When to refinance your private student loans

Refinancing federal student loans is almost never recommended, as this would make you lose access to income-driven repayment plans and forgiveness, but this isn’t the case for private loans. Refinancing private student loans may be a good idea if you can save money in interest, secure a lower monthly payment – or both – or if you’re simply not happy with your current lender.

1. When you have high interest rates

Interest on some federal student loans may be subsidized, meaning it doesn’t accumulate while you’re in school. With private student loans, on the other hand, interest accrues while you’re in school and is eventually capitalized. In other words, any unpaid interest becomes part of the principal balance. This can add years to your repayment timeline, in addition to increasing the overall cost of the loan.

Interest rates on private loans can be fixed or variable and currently fall between 4 percent and 18.5 percent. The rates you’re given are based on your creditworthiness and overall financial health.

If your current student loans’ interest rates are on the higher side, it may be a good idea to consider refinancing. This is particularly true if both your credit score and income have improved since you took out the loans, as you could secure a lower rate. Likewise, if you have variable rate loans, refinancing may be worth it to lock in a fixed rate. This can make your payments predictable and protect you against future rate increases.

If saving on interest is your main goal, consider prequalifying with multiple lenders. This will allow you to see realistic student loan refinance rates without impacting your credit, so you can decide if refinancing is right for you.

2. When you want to switch lenders

Maybe your lender’s customer support is lacking, or you have run into multiple difficult situations with its systems that weren’t resolved well. If that’s the case, refinancing is definitely worth looking into.

When you refinance with a different lender, the new loan will be used to pay off your existing balance with your current lender. Then, that account will be closed, and you will begin making payments with your new lender, according to the terms specified in your contract.

Before switching lenders, research your options carefully. Take into account perks, like automatic payment and loyalty discounts, in addition to the offered terms and interest rates. Likewise, check the lender’s track record with customers on review websites like Trustpilot and the Better Business Bureau to ensure you’re dealing with a reputable company.

3. When you want to change your payment timeline

If you’re having trouble making your loan payments, refinancing can help make your monthly payments more manageable by altering the repayment period.

With most lenders, you can choose to lengthen your repayment timeline to lower your monthly payments. While this method provides short-term financial relief, keep in mind that you’ll end up paying more interest over the life of your loan.

When it may not make sense to refinance your private loans

Though refinancing comes with some benefits, it isn’t the best solution for everyone. For example, refinancing may not be right if your credit score isn’t in good condition, as you won’t be able to secure the best rates. Refinancing is also not recommended if you’re close to your payoff date, as you could potentially pay more in interest, unless your plan is to make additional payments each month.

The decision to refinance your private student loans is personal. Your current loan interest rate, personal financial health changes and budgeting needs can all impact your decision.

Next steps

The refinancing process will vary from lender to lender, but generally will operate similarly to the private student loan application process. The first thing you’ll need to do is compare lenders to find the best rate available and then complete the application process once you find a lender who meets your needs.

The lender will then be in touch with you regarding the status of your loan and repayment term. Keep paying your original loans during the application process so you don’t fall behind and be on the lookout for any information from the new lender.