Very few things inspire as much fear and dread among American millennials than their student loans. In February, Forbes reported that the total student loan debt had reached $1.13 trillion, spread out across almost 45 million borrowers in the United States. Everyone knows that paying off your student loans is basically the best feeling ever, but not everyone knows this simple process that could help you pay off your loans faster, or pay less interest over time. “Refinancing is a new term being applied to student loans just in the last couple of years,” Joanne Bradford, CMO of SoFi, tells Bustle. “Most people don't really understand the refinancing concept until they have a mortgage, but they can consolidate their loans and refinance them at a lower rate,” she says. But how do you actually refinance your student loans? As Bradford explains, it’s so much easier than you might think, but not many people are actually doing it.
“I talk to lots of people who don't understand it, or don't really tackle it. They just think, ‘I don't want to look at it.’” Bradford says. “People don't really want to break down the math and what they need” from their loans, whether that’s to maximize the payment (and get it over with) or minimize the payment (and pay it off on their terms). But by not thinking about it, and just paying what it says on the bill, they could be losing out on serious cash.
According to SoFi’s own refinancing calculator, people who refinance with SoFi save on average almost $23,000 total, or $288 a month — not an insignificant chunk of change. (Other lenders boast similar returns.) “If you're paying an 8 or 9 percent [interest rate], and you can refi down to 4 percent, and you can lower the term — take it from 15 years to 10 years — you've cut the interest rate, you've cut the length, you would have been paying double the interest for a longer period of time,” Bradford explains. There are tons of calculators out there that will help you figure out how much you’d save over a longer period of time, across different lenders, so you can figure out if refinancing your loans is right for you, because it may not make sense for everyone.
The way student loan refinancing works is that a private lender pays off all your loans at once — both federal and private — and then offers you a new loan, at a new (preferably lower) interest rate. This is great for a number of reasons, chief among them being paying less, but for certain borrowers, it’s less than ideal. By combining your all federal and private loans into one new private loan, you lose out on certain protections that come with federal loans, like income-based repayment or student loan forgiveness, according to the Consumer Financial Protection Bureau. If you work in public service, as a teacher, or in certain non-profits, you might be eligible for student loan forgiveness after a period of time paying off your loans on schedule, but only for your federal loans. So if that sounds like you, refinancing your student loans may not save you money over the long term. Additionally, if you don’t have as much job security (e.g., if you’re a freelancer), you will likely want the flexibility of an income-based repayment plan. You also can’t undo your refi once it’s done, so it’s something to consider very carefully before moving forward.
But for people who work in the private sector, have relatively high job security, and have built up their credit score since they were first offered their original rates, refinancing can be a great way to lower the burden of student loans. “In general, you need to have a couple of years of work experience under your belt” to be eligible to refinance, Bradford explains. You also need to “show that you're managing your free cash flow and your debt-to-income ratio, and that your credit score and income are stable.” Not everybody qualifies: “Sometimes people have an outstanding medical bill or a cell phone bill, and they can clear those things up very quickly” and apply again, Bradford says. “Other people qualify and don't continue on with the process,” she says.
The consequences of putting off your refi (if you qualify and it makes sense for your loan situation) can add up quickly. Millennial women “are so focused on paying off student loan debt that they're waiting to buy homes or make other large purchases that our parents were making at our age,” Alicia McElhaney, founder of the personal finance newsletter She Spends, tells Bustle. Refinancing can make it easier to pay off your debt faster, which no one doesn’t want to do. "You should always check to see if you qualify, because there’s no reason to not save money," Bradford says. Research by LendEDU found that 57 percent of applicants qualify, so there’s little excuse not to at least try. And according to Student Loan Hero, across the top six student loan refinancers, it takes on average less than 20 minutes total to check your rates and apply online (or even on an app).
If student loan refinancing is a practical solution for you, just rip the Band-aid off and do it. “The biggest thing when I talk to people is they say ‘I should have done it sooner,’” says Bradford. It’s quick, easy, and will help you save money for your avocado toast habit — or a wedding, or a house, or a kid. But, you know, it’s your money.