When should I refinance my student loans?

Student loan refinancing makes sense when you can replace one or more of your existing student loans and move them into a new private one to lower your interest rate or streamline payments.

Recent Fed rate cuts could lead to lower refinance interest rates, making your monthly payments more manageable and potentially saving you thousands of dollars over the life of the loan.

However, there are times when refinancing is not in your best interest. Knowing the factors involved will help you decide whether it benefits you.

When to refinance your student loans

You should consider refinancing your student loans when your finances are in good shape and you can save money on your payment or interest rate without giving up existing loan benefits.

Refinancing usually makes sense in the following scenarios:

• You have high-interest private student loans. If you took out bad-credit private student loans and your credit scores have since improved, you may want to consider refinancing to a lower rate. The best rates on private student loans may be below 4 percent, which could mean major savings on monthly payments and total interest.
• You have a high credit score. Your credit score is one of the biggest determining factors in whether you should consider refinancing. The higher your credit score, the more likely you are to qualify for the lowest interest rate available.
• You have a variable rate. If you’re losing sleep over how high your variable student loan rate could go, consider refinancing to a fixed rate. While variable interest rates can be beneficial in low-rate environments, they’re risky in the long term if the Federal Reserve is hiking rates. However, the Fed lowered rates three times last year, which makes it less likely that your variable rate will rise significantly.
• You have multiple loans. Student loan refinancing allows you to replace multiple student loans with different rates and due dates with one new loan and payment due date. Most lenders also allow you to set up autopay so you never have to worry about being late again.
• You meet the minimum balance requirements. Many lenders require a minimum loan balance to refinance, which could be as high as $10,000. If you still have a large loan balance, your loans will likely qualify for refinancing.
• You’ve graduated. Many lenders require proof of graduation to be eligible to refinance. Some require evidence of an associate degree, bachelor’s degree or higher. Check the lender’s eligibility requirements before you apply for a student loan refinance.
• Your income is steady and you don’t have too much debt. Lenders will review your income and total debt to assess your ability to repay your refinance loan. They generally require proof of a steady income and proof that your total monthly debt payments are no more than 50 percent of your income.

• Are you eligible to refinance?

  There’s no set eligibility standard that all lenders use for refinancing. To see if you’re eligible to refinance, prequalify with a few lenders and consider things like:

  • Your credit score. A high credit score means that you’re likely to be eligible to refinance with many lenders and choose the best one for you. Most lenders look for scores over 650, and scores on the lower end will result in higher interest rates.
  • Your debt-to-income ratio. Your DTI is what you owe in debt compared to your overall income. The lower your DTI, the more enticing you are to lenders. It can indicate to a lender that you can handle additional debt repayments. Try to keep your DTI under 50 percent.
  • Your monthly income. Even if they don’t advertise it, many lenders have a minimum income threshold. You will likely have to submit pay stubs or otherwise prove that you hold a steady job in order for lenders to consider you. In many cases, the minimum income threshold is around $35,000.

When you shouldn’t refinance your student loans

Refinancing is great if you can save money and time, but it’s not always the right move for everyone. In these instances, you should avoid refinancing.

• You need the repayment flexibilities of federal loans. Federal student loans come with more repayment options than private loans. Features like income-based repayment, extended deferment and forbearance are not typically offered on private student loans.
• You have low-interest loans. Refinancing isn’t usually worth it if you can’t get a lower interest rate than you’re currently paying. The exception is if you’re extending your term to avoid defaulting on your loan. Remember: You’ll pay much more interest for a longer term than a shorter term.
• You’ve defaulted on your loans or declared bankruptcy. Many lenders require your loans to be in good standing before refinancing. If you’ve defaulted on your loans or have recently declared bankruptcy, you won’t qualify for refinancing. You may be eligible to refinance with a low credit score, but it may not be worth it if the rate is too high.
• The fees outweigh the savings. If your student loan balance is low, the fees associated with refinancing may cost you more than the interest you’ll save.
• You don’t have a stable income. You may not qualify for a student loan refinance if your income varies due to commissions or seasonality.

How much will refinancing your student loan save you?

Refinancing your student loans could save you several hundred dollars per year or several thousand dollars over the life of the loan. How much you save depends on what you’re currently paying and the new rate you’re eligible for.

For example, let’s say you have a $20,000 federal student loan balance remaining with a 6.53 percent interest rate and a 10-year repayment term that you’ve just begun repaying.

• Your monthly payment will be $227.40 for the next 10 years.
• You’ll pay a total of $7,288 worth of interest over the term of the loan.

Now assume you can qualify for a 4.5 percent rate on the same balance over the next 10 years for a private student loan refinance.

• Your payment will drop to $207.28 over the same 10-year period, or $20.12 per month.
• You’ll pay $4,873 worth of interest over the loan term.

The bottom line:

• With the monthly savings, you can allocate $241.44 per year to other debt paydown or savings goals.

• You’ll save $2,414.94 in interest over the life of the new refinance loan.

Try using a student loan refinancing calculator to find out how much you could save.

Alternatives to refinancing your student loans

If refinancing isn’t the right move for you at the moment, consider other alternatives, including:

• Loan consolidation: Similar to a private student loan refinance, this option combines multiple federal student loans into one loan, making it easier to manage your payments. However, there is usually a slight bump to your interest rate, and you may end up extending your repayment period, which costs you more interest in the long run.
• Income-driven repayment (IDR) plans: These are federal loan repayment plans that base your monthly payment on your income and family size. Check with your servicer to see if your IDR plan is likely to change with the potential end of the SAVE plan.
• Student loan forgiveness programs: Student loan forgiveness isn’t likely under the Trump administration, as his administration focuses more on reducing the cost of college rather than reducing debt already incurred from pursuing college. Check with your servicer if you’re not sure what to do next.
• Deferment and forbearance: These options allow you to temporarily pause your loan payments during financial hardship. However, interest might continue to accrue during this period, increasing the total amount you owe.
• Employer assistance programs: Some employers offer student loan repayment assistance as part of their benefits package. Check with your human resources department to see if this is an option for you.
• Make sure your credit reports are accurate. If you don’t have great credit and can’t secure a lower interest rate, check your credit reports at AnnualCreditReport.com to see if you have any errors or bad marks that can be resolved before applying for refinancing.

Bottom line

Refinancing your student loans can be a smart strategy when you can save money and are on solid financial ground. Private student loan refinance rates may be significantly lower than what you’re paying on your current federal loan.

However, you need to assess the benefits of the lower rate against the payment flexibility you’ll give up if you pay off your federal student loans. With student loan forgiveness looking less likely going forward, develop a repayment plan and take advantage of any refinance opportunities to save on your monthly payment and pay as little total interest as possible.