Fidelity Investments nor your employer can guarantee the accuracy or completeness of any statements or data.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

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