When Does It Make Sense to Refinance Student Loans
If you have private student loans and are eligible for a lower interest rate through refinancing, it is likely a good idea. If you have federal loans and are not dependent on federal benefits and repayment plans, and are eligible for a lower rate, then it is worth considering as well.
As tuition and other costs rise, the percentage of students graduating with significant debt has risen along with it: it’s not uncommon for graduates to end up with more than $28,000 in student loans. For many Americans, this means monthly student loan payments that may take a significant chunk out of their budget.
Refinancing your student loans can be a great option for lowering these monthly payments and for saving money in interest. If you qualify for student loan refinancing, your loan or loans will be replaced by a new loan with a potentially lower interest rate. In many cases, refinancing can result in lower monthly payments and/or paying less over the life of the loan.
Refinancing is not for everyone, however. Borrowers must meet lender criteria including having a good credit score to be eligible for refinancing, which can be difficult. Additionally, if you refinance federal student loans, you lose the ability to utilize the repayment and forgiveness programs only available for those loans.
On this page:
- What is Student Loan Refinancing?
- What are the Benefits of Refinancing Student Loans?
- What are the Downsides of Refinancing Student Loans?
- When Should You Refinance Your Student Loans?
- Refinancing Federal Student Loans vs. Private Student Loans
- When Is It a Bad Idea to Refinance Your Student Loans?
What is Student Loan Refinancing?
When you refinance student loans, you take out a new loan to pay off one or more of your existing student loans. This new loan has its own repayment terms and interest rate and replaces your past loans. They show up on your credit report as paid off, while your new loan is subject to credit reporting.
You have to go through the process of having your credit approved, just as you would with any other loan program. If you can’t get approved on your own, adding a cosigner can help you qualify for a loan and a potentially lower interest rate. If you’re wondering “should I refinance my student loans,” there are specific pros and cons to consider.
What are the Benefits of Refinancing Student Loans?
Refinancing can be a smart move, depending on your situation. Here are some of the advantages of student loan refinancing:
- Potentially lower monthly payment
- Lower interest rate
- Pay less on your student loans over time
- Possibly pay off your loans faster
- Easier to manage your loans with only one payment due date each month
What are the Downsides of Refinancing Student Loans?
On the other hand, there are some disadvantages to getting a refinance loan.
First of all, you might lose access to certain programs only available with federal student loans, like Public Service Loan Forgiveness and Income-Driven Repayment plans. Refinancing replaces your federal loans with a new loan that’s private, so you’re no longer eligible for these federal programs.
Your new lender might not have the same benefits and loan terms as your old lenders. Maybe the new financial institution doesn’t have a hardship program or other perks you were used to with your old student loans. Carefully look at the terms and conditions of the new loan to ensure that you are getting what you need from the deal.
Refinancing Federal Student Loans vs. Private Student Loans
As mentioned, when you refinance federal loans, you lose access to federal programs for loan forgiveness and repayment based on your income. With private student loans, you simply have a new loan with a new company and your benefits will likely not change too much.
When refinancing, though, you don’t have to refinance all of your loans together; you can choose which you want to refinance. So, it might make sense to consolidate federal loans with a Direct Consolidation Loan to get down to one payment. Then, if you have private loans, you can refinance only the private loans. That way, you maintain federal benefits for a portion of your student loans.
If you aren’t dependent on federal repayment programs and benefits, however, it may make sense to refinance them if you can receive a lower interest rate that can save you money.
When Should You Refinance Your Student Loans?
In some cases, it makes sense to refinance your student loans. Here are some reasons you might consider student loan refinancing—even for federal loans.
You Have a Stable Income
If your income is stable, you might be able to handle making your loan payments without too much trouble. And, if you have a high income that won’t qualify you for an income-driven plan, it can make sense to refinance federal loans along with private student loans in an effort to get out of debt faster.
You Have Good Credit
With good credit, you can typically qualify for a lower interest rate on your loans. Federal loan rates are set at a specific level, and well-qualified borrowers can usually get a rate that is lower than the federal loan rate if they have a good credit history. Additionally, refinancing rates on private student loans can often beat the original rate.
If you have good or excellent credit and can save money by refinancing, it might be a smart move for you.
Your Current Loans Have 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. A Grad PLUS Loan, for example, has a higher interest rate than other federal loans, and refinancing might bring it down and save you money with a lower rate on your student debt.
In addition, if you took out a private student loan when you had little-to-no credit history, you may now qualify for a lower rate if you’ve built your credit.
You Have Variable Interest Rates
While you don’t have to worry about variable rates with federal student loans, some private loans have them. With interest rates trending higher, you risk paying more on your student loans over time—and ending up with higher monthly payments than you expected. Refinancing can help you lock in a fixed rate loan, so you don’t have to worry about variations down the road.
You Have Multiple Loans
Managing several loans each with different loan amounts can be difficult. You have multiple payments, multiple due dates, and multiple interest rates. All of that can get confusing and time-consuming.
Once you refinance, you get a new loan with one payment, due date, and interest rate. It saves time and effort. Even if you decide not to include your federal loans in your refinancing, you can benefit. Consolidate federal debt, refinance private debt, and now you only have two payments to worry about instead of several.
Your Grace Periods Have Expired
You usually have some time after you leave school before you have to begin repayment on your loans. This gives you a chance to get a job and get settled. As your grace period comes to an end and you’re required to begin making payments, this can be a good time to refinance your loans to a more manageable payment.
Some borrowers want to refinance before leaving school. While this is possible with some refinance lenders, in many cases, it’s difficult because you don’t have an employment history or stable income, so the lender can’t be sure you can afford your payments.
When Is It a Bad Idea to Refinance Your Student Loans?
Sometimes it just doesn’t make sense to refinance your loans. Here are some situations that shouldn’t be used as an excuse for student loan refinancing.
You Have Federal Loans With Certain Repayment Plans
Once you refinance federal student loans, you no longer have access to income-driven repayment plans. If you’re unsure that you’ll be able to make ends meet in the future, refinancing federal loans can be a bad idea because you lose the protection of income-based repayment and other flexible repayment plans and repayment options.
You’re Exploring Student Loan Forgiveness
Some federal and state loan forgiveness plans only apply to federal loans. Public Service Loan Forgiveness is a good example. When you refinance to a new loan with a private lender, you can’t use these types of loan forgiveness programs. If you think you might use a forgiveness program, think twice before refinancing.
You 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 refinance.
You’re in Default
Most hardship plans are designed to be put into place before you end up in default. Most lenders won’t agree to refinance your student loans if you’re in default. If you want student loan refinancing, you need to rehabilitate your loans before moving forward.
For some borrowers, student loan refinancing makes a lot of sense. If you’ve got a stable income and aren’t dependent on income-driven repayment plans or loan forgiveness, it can make sense to refinance student loans—as long as you understand the federal protections you’re giving up.
When you have private student loans, refinancing can make sense when you find a lower interest rate and your credit situation allows you to access the best deal.
However, if you still want federal protections, or if your credit situation has been damaged by bankruptcy or default, refinancing may not make sense. Explore other options to begin bettering your finances if refinancing could be more costly or problematic.
Author: Miranda Marquit
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