Should I Refinance My Student Loans?
A student loan refinance could help you save interest and make your monthly payments easier to manage. Generally, though, refinancing is a better fit if you have private student loans and a robust credit profile.
Before refinancing your student loans, here are some ways to determine if it’s a smart move for you.
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When should I refinance my student loans?
Student loan refinancing involves a private lender paying off your current student loans and issuing you a new loan. The right time to refinance will depend on your situation and current interest rates.
Here are some reasons you might consider a student loan refinance:
- You have private student loans. Private student loans typically don’t have specific benefits or protections, meaning it’s easy to switch lenders anytime. It’s best to avoid refinancing federal student loans if you want to take advantage of government benefits (more on this below).
- You have a good credit score and stable finances. A good to excellent credit score of at least 650 is usually needed to refinance your student loans. You’ll also need a steady income to meet your new loan’s monthly payment. If you fall short, consider applying with a creditworthy cosigner.
- You qualify for a lower rate. Many lenders allow you to enter a few details to view potential offers without impacting your credit.
Ultimately, the best time to refinance your student loans is when you qualify for a lower rate. Compare lenders with our student loan refinance calculator and see how much you could save.
You can also refinance multiple times, allowing you to switch whenever you find a better offer. Some lenders, however, might charge refinancing fees, which could negate your savings.
When should I NOT refinance student loans?
While refinancing can save time and money, it’s not always the best debt solution.
Here are some reasons to avoid a student loan refinance:
- You don’t qualify for a lower interest rate. The main benefit of refinancing is lowering your student loan interest rate. If you don’t see or qualify for a better rate, it’s best to stick with your current lender.
- You have federal student loans. Be wary of refinancing federal student loans — by doing so, you’ll lose access to government protections like income-driven repayment plans, student loan forgiveness programs and deferment and forbearance.
- You have defaulted student loans or recently filed for bankruptcy. Most lenders require your loans to be in good standing before approving a refinance. That means you can’t typically refinance a student loan in default or have bankruptcy on your credit report. You can, however, consider refinancing after recovering from a student loan default.
- The refinance fees are too high. Some lenders charge origination or application fees to refinance your student loans. While more lenders offer fee-free refinances, you should read the small print before proceeding to ensure that you’ll save money in the long run.
How much will I save by refinancing?
Student loan refinancing can potentially save you thousands of dollars throughout the loan’s duration, depending on your balance, credit profile and new refinance rate.
For example, let’s say you have $30,000 in student loans with a 7% interest rate and a 10-year term. Your monthly payments would be $348.
If you refinance to a 5% rate, you could trim one year off your repayment time while keeping a similar monthly payment of $346. Plus, you’d save $4,483 in interest by refinancing to the lower rate.
Am I eligible to refinance my student loans?
Student loan refinancing companies tend to have stricter eligibility terms than federal student loans. Before you go through the hassle of applying, research the requirements for each lender.
While refinance requirements can vary, lenders will typically look at the following:
- Credit score: Your FICO Score helps determine your creditworthiness. Many lenders prefer a score of 650 or higher. It may be wise to try to boost your credit score before applying to improve your chances of getting the best rate.
- Debt-to-income ratio: Your debt-to-income (DTI) ratio shows lenders how much income goes to your monthly bills — the lower the ratio, the better. Many lenders require a DTI ratio below 50%.
- Monthly income: Lenders want to know if you can manage the monthly payments. You’ll likely need to provide recent pay stubs or tax returns for income verification.
- School details: Lenders typically require that the original student loan funds were used at a qualifying Title IV-accredited school in the United States. Further, most lenders require degree completion to refinance your loans, although Citizens Bank offers to finance borrowers who didn’t graduate.
Read our complete guide on how to refinance student loans for more details.
Alternatives to student loan refinancing
Looking for additional ways to manage your student loan debt? Here are some options, including some for your federal student loans.
- Student loan forgiveness: Eligible students can apply to have part or all of their student loans forgiven with programs such as Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness and military loan forgiveness.
- Direct Consolidation Loan: Combine your federal student loans into a Direct Consolidation Loan while retaining federally-sponsored benefits, such as access to income-driven repayment and student loan forgiveness.
- Employers offering student loan repayment assistance: Check out our list of 20 companies offering student loan repayment assistance.
Frequently asked questions
The federal government offers student loan forgiveness programs for federal student loans. Once you refinance your debt with a private lender, however, you lose access to all government benefits and protections.
There are other programs worth pursuing after refinancing your student loans. For example, state-sponsored student loan repayment assistance programs can help repay your debt in exchange for working in high-need areas or fields. Reach out to your state’s education authority to see what’s available where you are.
In general, refinancing federal student loans is not a good idea. When you refinance federal debt, you lose access to government programs, such as income-driven repayment plans, student loan forgiveness, and deferment and forbearance.
That said, if you’re nearing the end of your repayment term and see a lower rate, refinancing your federal loans could save you money.
Yes, you can refinance your student loans as many times as you want — and you can even do multiple refinances with the same lender. Watch out for origination or application fees, though, which could make repeat refinances less practical.
This depends on your situation. If you have a fixed rate and can manage your student loan payments, there’s no urgency to refinance. But if you struggle with your payments, refinancing could help with a lower monthly payment.
Just remember — every refinance should save money. Keep your eyes out for lower rates and check the numbers in our refinance calculator to ensure you get the best deal.
Applying for a new loan might cause your credit score to drop a few points, but on-time payments help improve your score over time. New credit applications account for 10% of your FICO Score, while payment history makes up 35%.
Many refinancing lenders let you view rate offers without any impact on your credit score. This helps you shop around for the best deal before undergoing a hard credit check.
Your DTI ratio should remain the same since you’re simply combining your current loans into one instead of taking on new debt.
Student loan interest rates are closely connected to the federal funds rate. So when there’s a Federal Reserve rate hike, private lenders tend to follow suit and increase their rates too.
If you’re happy with your fixed-rate student loan payment, it’s worth staying on course. However, variable interest rates may fluctuate during the current high-interest environment. As such, refinancing to a fixed-rate loan could offer more stability and predictability in the coming months.