Breakups can get complicated, but sometimes they’re necessary—especially when it comes to your student loan lender. Whether you’re looking for better terms or are just frustrated with the customer service experience, you have every right to transfer your loans somewhere else.
But the grass isn’t always greener on the other side, and there’s no guarantee you’ll end up in a more favorable situation just by switching lenders. And the switching process can look very different depending on whether your student loans are private or federal.
Let’s look at how to change lenders with both private and federal student loans, along with the pros and cons for each.
In this article:
- How to transfer private student loans to another lender
- How to transfer federal student loans to another lender or servicer
How to transfer private student loans to another lender
The only way to transfer your private student loans to another lender is by refinancing your current loans to a new lender. When you refinance student loans, you can keep your current repayment term or choose a new schedule. Your interest rate will vary depending on the repayment term you choose, but will usually be lower if your financial picture has improved since you first took out your student loans. This can result in less total interest paid over the life of the loan.
You can refinance student loans as often as you want. And because most lenders don’t charge origination, application, or prepayment fees, there are no costs when refinancing student loans.
Pros of refinancing private student loans
The main potential benefit of refinancing private student loans is to lower your interest rate and therefore the total cost of your loan.
Here’s how that works. Let’s say you owe $50,000 with a 10% interest rate and 10 years left on your loan. If you refinance to a 10-year term and a 5% interest rate, you’ll pay $15,650 less in total interest. Your monthly payment will also be $130 less. You can use that extra $130 to invest, save for a down payment, or pay down other loans.
Refinancing may also help you pay off your student loan ahead of schedule while paying less interest. For example, let’s say you decide to add the extra $130 to your student loan payments. In this case, you would pay off your loans in about seven years and eight months while saving an additional $10,296.97 in total interest.
Cons of Refinancing Private Student Loans
Refinancing isn’t guaranteed to save you money. In some cases, you may actually pay more in total interest by refinancing.
When you refinance, you can choose from several different repayment terms. You can lower your monthly payment by picking a repayment term that is longer than the term left on your existing loan, but this longer repayment term may cause you to pay more in total interest over the life of the loan.
For example, let’s say you owe $50,000 with 10 years of payments left and a 10% interest rate. If you refinance to a 20-year term, even with a lower 6% interest rate, you would end up paying $6,681 more in total interest over the life of the loan. On the other hand, your payments would drop from $660.75 per month to $358.22.
Many borrowers who choose a longer repayment term choose to do so to lower their monthly payments. They may use that difference to pay off high-interest credit card debt or invest for retirement. If you choose the right strategy, you may end up saving more money by refinancing to a longer term.
However, if you refinance to a longer term and just spend the difference, then refinancing could have an overall negative impact on your finances.
How to qualify for a refinance
As with any other loan, you must meet certain criteria to be eligible for student loan refinancing. Most lenders have an income threshold that you must meet, as well as a minimum credit score. These requirements differ depending on the lender, but a credit score of 650 is the usual threshold.
Lenders sometimes have limits on how much you can refinance, usually up to $500,000. If you can’t refinance all your student loans, you can still save money by refinancing a partial amount.
If you don’t meet the income or credit requirements, you may be able to qualify by adding a cosigner. A cosigner is someone with a good credit score and stable income who will take on legal responsibility for your loans if you default.
Most lenders allow cosigners, and even if you don’t need a cosigner to qualify for refinancing, you may receive a better interest rate by adding one.
Asking someone to cosign on a loan is a major request because the loan will show up on their credit report and could affect their ability to qualify for other loans. If you ask someone to cosign, make sure they understand all the implications. While you can’t protect yourself from losing your job, you should make sure your loan will be paid off should you become disabled or die prematurely. Pay attention to the loan terms and purchase appropriate insurance if necessary.
How to transfer federal student loans to another lender or servicer
There are essentially two options to transfer your federal student loans. If you want to keep your federal loan status, you can consolidate your federal loans to switch to a different servicer.
If your main goal is to save on interest, you can refinance your student loans with a private lender. Read below to learn more about the pros and cons of each scenario.
If you want to keep your federal student loans
If you want to keep your federal student loans as is, the options are limited. First, you can consolidate your student loans and choose a new student loan servicer. Consolidating multiple loans into one can simplify the repayment process by reducing the number of payments you need to make. You can do this with a Direct Consolidation Loan.
However, make sure you’re not giving up any benefits by consolidating. For example, if you’ve already been working toward Public Service Loan Forgiveness (PSLF) or Income-Driven Repayment (IDR) loan forgiveness, you could lose credit for all your previous payments if you consolidate. Also, if you have Perkins loans and consolidate, you won’t be eligible for Perkins loan cancellation.
Another way to change loan servicers is to work toward PSLF. All PSLF applications are managed by FedLoan Servicing, so this will only transfer your loans if your loans aren’t currently serviced by FedLoan Servicing. An important note: after December 2022, FedLoan Servicing will end all federal loan servicing and all borrowers enrolled in PSLF will be transferred to MOHELA. This option is only available for borrowers who work in an eligible government or non-profit organization and plan to work there for 10 years while making payments.
If you want to switch to a private lender
The federal government has paused student loans through May 1, 2022, due to the COVID-19 pandemic. Interest rates are set at 0%, which means interest is not currently accruing on paused student loan payments. If you refinance your federal loans, you will lose access to this program and other federal protections.
When you refinance federal student loans, they will become private student loans. You will then lose access to all federal benefits and protections. You will not be able to go back and undo this change.
Here are some of the perks that borrowers with federal loans lose when refinancing:
- IDR plans: IDR plans base your monthly payment on your income and family size. If you need a lower payment at any time, you can switch to an IDR plan with no extra fee.
- Longer deferment and forbearance programs: Federal loans have longer deferment and forbearance programs than private loans. If you can’t afford your payments, even on an IDR plan, you can apply for one of these year-long programs. They can be renewed for three years in total. Private lenders will sometimes offer one year of deferment, but some offer as little as six months.
- Loan forgiveness programs: Federal loans come with loan forgiveness options like Public Service Loan Forgiveness (PSLF) and Income-Driven Repayment (IDR) loan forgiveness. If you refinance, you’ll be forfeiting access to all federal loan forgiveness programs.
If you want to transfer Parent PLUS loans
Currently, the federal government does not have an official program that transfers Parent PLUS loans to the child. The only option is to refinance the student loans into the child’s name with a lender that allows this. If you do this, the loan will be underwritten based on the child’s eligibility, so make sure they can qualify on their own.
To qualify for a student loan refinance, the child needs to meet the income requirements and minimum credit score, usually 650 or higher.
Once the refinance is complete, the Parent PLUS loans will become private loans. If the parent is not added as a cosigner, then the parent will be officially removed from the loan.
Parents may want to transfer a Parent PLUS loan in order to remove the loan from their credit reports. For example, if they want to buy a home or refinance a mortgage, having tens of thousands in student loan debt could negatively impact that process.
Another option is for the child to gift money to the parent for loan repayment. Any individual may gift another individual $16,000 per year in 2022 without needing to file a gift-tax return. The child can help pay off the loan without losing access to federal programs.
What happens after I transfer my student loans?
After you refinance or consolidate your student loans, make sure to note the due date, which may be different from the previous one. Set up automatic payments to save an extra 0.25% on your interest rate and ensure that you never miss a payment. Late payments can appear on your credit report and decrease your credit score.
After refinancing is complete, check your credit reports at annualcreditreport.com to ensure the old loan is marked “paid off.” Your new loan should be listed on your credit report. If you see any errors, notify the credit reporting agency.