How Much Can I Actually Save By Refinancing My Student Loans?

The main reason to refinance student loans is to save money, and depending on the interest rates and how much debt you have, you could save quite a lot.

There are a lot of factors that will determine how much you could save when refinancing your student loans, but the first thing you need to consider is whether refinancing suits your individual financial situation. There are only a handful of banks and companies that refinance education loans, and if you have federal loans, it means giving up government programs like income-based repayment, pay-as-you-earn and loan forgiveness. While there are risks to refinancing, it could make a huge difference in your financial health, especially if you’re paying off a large amount of debt or have high interest rates on your loans (or both).

If you’ve weighed the pros and cons and decided to refinance your loans, there are a few strategies you can employ to maximize your savings. How much you can actually save will depend on how much you can afford to pay each month and the interest rates you qualify for, and when it comes to interest rates, it generally helps to have a good credit score.

The way to measure your savings is to compare what it would have cost if you paid off your loans on schedule. For example, if you graduate with a loan balance of $20,000 with 6.8% interest rate and a 10-year repayment term, you would end up paying about $7,600 in interest over the life of the loan. Compare that number to what you would pay if you had a lower interest rate or shorter repayment term. Many refinancing companies offer an interest rate reduction if you enroll in autopay, which could save you even more.

To save the most, you could opt for a variable interest rate and a short repayment period, but know there are risks to that approach: A variable rate means your payments will change from month to month and could potentially get much more expensive. On top of that, a shorter repayment term means you have to pay more every month, which could make your loans unaffordable if your financial situation changes.

Still, if you want to reduce the cost of your student loans, refinancing could be the way to go. Phil DeGisi, vice president of marketing for student loan company CommonBond said its borrowers save an average of about $14,500 (the average loan balance for its borrowers is $80,000). Borrowers with SoFi, another loan company, save about $14,000, according to co-founder Dan Macklin.

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Christin Gomes, a 27-year-old from Austin who refinanced with SoFi over the summer, said she’s set up to save about $40,000. She graduated from the University of Miami in 2010 with about $100,000 in debt, and one of her loans had a 13.25% interest rate.

“It was really daunting because you feel like you don’t have any control,” she said. “You think, ‘I did what I was supposed to do, I went to a good school, I have a job, I’m paying more than the minimum payment … and I’m still not getting anywhere.'”

Gomes had both private and federal loans, but the bulk of her debt was private. Those loans had a 25-year term, so she refinanced them to a 15-year loan term at a 6.8% rate. She later refinanced her federal loans to a five-year term at a 3.2% variable rate. Her monthly payments are similar to what she had to pay before refinancing (about $800 before and $830 now), but she’s also paying about $170 extra each month (a total of $1,000), to try and pay off the loans faster and save more.

“I see the original balance, and I see where it’s going and I see it going in a positive direction,” Gomes said. “I feel like a burden has lifted, because I’m under a reasonable plan where I can make a difference.”

The average student loan borrower who graduated in 2014 had $28,950 in debt, so Gomes’ situation isn’t the norm, but it shows the value of refinancing for people with large debts and high interest rates. Keep in mind that applying for student loan refinancing can cause a small, temporary drop in your credit score, and you’ll want to check your credit before applying (you can check your credit scores for free on Credit.com), because a higher credit score is likely to get you a better rate.