When should I refinance my student loans?

Student loan refinancing involves taking one or more of your existing student loans and moving them into a new private one — typically to help lower your interest rate or streamline payments.

If you secure a lower refinance interest rate, your monthly payments could become more manageable and potentially result in saving thousands of dollars over the life of the loan.

However, refinancing is not right for everyone. Before you refinance your loan, be aware of the factors involved to make sure it will be beneficial.

When to refinance your student loans

If you’re considering refinancing your student loans, consider your finances, your existing loan benefits and any potential savings. Refinancing could make sense in the following scenarios.

• You have a solid credit score. Your credit score is one of the biggest determining factors in whether you should consider refinancing. The higher your credit score, the more likely you are to qualify for the lowest interest rate available. If you don’t have great credit and can’t secure a lower interest rate than what you’re currently paying, you may want to look into alternative repayment plans. Check your credit history through AnnualCreditReport.com to see if you have any errors or bad marks that can be removed before applying for refinancing.
• You have private student loans. If you already have private student loans, you won’t lose any benefits through refinancing as you would with federal loans. Because of this, it’s usually best to start by refinancing your private loans.
• You have a variable rate. While variable interest rates can be beneficial in low-rate environments, it may not be the right option for you in the long term. If interest rates start to rise, it could make sense to refinance your variable-rate loan into a fixed-rate loan to lock in a good interest rate.
• You have many loans. Having many loans with different interest rates and due dates is hard to manage. Refinancing will pay off all of your existing loans, and then you’ll make one payment every month to your new loan. With most lenders, you can also set up autopay, so you never have to worry about being late again.
• You meet the minimum balance requirements. Many lenders require a minimum loan balance to refinance, which could be as high as $10,000. It’s important to look for lenders that meet your qualifications just as much as you meet theirs. If you still have a large loan balance, your loans will likely qualify for refinancing.
• You have a degree. For many lenders, you’ll need to have a degree to be eligible to refinance. Some require an associate degree, while others require a bachelor’s degree or higher. Some specify that a degree isn’t required. Before deciding to refinance with a certain lender, check that you meet the eligibility requirements.

When you shouldn’t refinance your student loans

Refinancing is great if you can save money and time, but it’s not always the right move for everyone. In these instances, you should avoid refinancing.

• You have low-interest loans. If you can’t guarantee a lower interest rate on your student loans than what you’re currently paying, refinancing usually isn’t worth it. Stick with your current loans until you can find a lower interest rate with a lender you like.
• You have federal loans. If you have federal student loans, refinancing means that you’ll lose out on a few benefits, like Public Service Loan Forgiveness or federal student loan deferment. If you’re struggling to make payments on your federal student loans right now, you could move to an income-driven repayment plan, which bases your payments on your income and household. Private student loans, including refinanced ones, aren’t eligible for this.
• You’ve defaulted on your loans or declared bankruptcy. Many lenders require your loans to be in good standing before refinancing. If you’ve defaulted on your loans or have recently declared bankruptcy, you won’t qualify for refinancing. You may be eligible for refinancing with a low credit score but might not find lower rates.
• The fees outweigh the savings. In some cases, you may be charged origination fees or application fees when you refinance, which are usually a percentage of your total loan amount. If you have relatively little left to pay on your student loans, those fees could end up being more than what you’d save in interest.

Are you eligible to refinance?

There’s no set eligibility standard that all lenders use for refinancing. To see if you’re eligible to refinance, prequalify with a few lenders and consider things like:

• Your credit score. A high credit score means that you’re likely to be eligible to refinance with many lenders and choose the best one for you. Most lenders look for scores over 650, and scores on the lower end will result in higher interest rates.
• Your debt-to-income ratio. Your DTI is what you owe in debt compared to your overall income. The lower your DTI, the more enticing you are to lenders. It can indicate to a lender that you can handle additional debt repayments. Try to keep your DTI under 50 percent.
• Your monthly income. Even if they don’t advertise it, many lenders have a minimum income threshold. You will likely have to submit pay stubs or otherwise prove that you hold a steady job in order for lenders to consider you. In many cases, the minimum income threshold is around $35,000.

How much will refinancing your student loan save you?

Refinancing your student loans could save you a few dollars every month or hundreds of dollars a year. How much you save depends on what you’re currently paying and what you could be paying when you refinance.

For example, let’s say you have a $20,000 balance remaining with a 5 percent interest rate and a five-year repayment term. In this scenario, you’ll have a $377.42 monthly payment. If you refinance into a new loan with the same repayment term but a 4 percent interest rate, your monthly payment will be $368.33. That’s a monthly savings of $9.09 a month but an overall savings of $545.65 over the life of the loan.

And that’s just a drop of a single percentage point; if you can get a significantly lower rate, you could see savings of thousands of dollars. To find out how much you could save, try using a student loan refinancing calculator.

Alternatives to refinancing your student loans

If refinancing isn’t the right move for you at the moment, there are other alternatives you may want to consider, including:

• Loan consolidation: This involves combining multiple federal student loans into one loan, potentially simplifying your loan management. However, it could extend your repayment period and raise the total interest you pay over the life of your loan.
• Income-driven repayment (IDR) plans: These are federal loan repayment plans that base your monthly payment on your income and family size. You might even qualify for loan forgiveness after 20-25 years of payments.
• Student loan forgiveness programs: Certain professions offer loan forgiveness programs, such as the Public Service Loan Forgiveness (PSLF) for those working in public service roles.
• Deferment and forbearance: These options allow you to temporarily pause your loan payments during times of financial hardship. However, interest might continue to accrue during this period.
• Employer assistance programs: Some employers offer student loan repayment assistance as part of their benefits package. Check with your human resources department to see if this is an option for you.

Remember, it’s important to carefully evaluate your financial situation and loan terms before deciding on the best strategy for managing your student loans.

The bottom line

Refinancing your student loans can be a smart financial move if it results in significant savings. However, it is crucial to assess your individual circumstances and eligibility before making a decision. With the current uncertainty surrounding federal loans and interest rates, it is important to carefully consider all options and alternatives before committing to refinancing. By taking the time to carefully evaluate your options, you can make the best decision for managing your student loans and achieving financial stability.