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When borrowers first hear that it’s an option, they often ask themselves, “Should I refinance my student loans?”
That’s a great question.
After the dust settles and the reality of student loan debt repayment hits, many college graduates are forced to ask that very question. The answer, like most things in life, is not always cut and dry.
Refinancing student loans can potentially lower your interest rate, decrease your monthly student loan payment, or help you pay off your student loans faster. But all of those positives are subject to a host of factors such as your loan type, rates, and repayment options, as well as your credit score and monthly income.
So, back to your original question. Should I refinance my student loans? Here are seven questions you need to ask before deciding:
- Will Student Loan Refinancing Save You Money?
- Will the Refinance Lower Your Monthly Payment?
- Do You Need a Cosigner?
- Are You Willing to Lose Federal Loan Protections If You Refinance?
- What Do You Need From the Refinance Lender?
- Will Your Credit Score Increase Significantly Soon?
- Is Federal Student Loan Consolidation a Better Choice?
1. Will Student Loan Refinancing Save You Money?
Most borrowers refinance to lower student loan interest rates. When you receive a lower interest rate, you will pay less in interest over the life of the loan as long as the new term length is shorter or equal to the remaining term on your current loans (and, sometimes, even if it is longer).
If approved for refinancing, be sure to check if your new interest rate is lower than those of the loans you are trying to refinance. If it isn’t, then refinancing probably doesn’t make much sense for you.
Even if your rates are lower, be sure to consider the total overall loan cost. If you extend the repayment term to get a lower monthly payment, you might end up paying more over the life of the loan, even with a lower interest rate.
Let’s say you have $10,000 left on your student loans with an interest rate of 6% and a 10-year repayment term. If you refinance at 5.25% but your repayment term increases to 15 years, your payments will decrease — but you’ll end up repaying an additional $1,000 by the time your term ends.
2. Will the Refinance Lower Your Monthly Payment?
Many borrowers also refinance to lower student loan payments, but student loan refinancing doesn’t always guarantee this. In some cases, it can have the opposite effect. The best way to determine if your payments will be lowered is to do a side-by-side comparison.
Look at the monthly payment, rates, and terms of your current loans and compare them to your offer from a refinance lender. To do this, we suggest using a student loan calculator, which can help you analyze several scenarios.
Check out these three calculators to better understand your loan:
Knowing your “sweet spot” when it comes to the interest rates and terms can help you identify whether an offer represents a good opportunity or you’re better offer staying your current repayment course.
As a general rule of thumb, if you keep your repayment term the same or extend it while securing a lower interest rate, your monthly payments will likely be lower. If you shorten your repayment term, your payment may go up or down depending on how much lower your new interest rate is.
3. Do You Need a Cosigner?
Student loan refinancing rates, terms, and even approval are contingent on a variety of factors, most of which are tied to the perceived financial risk associated with the borrower. Lenders often look at your income, debt-to-income (DTI) ratio, and credit score when evaluating your application. If you have a steady income, a reasonable DTI, and a good credit score (650+) a cosigner may not be necessary.
However, if you don’t meet those requirements, a cosigner could increase your chances of being approved and securing lower rates and better repayment terms.
4. Are You Willing to Lose Federal Loan Protections If You Refinance?
When you refinance your federal student loans, they will become one new private student loan. This means you are no longer eligible for the benefits, protections, and repayment plans that are only available for federal student loan borrowers.
Some of these include income-driven repayment plans, loan forgiveness programs, and forbearance and deferment options. These safety net provisions can help borrowers during emergencies or other life changes that can impact their ability to remain current on monthly payments.
That’s not to suggest you shouldn’t refinance federal loans, but it does mean you should do so with caution. If you’re confident you can continue meeting the requirements now and in the future, it may be a good idea. If you are currently facing financial instability or see that as a likely part of your future, refinancing your old loans into a private loan may not be the best decision.
5. What Do You Need From the Refinance Lender?
There are many lenders that refinance student loans, which means you’ll need to shop around to find the perfect fit. Before you start, determine what you need from the financial institutions with which you’re applying.
Here are a few things you’ll need to find out:
- Approximate new loan rate
- Repayment term lengths available
- Eligibility requirements, including credit threshold, income, and DTI limits
- Minimum or maximum student debt requirements (i.e. how much debt can you refinance through the lender?)
- Financial hardship options (i.e. will they pause your payments should you lose your job or otherwise encounter a financial setback?)
- Cosigner release options (i.e. can your cosigner be released from the loan under certain circumstances, and what are those circumstances?)
- Rate reduction opportunities (e.g. autopay)
- Additional benefits offered by the lender (e.g. discounted rates on future loans, educational or professional resources)
By determining the aforementioned items, you will get a better picture of what your future relationship with the student loan refinancing lender will be like while making the best decision for your needs.
6. Will Your Credit Score Increase Significantly Soon?
If you have been working on (or plan to work on) building your credit and anticipate that it will increase significantly in the coming weeks or months, it may be worth waiting to apply for student loan refinancing so you can receive a lower interest rate.
If you do not anticipate that your credit score will change in the near future, it may make sense to see what kind of rates you qualify for now.
7. Is Federal Student Loan Consolidation a Better Choice?
If you have federal loans, you may want to consider federal consolidation as opposed to student loan refinancing. Though the rates (which are a weighted average of the rates for all loans being consolidated, plus a small percentage more) cannot be lower, consolidation does have its perks.
That’s particularly true if you plan on taking advantage of income-driven repayment plans or federal benefits. Many protections offered to federal borrowers, like public service loan forgiveness and capping payments at a percentage of your discretionary income, are usually not available when you refinance those loans with a private lender.
For better or worse, refinancing your student loans can have long-lasting implications for your financial future, so it’s important to evaluate all of your options and proposed loan terms from refinancing companies before jumping into a new loan. These seven questions should help you lay the groundwork for a good decision based on your individual circumstances.
Author: Jeff Gitlen
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