Should I Refinance My Student Loans? What To Consider

While paying off any kind of student loans isn’t exactly anyone’s idea of a good time, refinancing them can make your debt repayment journey a bit easier. In most cases, you can simplify your payments and save money at the same time. You may also be able to pay off your debt faster.

Whether you want to refinance either federal and private loans, there are pros and cons to consider.

As with all financial decisions, it’s not the right fit for everyone, so keep some important considerations in mind before refinancing your student loans.

What Does It Mean To Refinance Student Loans?

Refinancing your student loans is similar to other debt consolidation processes – a lender will pay off your existing student loans and replace it with a new one, hopefully with better terms. Borrowers may be able to qualify for a lower interest rate and other options such as a longer repayment period. 

Many borrowers seriously consider refinancing student loans when they want to save money or better afford their payments. Refinancing to a lower interest rate can save money on monthly payments or throughout the life of the loan.

For example, say you took out $20,000 in student loans with a 7% interest rate over the next 15 years. That means you’ll be paying $179.77 each month. If you were to refinance that to one offering a 5% interest rate, also over the next 15 years, your monthly payments will be lowered to $158.16, saving you $3,890 overall.

Borrowers may also consider refinancing if they want to better afford their loan payments. Refinancing to a longer repayment period, for example, typically means a lower monthly payment; however, because the loan term is longer, you may be paying more interest overall.

Pros And Cons Of Student Loan Refinancing

As with any financial decision, it’s crucial to look at the benefits and drawbacks of student loan refinancing.

Pros

• Pay less in interest: Given the right situation, refinancing your student loans can drastically reduce the amount of interest you’ll pay over the life of your loan. It can free up money you might want to put toward other financial goals, like buying a car or saving for a down payment on a house.
• Simplify payments: If you have multiple student loan payments, refinancing them into one loan could mean you’re not worrying about numerous due dates.
• Ability to alter repayment term: Whether you want to shorten or lengthen your loan term, refinancing allows you to select a payment plan that works better for your financial situation.

Cons

• You’ll lose federal loan benefits: You can only refinance to a private student loan, so you won’t be able to take advantage of federal loan benefits. For example, if you’re trying to pursue student loan forgiveness or public service loan forgiveness, refinancing your loans to private ones will make you ineligible. Additionally, if you anticipate a drop in your income and you have federal loans, it might not make sense to refinance since you’ll lose out on programs like income-driven repayment plans, which could lower your payments when your income goes down.
• Could pay more in interest: Refinancing won’t make sense if it could take you longer to pay off a loan. Say you have a few years to pay off your student loans, refinancing to a new one could mean a longer term and the lower interest rate won’t make much of a difference. In other words, stretching out your payments could mean that you’re paying more in interest overall.
• May not qualify for better loans: Depending on your financial profile, you may find it hard to qualify for a new loan with a lower interest rate. In this case, you may be better off sticking to your loan. Or, you could consider applying with a co-signer with good credit, which could help you qualify for better loan rates and terms.

Should I Refinance My Student Loans?

Deciding whether you should refinance student loans needs to be based on your financial situation. If you can qualify, you may benefit from having smaller monthly payments on your student loan debt.

In order to refinance, borrowers must qualify with their lender. Some of the most common eligibility requirements for refinancing student loans include:

• Credit score: In general, the better your credit score, the more likely you’ll be able to qualify for student loan refinancing and at a more competitive rate. The minimum credit score will vary depending on the lender, but it’s probably safe to assume you’ll need at least a good credit score.
• Income: Most lenders will require that you have some sort of steady income. You may be asked for proof of income when applying for a loan so lenders can see that you’re able to afford making payments towards your debt. 
• Debt-to-income ratio (DTI): Your DTI compares your gross income to your loan payments. The lower your DTI, the more likely it’ll seem you can manage your finances well. Lenders are more likely to approve you for a student loan refinance if your DTI is within their acceptable range. Each lender will have their own requirements, so it’s best to check with them before submitting an application.

When To Refinance Student Loans

It may make sense to refinance student loans in certain situations, such as:

• You have a history of on-time payments: Paying back debt consistently and on time will signal to lenders that you’re a trustworthy borrower. Lenders will look at your credit history to determine whether to approve you for a refinance.
• You have good credit: The higher your credit score, the more likely you’ll be approved at a competitive interest rate. You may be able to qualify with a co-signer if your credit isn’t great, but there are risks associated with that, too.
• You have student loans with high rates:  Interest rates that are high indicate that you have an opportunity to find ones that are lower, nabbing you some significant savings. If you have a variable rate loan, consider refinancing to a lower fixed-rate one
• You have private loans and can qualify for a lower rate: Refinancing from one private loan to another is a good bet since you’re not at risk of losing any federal loan benefits or programs. Generally, as long as refinancing means significant savings, it’s a great time to do so. Even if you don’t qualify for the best rates, if it’s lower than what you have now, you can save money.
• You want to lower your monthly payments: If you’re struggling to keep up with current payments and don’t have access to or can’t qualify for income-driven repayment plans, refinancing can offer you some much needed relief.
• You want to release a co-signer: Some lenders or student loans won’t allow you to release a co-signer. If so and you no longer want your co-signer to be part of your loan, then refinancing to a new student loan can help you do so.

When You Shouldn’t Refinance Student Loans

Here are some reasons why you might want to hold off refinancing:

• If your credit history needs improvement: if you have poor credit history or a low credit score, you may not qualify for loans with lower interest rates compared to what you have now. In this case, you may want to hold off until you can improve your credit.
• You currently qualify for (or anticipate qualifying for) federal loan benefits: If you want to take advantage of programs such as loan forgiveness or income-driven repayment plans, you could be better off not refinancing.
• Interest rates are high: High interest rates won’t save you any money, especially if your current student loans are lower than what you see in your research.
• You won’t save money in the long run: if you end up qualifying for a new loan, you may have to pay application or origination fees. If the savings aren’t enough to offset these fees, then refinancing may not be the best option.

Alternatives To Student Loan Refinancing

If you end up deciding that student loan refinancing isn’t the best move for you, there are alternatives to help you save money, such as making extra payments and student loan consolidation.

Student Loan Consolidation

Student loan consolidation lets borrowers combine their student debt payments into one – a tactic more commonly used with federal student loans. Refinancing federal loans with a direct consolidation loan can also help you become eligible for other types of repayment plans, or even student loan forgiveness. The main benefits of this methods are to help lower your monthly payments and streamline your repayment plan.

Student Loan Deferment Or Forbearance

Either loan deferment or forbearance allow you to temporarily pause your student loan payments. Or, you can negotiate making a smaller payment. Both options are for those who are struggling with meeting their daily needs. You’ll need to submit a request with your loan servicer, including the length of time of your forbearance.

Keep in mind that you may still accumulate interest during the pause. Discuss your options with your lender before applying.

Extra Student Loan Payments

Making extra student loan payments can help you get debt-free faster and lower the amount of interest you’ll pay overall. Assuming you can afford to make additional payments and won’t have to pay any prepayment penalties, you can consider this option. Make sure the amount you’re paying goes toward the principal.

The Bottom Line

Refinancing your student loans comes with many benefits such as the potential to save money in interest paid, simplifying payments, and the ability to better afford your student loan payments. It’s best to consider whether it makes sense to do so — if your credit situation isn’t great, you may not even qualify for student loan refinancing. If you qualify for other federal programs to make student loan repayment easier, it may not make sense to refinance, either.

Refinancing your student loans is one of many steps you can take to get on track with your finances. To more effectively keep tabs on your monthly bills (including student loan payments), manage spending and establish other financial goals, consider creating an account with Rocket Money℠.