How to decide when to refinance your student loans


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It’s no secret that America’s student loan debt is expanding at an alarming rate. As of 2018, borrowers owe a total of $1.5 trillion in student loans, a number that’s only growing each quarter.

If you’re one of the 45 million Americans who hold an average of $37,000 in student loan debt, refinancing it at a lower interest rate can save you thousands over the lifetime of the loan.

But is refinancing the right choice for you right now? These questions will help you decide.

Are you eligible to refinance?

There are no standard eligibility requirement for refinancing your loans, but there are traits that lenders often look for in a applicant. Just like any other loan you apply for, loan providers will evaluate your income, credit score and repayment history to determine your terms.

Also consider your debt-to-income ratio before you apply. This includes unrelated debts, like a mortgage, auto loan or credit card debt. A low debt-to-income ratio is a measure of your trustworthiness to lenders.

Still, each lender may operate differently. “They’re going to have their own way of assessing risk on their loan portfolio,” says Scott Snider, CRPC, CFP, a financial planner at Mellen Money Management in Ponte Vedra, Florida.

Have you evaluated your current loan?

Look at your federal loan profile or private loan portal to ensure you will actually benefit from refinancing the type of loan you have.

It’s important to decide if refinancing aligns with your personal debt goals. If your priority is paying off your loans as quickly as possible, then refinancing may make that happen, if you can lower the interest rate and or shorten the term. If your goals align more with steady, manageable monthly payments, however, sticking with your current plan may be more effective (assuming you can pay them in a reasonable time frame).

Refinancing also effectively consolidates your loans, so if you plan to pay your federal loans off individually, concentrating on the loan with the highest interest rate, refinancing will change that.

Knowing all the facts and numbers around what you owe and the repayment track you’re on can allow you to assess whether refinancing really offers the incentives that matter most to you.

Will refinancing jeopardize your loan forgiveness options?

When you refinance your federal student loans, you forfeit the opportunity to take part in federal income-based repayment plans and loan forgiveness programs like Public Service Loan Forgiveness.

If you rely on an income-based plan or you will one day qualify for PSLF, refinancing may not be the best solution for your long-term goals. It’s important to look at how much you’ll be paying over the lifetime of the loan using both options.

“It’s very dependent on your personal situation, because at the end of the day, once you make that move to refinance, you can’t go back to your federal loans, and federal loans offer the most repayment flexibility,” Snider says.

This is why Snider recommends considering refinancing only once you’ve secured steady income. Without the flexibility of federal payment plans, refinancing options can be a heavier burden if your income fluctuates or isn’t enough to meet all your monthly obligations.

Is now the best time for you to refinance?

Experts say that your application will look most attractive to lenders once you’re financially stable and have built up a good credit score. If you are still a student or unemployed, it will be more difficult to get an offer. If you are gainfully employed, you should be confident that your employment will last before considering refinancing.

Snider advises caution to “somebody that is not certain about their job future, or somebody who’s in a more commission-based income. It just depends on how consistent that is.”

Another deciding factor is current interest rates.

Federal loan interest rates fluctuate every year. If you took out your loans in 2006 or later, they’re fixed at that year’s rate, but if you were in school before 2006, your rates are likely variable. As a result, if your loans are from a low-interest year like 2012 or 2013, you may already have a more-competitive rate than refinancing can offer in today’s climate where rates are on the rise. Private loans, on the other hand, are usually based on credit score and may be fixed or variable.

Knowing what interest rate you’re paying now and comparing it to offers you receive from multiple lenders can help you decide if refinancing is the best option. As rates continue to rise, though, your decision could come down to how much you’re willing to gamble on rate changes as your current interest accrues.

Is your loan amount substantial enough to refinance?

Ultimately, refinancing is for borrowers with substantial debt who expect to make years of payments and pay many additional thousands in interest.

If you chose an inexpensive university or were able to pay your way through school with only a few thousand in loans, refinancing may not be worth it for you. The lower rates offered by lenders won’t make a significant difference in the long run of your repayment plan, so sticking to monthly payments under your federal plan and contributing additional money where you can might be just as effective.

Have you shopped around?

Refinancing is a one-time process. Make sure you’re getting the best deal from whichever lender you choose.

Each loan provider has their own set of criteria, so don’t count on the first offer you receive to be the best. Shop around for different rates and payment plans that will work with your long-term goals.

Loan providers won’t pull a hard credit check until you’ve decided to move forward with the application, so you don’t have to worry about any repercussions on your credit score by applying for multiple offers.

Your best weapon in the refinancing game is preparedness. As long as you’ve done your research and developed clear goals, refinancing can pay off over time and allow you to direct more money towards savings and investments.

When looking at all of your student loan repayment options, “you just want to go through the checklist of ‘how can I minimize my payments and costs as much as possible,’” Snider says.

Bankrate’s Student Loan Calculator can help you compare your current federal loan with your refinanced loan offer. A financial planner or reputable student loan consultant can help you align your student loan debt obligations with the most effective repayment plan.

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