TUN sits down with Betsy Mayotte, the president and founder of The Institute of Student Loan Advisors (TISLA), to discuss what you should know before you refinance your student loans. 

TUN: Betsy, thanks so much for joining us. 

MAYOTTE: Yeah, thanks for having me. 

So, what does it mean to refinance your student loans?

Refinancing your student loans usually applies to private loans. In fact, it always applies to private loans. What it means is that you approach either the lender that you’re already with or another lender that will hopefully give you better terms than what you have now. Maybe they will offer a lower interest rate or a longer term. So, instead of having 10 years to pay the loan back, you might have 15 years to pay the loan back. 

Great. So, when should borrowers consider refinancing their student loans? 

Some people wonder if they should actually refinance their federal student loans. They might even be able to get a lower interest rate than what they have on their federal loans. 

I have been doing student loan compliance and advocacy work since the earth cooled, and I can count on one hand the number of people for who I thought that was a good idea.

Even if you can get a lower interest rate, refinancing federal student loans under the private student loan program is fraught with peril. You lose access to any lower payment options that you might have available to you, like deferments and forgiveness programs.

So, when to consider refinancing your private student loans is, if you think you can get a lower interest rate. However, the lenders are very picky. They’re only picking those “cream of the crop.” 

What they’re looking for is not just a good credit score. They’re looking for borrowers who have made several years of on-time payments. They’re looking at your debt-to-income ratio. In some cases, they’re even looking at what school you graduated from, what your degree was and whether you graduated at all. 

So, when is a good time to refinance? If you check all those boxes and you’re going to get an interest rate reduction of at least a quarter or half a point. Otherwise, it’s not really worth it. 

Another reason that some people refinance their private student loans is if they have a cosigner on their existing private loan. Refinancing the loan is a tool that can be used to drop the cosigner so they’re no longer liable for the debt. 

So, that’s another time you might want to look into refinancing: if you’re looking to get your cosigner off the hook.

Great. For borrowers who decide to refinance their student loans, what are the next steps? Could you provide some tips to help make the process smooth and easy for borrowers?

Do your homework. Just like with any other major financial decision, I wouldn’t pick the first lender that comes across your email box or the pop-up ad when you’re on the internet.

You want to make sure that you’re not just looking for the lender that gives you the best rate. You want to look at their reviews, how easy they are to work with, and what options they have available if you have a financial crisis. Private loans tend not to have very many options, but you want to look to see if they have any. 

You also want to check, what is their late fee policy? When do they consider you in default? You want to read all the terms and conditions for this. You should plan on spending a good amount of time making this decision. 

Because one of our values at TISLA — to make sure that we’re giving trustworthy information — is to remain unbiased, we will not recommend one lender over another. But, Google is your friend and you should take a look at the reviews out there. 

Just keep in mind that every private lender is going to have some bad reviews because it’s money and people get mad at money stuff. So, you want to take the reviews you see holistically.

There are tools out there that will help you compare and contrast. There are organizations like Credible, for example, where you just have to type your information in and a bunch of different responses will pop up. Those are great for time-saving. But, keep in mind, none of them cover all the lenders. They also usually get some sort of referral fee, so you don’t want to just use a single tool when you’re doing that examination, when you’re doing that research.

Great. Are there any potential repercussions to refinancing student loans? Could this decision come back to hurt students in any way? 

Refinancing your federal student loans into the private loan program is usually a bad decision. I saw borrowers do that this year, and they wanted to know if they could reverse it because they wanted to be able to take advantage of the zero percent interest rate and the fact that they didn’t have to make payments because of COVID. And there’s no take-backsies. So, there can be repercussions that way.

The only other way that there could be a repercussion is if you refinanced a fixed-rate loan that might have had a decent interest rate into a variable rate loan that might have been low when you refinanced. But, the economy can change, and all of a sudden, the loan could have a higher interest rate than you had before. 

So, that’s something else to consider when you’re refinancing. Are you going into a variable rate and are you taking a risk by doing so?

Great. Do you have any additional tips or pieces of information that you would like to add that I may have skipped over? 

As far as refinancing private loans go, if you need a cosigner to refinance, it might be worth waiting until you don’t need a cosigner anymore. I’ve never run into a cosigner that said, “Oh my God. I’m so glad I co-signed on that loan.” Not once have I ever run into someone that said that.

Unfortunately, I see people who need to refinance because their payments are too high, and they’re generally not going to be the ones that get the best terms. So, even if your interest rate or your payment is high, and it might be challenging financially, you have more of an opportunity to get a better deal if you’ve got a couple of years of on-time payment under your belt. 

So, it might be a situation where you might want to just bite the bullet, make some choices financially for a couple of years and then try to refinance at that point. 

Great. Thanks, Betsy, for joining us today. 

Thanks for having me. 

This interview has been edited for clarity.