When Should I Refinance My Student Loans?

Wondering “Should I refinance my student loans?” You’re not alone.

Before doing so, there are many factors 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.

Refinancing your student loans means taking all of them and consolidating them into one payment that has a lower interest rate. That way you can simplify your payments and save money at the same time. You may also be able to pay off your debt faster.

Sounds amazing, doesn’t it? If you’re wondering if you can you refinance your student loans, the short answer is that you can do it with both federal and private loans but there are downsides to it.

As with all financial decisions, it’s not the right fit for everyone, so let’s take a look at some important considerations before refinancing.

Refinancing a student loan is a process similar to other types of debt consolidation loans – a lender will pay off your existing student loans and replace it with a new one (theirs) that offers a lower interest rate or a longer repayment term. The theory behind refinancing at a lower interest rate is that doing so can save you money throughout the lifetime of the loan because you’re paying less in interest.

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.

Refinancing either federal or private loans is an option even if you’ve already done so in the past. Though you can’t refinance private loans back to federal ones, it can work the other way around.

When refinancing student loans, you’ll want to make sure you have a few things in place before doing so, or else there may not be much point.

• 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. To find out your score, you can sign up for free credit monitoring services like ones that are included with your credit card provider or companies like Rocket Homes^SM.
• You have sufficient income – Lenders will look at whether you can afford to pay off refinanced loans, so if you got a raise or landed a new job with a higher income, you have a higher chance of qualifying. Besides, it might mean you can pay off that debt faster.
• 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.

Refinancing your student loans can affect your credit score, but not as much as you think.

When you’re shopping around, there are plenty of companies that will let you prequalify to see what your rate could be. This results in a soft credit check, which won’t affect your score.

When you’re ready to complete a full application, the lender will conduct what’s known as a hard credit check. This could affect your score. Actions like on-time payments will help reverse dips in your credit score.

If you submit full applications to multiple lenders, your score could be more impacted. That’s why it’s better to see what you can qualify for, then submit an application once you’ve narrowed down your choices.

Given the right situation, refinancing your student loans can drastically reduce the amount of interest you’ll pay throughout the lifetime of your loan. In other words, it can free up money that would have gone toward debt, and you’ll be able to pay it off faster if you make the same monthly payments.

Even though there may be fees to refinance – ones like origination or application fees – these costs might outweigh the savings you’ll get. Considering you can refinance more than once, you can lock down a better rate if you happen to find one in the future.

Refinancing student loans won’t make sense if you want to keep your federal loan benefits. For example, if you’re trying to pursue student loan forgiveness, refinancing them won’t make you eligible for them anymore. This includes other programs such as Teacher Loan Forgiveness and Public Service Loan Forgiveness.

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.

Whichever type of loan it is, 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.

The good news is that you can refinance your student loans numerous times, and it can save you money if you do your calculations carefully. Consider asking your current lender if you’ve proven to be a creditworthy borrower with a history of on-time payments, or shop around every once in a while to see what current rates care.

Be careful – refinancing too often might affect your credit score, as every hard inquiry can put a ding in it. Refinancing can also cost you in fees, so doing it often could mean you’re not really saving yourself that much money.

Refinancing can offer huge financial benefits in the right situation. Here’s how to tell if it’s a good idea:

• You have loans with high interest rates – This reason is even more pertinent if you have variable rate loans, as your rate could go even higher in the future. Shop around to see if you can get a lower fixed rate, which can save you big bucks.
• Your credit situation is better – If your credit score has gone up, your income has increased and you have a history of on-time payments, chances are you’re more likely to be approved for a much lower rate.
• You have private loans – You don’t need to worry about losing federal loan benefits, so you might as well try to see if you can qualify for a lower rate.

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

• 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.
• Your current credit situation has worsened – If your credit score is low, it’s not likely that you’ll qualify for a better rate, if at all.
• You want to extend the term of your loan – Refinancing to a longer loan term, even if it’s a lower monthly payment, could mean you’re paying more overall. Be careful and do your calculations before proceeding.

Understanding when you should refinance your student loans is crucial if you want to save money and improve your overall financial situation. That way when you’re ready to do so, you’ll know that your decision will benefit you. For more articles like this one, check out Rocket HQ^SM’s personal finance and credit Learning Centers.