When you have $150,000 of student debt, repaying it can feel like a monumental task. If you want to save money and pay less in interest, things can get even trickier. However, refinancing your high-balance student loans to a lower interest rate or longer loan term can help you better manage repayment.
5 steps to complete a $150,000 student loan refinance
Before you start, it’s important to understand that refinancing can have some drawbacks, particularly if you have federal student loans. If you refinance federal student loans, your debt becomes a private loan, meaning you’ll lose access to borrower protections like income-driven repayment plans, forgiveness programs, and more flexible deferment and forbearance options.
In addition, refinancing only makes sense if it can help accomplish your financial goals, such as saving money with a lower interest rate.
“I would be hesitant to refinance federal loans unless you were getting a clear-cut, point to point-and-a-half difference in lowering that rate,” said Jeff Wood, a CPA, investment advisor, and partner at Lift Financial in South Jordan, Utah. He added that if widespread federal student loan forgiveness moves forward — as the Biden administration hopes — refinancing federal loans would make them ineligible for that type of forgiveness, too.
However, refinancing private student loans carries less risk. If you can refinance to a lower rate or more desirable terms, it could help you reach your financial goals faster. Here’s how to do it.
1. Find lenders to refinance your student loans
The first step to the process is shopping around for lenders that offer student loan refinancing. If you have six figures of debt, note that some lenders limit the amount of debt they’ll refinance, or they may require an advanced degree (such as a doctorate) to refinance a high amount.
As you research lenders, make sure that you can meet their refinance requirements and they can manage the amount of debt you have.
2. Prequalify, if possible
Once you’ve found a few lenders of interest, see if you can prequalify. To do so, simply input a few pieces of personal information on a lender’s site. The lender will typically conduct a soft credit check before showing you the estimated rates and loan terms you may qualify for.
Prequalifying is a quick and simple process that gives you a more realistic idea of whether you can qualify for a loan and what rates you’re likely to get. However, not all lenders offer the chance to prequalify.
3. Estimate your savings and benefits
After prequalifying, take the information that you’ve been given — such as interest rates and terms — and use a refinancing calculator to estimate potential savings when compared to your current loans. This can give you a better idea of which loan offer can save you the most or give you the lowest monthly payment.
4. Add a cosigner, if necessary
If you aren’t able to qualify for a competitive interest rate, or simply can’t qualify for refinancing on your own, adding a cosigner can be a useful solution.
A cosigner is a family member or friend with good to excellent credit who agrees to share responsibility for your refinanced loan. However, their credit will be equally impacted by your debt. That means if you miss a payment, both of your credit scores will take a hit. And if you later find you can’t make payments at all, your cosigner will have to repay your loan on your behalf.
Asking someone to cosign your loan is a big request, and it’s one that you and your cosigner should carefully consider before going forward. It’s worth noting, however, that some lenders offer a cosigner release. After making a certain number of on-time payments, for example, you may be able to remove your cosigner from the loan.
5. Submit an application and finalize the loan
Once you’ve chosen your preferred lender, you can submit a formal application. You’ll need to include information about your income and existing loans, as well as personal data about your cosigner, if you’re using one.
If approved, you’ll sign the final paperwork before your new lender begins to pay off your existing loan. It’s important to keep making payments on your old debt until you receive confirmation that the account has been closed. Once that happens, you can begin making payments to your new lender on your refinanced debt.
Alternatives to refinancing $150,000 in student loans
If you aren’t able to complete a $150,000 student loan refinance, or you’re not interested in it, you can save money on your debt in other ways. There may also be options to help control costs if you can’t afford your minimum monthly payments.
Pay off the loan with the highest interest rate first
Targeted payments can prove extremely helpful when paying off $150,000 in student loans. When you focus on paying down your highest-interest debt first, you can pay off the loan early and save on interest.
To use this strategy, also called the debt avalanche method, list your student loans in order of interest rate. Continue making the minimum payments on all your debt, but funnel any extra cash toward the highest-rate loan. Once that debt is paid off, move on to the next-highest rate and repeat the process until all your loans are paid off.
Depending on the loan amounts and corresponding interest rates, paying off those loans early could save you thousands of dollars.
But as investment advisor Wood notes, it’s important to have a broader idea about your debt, not just student loan debt. So if you have consumer debt with a high interest rate, like credit card debt, it can help to focus on that first.
“I always talk to clients about not sweeping their debt under the rug, since it’s easy to do,” he says. “It’s just a problem waiting to happen, because it doesn’t go away. Don’t ignore them, don’t forget that they’re there.”
See if you’re eligible for an income-driven repayment plan
If you prefer to pay less each month and you have federal student loans, you may be eligible for an income-driven repayment plan. These federal programs cap your payments at a percentage of your discretionary income — generally 10% to 20% — and forgive any remaining balance after 20 or 25 years. If you have Federal Family Education Loans (FFEL) or Perkins Loans, however, you must consolidate those with a Direct Consolidation Loan before you can enroll in one of these plans.
You can log into your Federal Student Aid (FSA) account to see the types of loans you have and whether or not you qualify. If you do, use the FSA Loan Simulator to compare repayment plans.
Consider student loan forgiveness
If you’re a federal student loan borrower, you can also earn forgiveness through a program called Public Service Loan Forgiveness (PSLF). To be eligible, you must work for an eligible not-for-profit organization or federal, state, or local government, and make 120 qualifying payments.
Not all types of federal student loans are eligible for this program, and you must enroll in a qualifying repayment plan to successfully earn forgiveness.
Look for an employer that offers student loan repayment
An increasing number of companies are offering student loan repayment as a perk for their employees. These companies typically match your loan payments or simply offer extra cash each month to go toward payments, up to a specified annual or lifetime amount.
If your employer doesn’t currently offer this, ask your HR department if they might be willing to add it as an additional benefit.