When to Refinance Your Student Loans

When refinancing your student loans, you want to ensure you get the best deal possible without losing valuable benefits. Timing is everything; making the right move can save you money and simplify the loan repayment process.

Keep reading because we’ll share when refinancing could be a smart choice for your financial situation and when it might not be the best option. By the end, you’ll have the insights you need to make a well-informed decision about when to refinance your student loans.

When you should refinance your student loans 

Circumstances when you should consider refinancing your student loans include when you can get better rates and terms, when your current student loan payments are too high, when you want to simplify the repayment process, or when you need to remove a cosigner. 

Refinancing your student loans makes sense when the conditions are right. Here are situations where it might be the right move.

1. You can get better rates and terms

If interest rates have decreased or your credit score has improved since you took out the student loan, you might be able to get a lower interest rate with a refinance.

This means paying less interest over time and possibly the option to adjust the length of your loan, whether you want to pay it off faster or reduce your monthly payments by extending the term.

Remember that this option is only available for a private student loan refinance. You can’t lower your rate with a federal Direct Consolidation Loan (the federal equivalent of refinancing your loans). Instead, your rate is based on the weighted average of your federal student loan rates. 

Our expert on what to consider before refinancing student loans

Chloe Moore

CFP®

Before you consider refinancing your student loans, ensure you have a strong credit score, a steady income, and a low debt-to-income ratio. You should also consider how the new payment affects your budget and how much you’ll save in total interest over the life of the loan.

2. Your student loan payments are too high

If your current monthly student loan payments are straining your budget, refinancing could help by spreading out the payments over a longer period. This would lower your monthly outflow; however, it might increase the total amount of interest you pay over the life of the loan.

3. You want to simplify the repayment process

Juggling multiple student loans with unique rates, payment schedules, and lenders can be a headache. Refinancing lets you combine all your loans into a single one, with just one payment to worry about each month. 

4. You need to remove a cosigner

Perhaps a parent or another person cosigned your loan to help you qualify, but now you want to take full responsibility. Refinancing is one way to remove the cosigner from the loan, freeing them from the obligation and potentially improving their credit score.

Some lenders will allow you to remove a cosigner without refinancing the loan. Before you consider a refinance, check with your lender to see whether it has other options for removing a cosigner. 

When you shouldn’t refinance your student loans 

Before refinancing your student loans, it’s essential to consider whether it’s the right move. Situations, where you shouldn’t refinance, include if you don’t want to lose federal student loan benefits if you can’t afford the new payment if you’re getting another loan soon, or if you have the credit or financial issues.

Here are more details about when refinancing your student loans might not make sense:

1. You might lose federal student loan benefits

Some of the best features of federal student loans are their benefits. For instance, you can get help if you’re facing financial hardship, federal loans offer various loan forgiveness programs, and you might be able to sign up for an income-driven repayment plan. 

If you refinance your federal student loans into a private one, you’ll lose all federal benefits. Before refinancing your federal student loans into a new private loan, consider whether you might need to use these benefits in the future. 

You can’t undo a refinance, so weighing this decision carefully can help you avoid regret. Your future self will thank you.

Our expert’s advice: Lower rates vs. federal benefits

Chloe Moore

CFP®

Refinancing your student loans means losing the protections and benefits of federal student loans and transferring them to a private lender. Before making this decision, ensure you’re in a financial position to eventually pay the loan off. This means steady income and employment and a manageable loan amount. If you are unsure about your future job stability, believe you may qualify for loan forgiveness soon or are not confident you can pay off the loans, it may be worth continuing to pay a higher interest rate to keep your loans in the federal system.

2. You can’t afford the new payment

Getting into a loan you can’t afford to repay doesn’t make sense. Whenever you take out a loan—whether a new loan or a refinance—a critical step is to ensure you have room in your budget for the payment. 

Before you sign on the dotted line, evaluate whether you can afford the payment. If not, consider other options. 

For example, if you’re experiencing a short-term financial hardship, speak with your lender to see whether it might be willing to modify your loan temporarily. 

3. You’re getting another loan soon

When you refinance your student loans with a private lender, you can expect the lender to pull a hard credit check. The new loan and credit check can lower your credit score by a few points. 

Getting your credit as strong as possible is essential whenever you plan to get a new loan, such as a mortgage. It’s best to avoid any activity that might lower your credit score, even if the reduction is temporary. 

4. You have credit or finance issues

If you have bad credit or any negative items on your credit report, you might not be able to qualify for a low interest rate on a new student loan. Depending on the severity of the issues, it’s possible you might not be approved at all. 

You can expect the lender to review your finances before approving you for the refinance. If you don’t have a steady source of income or are experiencing financial difficulties, you may not be approved. If you are approved, the interest rate will likely be high. 

Rather than refinancing your student loans, consider taking other actions to improve your credit and finances. For instance, work on reducing high-interest-rate debt, clear any delinquencies, and make your payments on time. 

Once your credit is in better shape, you can reconsider whether refinancing is right. 

How long should you wait to refinance your student loans after graduating?

How long you should wait to refinance your student loans after graduating is a personal decision, but it generally doesn’t make sense to do so while the loan is in its grace period (often six months). If you refinance your loans before the grace period ends, your payments will start early. 

Some borrowers want to start making payments right away, so waiting until the grace period ends won’t be something they’re worried about. However, if you want to take advantage of the grace period, you should delay refinancing your loans until the grace period ends. 

Ensure you have good credit and a stable income before applying for a refinance. If you’ve graduated from college but haven’t yet secured a steady job, hold off on refinancing until this happens. 

Not only are you more likely to qualify for the refinance with a steady income, but the terms may be better. Remember, the better qualified you are for the loan, the better the rates and terms the lender will be willing to give you.

How to refinance your student loans 

If you decide to refinance your student loans, the process starts by searching for a lender. You’ll then submit applications, compare rates and terms with multiple lenders, select a lender and agree to a hard credit check, provide required documents, and sign paperwork to finalize the loan. 

Once you’re ready to refinance your student loans, follow these steps: 

1. Search for a lender

The first step is to search for a lender specializing in student loans. Ways to perform this research, including: 

• Asking for recommendations from friends and those you trust.
• Conducting an online search on your own for lenders.
• Review our list of the best student loan refinance companies. 

As you conduct your research, consider such factors as the lender’s reputation, recent complaints or regulatory actions, and customer reviews. You should also consider the types of rates and terms it offers and how easy it is to apply for the loan. 

2. Submit applications online

After you’ve selected one or more lenders, the next step is to submit online applications. Many lenders will allow you to see whether you qualify and the rates you can get without affecting your credit score. 

Before applying, ensure you understand when and how your credit will be checked. In most cases, there will only be a hard credit check that affects your credit score if you decide to move forward with the loan. 

3. Compare rates and terms with multiple lenders

After you’ve applied with several lenders, the next step is to compare the offers. Take time to evaluate each offer and select the one that best suits your needs. 

Compare the rates and terms each lender offers. Remember that the annual percentage rate (APR) you see includes fees. So when shopping around, it’s much better to compare the loan’s APR rather than the interest rate. 

Also, remember to consider the total cost of the loan. Loans with longer repayment terms might have a lower monthly payment but a higher total cost because you’ll make interest payments for longer. 

4. Select a lender and agree to a hard credit check

Once you choose a lender, let it know you want to proceed. At this point, you must agree to a hard credit check. The lender will check your credit, and as long as nothing has changed from the soft credit check, move the loan forward to the next steps in the approval process. 

5. Provide required documents

Your lender might also require additional documentation, such as proof of income documentation (e.g., tax returns or pay stubs) and bank statements. Provide this information as fast as possible to expedite the loan approval. 

6. Sign the paperwork to finalize the loan

After the lender reviews your credit and verifies your income, it will decide whether your loan is approved. If your loan is approved (which should happen if everything matches your application), the next step is to sign the paperwork and finalize the loan. 

Most lenders will allow you to sign the paperwork online. Once you’ve signed everything, the lender will pay off your loans and set up your new loan. The only thing you’ll have left to do is begin making your new loan payment. 

Alternatives to student loan refinance if the time isn’t right

If refinancing your student loans doesn’t seem like the best option right now, these alternatives might better fit your current financial situation.

Consolidation

Federal student loan consolidation allows you to combine multiple federal loans into one, simplifying your payments by rolling them into a single monthly payment. The interest rate on a consolidated loan is a weighted average of your loans, which means it won’t lower your rate, but it can make managing your loans easier.

Consolidation also preserves your access to federal loan benefits such as income-driven repayment plans and potential forgiveness options.

Income-driven repayment plan

Income-driven repayment plans adjust your monthly federal loan payments based on your income and family size to reduce your payments if your income is low. These plans can make your payments more manageable. Any remaining balance may be forgiven after 20 to 25 years of qualifying payments. 

However, be aware that lower payments mean you’ll pay more interest over time, and any forgiven amount could be considered taxable income.

Student loan forgiveness

Various programs, such as Public Service Loan Forgiveness (PSLF), offer loan forgiveness to borrowers who meet specific criteria, such as working in qualifying public service jobs. Loan forgiveness could eliminate a significant portion or even all of your student loan debt after a certain period of qualifying payments. 

Remember that these programs often have strict eligibility requirements and long timelines, so it’s important to stay on track with your payments and job qualifications to avoid disqualification.

Employer assistance

Some employers provide student loan repayment assistance as part of their benefits package, contributing to your loan payments. This benefit can help reduce your loan balance without increasing your monthly out-of-pocket expenses, and employer contributions are often tax-free up to a certain amount. 

However, not all employers offer this benefit, and your employer might limit the amount it contributes. If you change jobs, you’ll likely lose this assistance.

Deferment and forbearance

Deferment and forbearance options allow you to suspend your student loan payments during periods of financial hardship or other qualifying circumstances. This can provide much-needed relief if you face unemployment or unexpected expenses, helping you avoid defaulting on your loans. 

Remember that interest may continue to accrue during deferment or forbearance, particularly on Unsubsidized Loans, which can increase your total loan balance over time. Therefore, these options are best as short-term solutions until you can resume regular payments.

FAQ

Will refinancing my student loans lower my monthly payment?

Refinancing your student loans can lower your monthly payment, but it depends on the new loan’s terms. Your monthly payment could decrease if you qualify for a lower interest rate or extend your repayment term. However, extending the repayment term may result in paying more interest over the life of the loan, even if your monthly payment is lower. It’s important to balance the immediate relief of a lower payment with the long-term costs.

Can you refinance your student loans more than once?

Yes, you can refinance your student loans more than once. There’s no limit to the number of times you can refinance as long as you qualify with a lender each time. Refinancing multiple times might be beneficial if your credit score improves, interest rates drop, or your financial situation changes. However, be mindful of any fees associated with refinancing, and consider whether the new terms offer enough benefits to justify the process.

Will refinancing my student loans hurt my credit score?

Refinancing your student loans might have a temporary impact on your credit score. When you apply for refinancing, lenders typically perform a hard inquiry on your credit report, which can cause a slight dip in your score. 

However, this impact is often minor and should be short-lived. Over time, refinancing can help improve your credit score if it leads to more manageable payments and consistent, on-time payments. As with any financial decision, weighing the potential short-term effects against the long-term benefits is important.

What is a good interest rate for student loan refinance?

A good interest rate for student loan refinancing depends on your credit profile, the type of loan, and market conditions. Rates can vary based on your credit score, income, and other factors. Shop around and compare offers from multiple lenders to find the best rate available to you. Consider whether a fixed or variable rate suits your financial situation and risk tolerance better.