How to Decide If You Should Refinance Student Loans
If you are eligible for a lower interest rate than what you are currently paying on your student loans, refinancing usually makes sense as long as you aren't dependent on federal benefits such as income-driven repayment plans and student loan forgiveness.
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As the costs of college continue to increase, the percentage of students graduating with significant debt has risen along with it. Most borrowers are now graduating with more than $28,000 in student loans.
Refinancing your student loans can be a great option to save on interest costs and to potentially lower your monthly payment. If you qualify for student loan refinancing, your loan or loans will be replaced by a new loan with a (hopefully) lower interest rate and new monthly payment.
Refinancing is not for everyone, however.
Borrowers must meet lenders’ eligibility requirements—including having a good credit score, stable income, and a track record of on-time payments. Additionally, if you refinance federal student loans, you lose access to federal repayment plans and forgiveness programs only available for those loans.
On this page:
- When You Shouldn’t Refinance Your Student Loans
- When You Should Refinance Your Student Loans
- Calculate How Much You Can Save by Refinancing
- How to Find a Student Loan Refinance Lender
- Deciding Whether to Refinance or Not: An Example
- Alternatives to Student Loan Refinancing
When You Shouldn’t Refinance Student Loans
To start, let’s go over some situations when it doesn’t make sense to refinance your student loans.
- You May Need an Income-Driven Repayment Plan. Once you refinance federal student loans, you no longer have access to income-driven repayment plans. These plans limit your monthly payments to a percentage of your income which can be helpful if you lose your job or run into another kind of financial hardship.
- You’re Exploring Student Loan Forgiveness. Most student loan forgiveness programs are only for federal student loans. When you refinance with a private lender, you will be ineligible for these programs such as Public Service Loan Forgiveness.
- You’ve Declared Bankruptcy. Bankruptcy won’t wipe out student loans in most cases, and once you declare bankruptcy, many lenders won’t approve you for student loan refinancing.
- You’re in Default or Have Missed Many Payments. Most lenders won’t refinance your student loans if you’re in default or have missed many payments.
- You Have a Bad Credit Score. Lenders require you to have a good credit score to refinance your student loans. If you have bad credit, you should work on building your score before applying.
When You Should Refinance Your Student Loans
If none of the above situations apply to you, you’ll now want to consider when it makes sense to refinance your student loans. Here are some reasons when you should consider student loan refinancing—even for federal loans.
- You Have Stable Income. If your income is stable, you should be able to make your loan payments without too much trouble, which lenders like to see. Also, you likely won’t need to depend on income-driven repayment plans in the future, so refinancing your federal loans may be a safe move.
- You Have a Good Credit Score. With good credit, you can typically qualify for a lower interest rate than you are currently paying on both your federal and/or private loans. A lower rate can save you thousands over the life of your loan(s).
- You Have Loans With High Interest Rates. Even if you don’t qualify for the lowest interest rates, you could still benefit from refinancing to a new loan if your current loan rates are high. Federal PLUS Loans and private student loans often have high interest rates that could benefit from being refinanced.
- You Have Variable Interest Rates. While you don’t have to worry about variable rates with federal student loans, some private loans have them. If interest rates increase, you risk paying more on your student loans over time. Refinancing can help you lock in a fixed rate so you don’t have to worry about unexpected rate increases down the road.
- You Want to Consolidate Multiple Loans. Managing several loans each with different loan amounts can be difficult. You have multiple payments, due dates, and interest rates. All of that can get confusing and time consuming. When you refinance, you can consolidate both federal and private student loans together into one, more manageable loan.
Calculate How Much Refinancing Can Save You
If you think refinancing may make sense for you, you may be wondering just how much you could save. Knowing this can help you decide if going through the process is worth your time.
You can use our calculator below to find out how much you could save based on your personal situation.
How to Find a Student Loan Refinancing Lender
If you are ready to apply for student loan refinancing, the next step is to compare lenders to find one that works for you.
The easiest way to get started is by checking out our Best Student Loan Refinancing Companies page.
In this guide, we go over our top choices for student loan refinancing based on our Editorial Ratings. You can also find answers to frequently asked questions and links to full reviews of each company.
You can also check out our Refinance Parent PLUS Loans guide if you are specifically thinking about refinancing that type of loan.
>> Read more: How to Refinance Student Loans
Deciding Whether to Refinance or Not: An Example
LendEDU CEO Nate Matherson’s personal experience with deciding if he should refinance his student loans
When I graduated from college, the interest rates on my Sallie Mae student loans ranged from about 8.75% to 9.75%. And at the time, all of these loans had variable interest rates that were increasing.
I made the decision to refinance because I wanted to lower my interest rate, shorten my term length, and lock in a fixed rate for the life of my loans.
About a year after graduation, I refinanced with College Ave to a fixed interest rate of 6% and a 7-year term.
It is nice to know that my interest rate won’t be changing, and that I am pushing myself to pay off my student loan debt faster. Over the life of my student loan repayment I will be saving over $10,000 dollars in interest.
Alternatives to Refinancing Student Loans
If you have decided that refinancing your student loans isn’t right for you, there are still some things you can do to save on your student loans or to make repayment more manageable.
- If You Want to Consolidate Federal Student Loans. If you aren’t ready to refinance federal loans to a private loan, you can still consolidate most federal student loans through a Direct Consolidation Loan. This won’t save you money but it can make repayment more manageable.
- If You Want to Save on Repayment. There are many other ways to save on student loan repayment aside from refinancing. Most of the actions involve paying off your student loans faster to save on interest costs.
- If You Want to Lower Your Monthly Payments. There are other ways to lower your monthly payments aside from refinancing. Most of these involve extending your repayment term. Just be aware that doing so will increase the total cost of your loan because you will accrue more interest.
Author: Miranda Marquit