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Student Loan Refinancing Calculator
Student loan refinancing is the process of selling your loans to another lender in order to provide you with more favorable repayment terms. Your new lender pays off your loan from your old lender, and then you begin to repay your new lender.
Among other situations, this can be very helpful to borrowers who took out their loans during a period of high interest and have found that interest rates have dropped considerably. But student loan refinancing is not without its complications. It’s important to read your new contract carefully and ensure that it’s worth the lower interest rate.
You can use this calculator to determine exactly how much you can save in monthly payments and in overall amount repaid. Let’s get into what each term on the calculator means to ensure that you get the most out of it.
Definitions of key terms
Related: Student loan definitions
Simply put, the loan balance is the total amount you owe on your loan. It will be equal to the remaining balance of the principal plus any outstanding interest. Don’t confuse this number with the amount of money that you initially took out; if you have made payments towards your loan, your initial balance will not be the same as your current loan balance.
You should also be sure not to confuse your loan balance with the total projected repayment. Your total projected amount to be repaid will be higher than your loan balance, as it will include the future interest that your loan servicer will charge.
Your interest rate is the percentage of your loan balance that your loan servicer charges you every year. So, if you have an interest rate of 4%, you’ll be charged 4% of your principal balance every year as you repay your loans. For fixed-rate loans, this percentage stays constant throughout the entire lifespan of the loan.
That being said, the actual amount of interest you’re paying will dwindle as your principal balance shrinks. That is because a fixed percentage of a shrinking principal amount will reduce proportionally to the principal value.
If you have multiple loans with different interest rates, you may need to calculate your average interest rate between them all. This tool from NerdWallet can help you do so easily.
Remaining term is the amount of time that will pass before you pay off your loan on your current repayment plan. So, if you have a remaining term of three years, as long as you continue paying your exact monthly payments over those three years, you will pay off the entire loan on the dot.
Estimated monthly payment
Using your interest rate, loan balance, and remaining term, we can estimate the amount that you are paying each month under your current plan. So, this figure should reflect your current monthly payments before refinancing.
New interest rate
In this section, input the interest rate that your prospective new lender is offering you.
In this section, input the amount of time over which you would repay your refinanced student loan.
Change in monthly payments
In this section, we will tell you how refinancing under your proposed plan would influence your monthly payment. Depending on the terms of the plan and the repayment period, this could lead to an increase or a decrease in monthly payments.
Change in total interest paid
In this section, we will tell you how refinancing under your proposed plan would impact the total amount of interest you’ll pay over the lifespan of the loan. Ideally, you will see a reduction in the total interest paid.
Student loan refinancing calculator
You would pay this much more each month But you'll pay this much more interest
You would pay this much more each month---
But you'll pay this much more interest---
Reasons to refinance
There are many good reasons for a borrower to refinance their student loans. Let’s get into some of them here.
Lower interest rates
One of the best reasons to refinance your loans is because interest rates have dropped. If interest rates are lower now than they were when you took out your loan, you stand to save a lot of money by refinancing. You can use the calculator above to find out exactly how much you’d save under current interest rates.
Potential for lower monthly payments
Refinancing can also help lower monthly payments. If you are 5 years into a 10-year loan, you can refinance those debts into a new 10-year loan. That would leave your monthly payment at about half of what it is right now.
Keep in mind, though, that extending your repayment period will increase the amount of interest you pay overall. This is because you will be leaving more time for interest to accrue.
Found a cosigner or improved your credit score
If you took out your initial loans without a strong credit history and could not find a cosigner, you may be shouldering loans with unforgiving repayment terms and might even be paying inflated interest. If you find a cosigner or manage to improve your credit score drastically, you could qualify for more generous student loans. This could make it worthwhile to refinance.
Also see: How to find a cosigner
Reasons to avoid refinancing
As great as refinancing can be, it can also have its drawbacks. Here are a few things you should keep in mind when you consider refinancing.
Foregoing federal loan benefits
If you are refinancing federal loans into private ones, you are foregoing the benefits that come with federal loans. These include flexible repayment plans such as income-driven repayment, and the possibility of loan forgiveness. The pause on student loans which took place as a result of the COVID-19 pandemic only applied to federal loans; if another emergency were to occur, private borrowers would still have to make payments.
So, although it can be a good idea for some, make sure to read your new contract carefully to ensure that you are ok with foregoing your federal loan benefits.
Extending your loan repayment time
Extending your loan repayment time can come with the advantage of lower monthly payments, but it also has several drawbacks. For one, your loan will be looming over you for longer. And perhaps more importantly, you’ll end up paying more in interest.
It’s worth noting, however, that you can always repay your loan early in order to avoid these drawbacks. So, if you need a lower monthly payment for the time being, you can refinance and then increase your monthly payments once your income increases.
Could hurt your credit score
Refinancing student loans has a small, but notable effect on your credit score. When you apply for a loan with a new lender, they will make a formal inquiry into your credit history. This typically leads to a temporary dip in your credit score.
Your score will bounce back quickly from an inquiry, but remember that if you apply to multiple places and they all make inquiries, you could see some substantial reduction in your score that could last for a while. Make sure that you know you want to refinance before you authorize a formal inquiry.
Alternatives to refinancing
Refinancing is one of many options to deal with student loans that you are currently repaying. Others include applying for a forgiveness program, consolidating your loans, and changing your repayment plan. You can also apply to defer your loans or make additional payments. Each of these strategies suits people in different financial situation. Whether you are looking to pay your loan back quicker to save money on interest, or refinance to lower your monthly payments, you’ve got options.
Frequently asked questions
In what situation should I not refinance my student loans?
Here are a few situations in which it does not make sense to refinance:
- You are currently taking advantage of income-driven repayment on federal loans
- Your loans are almost paid off
- You might be eligible for federal loan forgiveness
Can I get my student loans forgiven if I refinance?
If you refinance your student loans, you will not qualify for any federal student loan forgiveness programs. Only federal loans qualify for forgiveness, and you cannot refinance your loans into other federal loans.
But, if you currently have private loans, you will not lose this opportunity by refinancing, because your private loans would not qualify in the first place. So, borrowers with private loans should be more open to refinancing than those with federal loans.
Does refinancing student loans hurt my credit score?
Refinancing student loans itself should not hurt your credit score. The main impact that you can have on your credit score is by authorizing credit score inquiries at multiple lenders. This would drop your score in the short-term, but it should not have serious lasting effects.