When should I refinance my student loans?

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While refinancing student loans is a good idea for some people, it’s not always the best option for everyone. In general, refinancing your student loans could make sense if you have the credit and income to secure a lower interest rate and pay less over the life of your loans. Here’s how to decide when it’s right for you.

When to refinance your student loans

If you’re considering refinancing your student loans, take a close look at your finances, your existing loan benefits and any potential savings. Refinancing could make sense in the following scenarios.

  • You have a solid credit score. Your credit score is one of the biggest determiners in whether you should consider refinancing. The higher your credit score, the more likely you are to qualify for the lowest interest rate available. If you don’t have great credit and can’t secure a lower interest rate than what you’re currently paying, you may want to look into alternative plans. Check your credit history through AnnualCreditReport.com to see if you have any errors or bad marks that can get removed before applying for refinancing.
  • You have private student loans. If you already have private student loans, you won’t lose any benefits through refinancing as you would with federal loans. Because of this, it’s usually best to start by refinancing private loans.
  • You have a variable rate. While variable interest rates can be beneficial in low-rate environments, it may not be the right option for you; after all, if interest rates rise, you’ll be stuck paying more on your loan. If interest rates are extremely low, it could make sense to refinance your variable-rate loan into a fixed-rate loan in order to lock in a good interest rate.
  • You have many loans. Having many loans with different interest rates and due dates is hard to manage. Refinancing will pay off all of your existing loans, and then you’ll make one payment every month to your new loan. With most lenders, you can also set up autopay, so you never have to worry about being late again.
  • You have enough to refinance. A few lenders require a minimum loan balance to refinance, which could be as high as $10,000. It’s important to look for lenders that meet your qualifications just as much as you meet theirs. If you still have a large loan balance, your loans will likely qualify for refinancing.
  • You have a degree. For many lenders, you’ll need to have a degree to be eligible to refinance. Some require an AA degree, while others require a bachelor’s or higher. Some specify that a degree isn’t required. Before deciding to refinance with a certain lender, check that you meet the eligibility requirements.

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 have low-interest loans. If you can’t guarantee a lower interest rate on your student loans than what you’re currently paying, you could end up paying more overall. At this point, refinancing isn’t worth it. Stick with your current loans until you can find a lower interest with a lender you like.
  • You have federal loans. If you have federal student loans, refinancing means that you’ll lose out on a few benefits, like your track to Public Service Loan Forgiveness or federal student loan deferment. If you’re struggling to make payments on your federal student loans right now, you could move to an income-driven repayment plan, which bases your payments on your income and household. Private student loans, including refinanced ones, aren’t eligible for this.
  • 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. Instead, you’ll need to focus on getting your loans back on track with your lenders.
  • The fees outweigh the savings. In some cases, you may be charged origination fees or application fees when you refinance, which are usually a percentage of your total loan amount, plus a prepayment fee for paying off your existing loan early. If you have relatively little left to pay on your student loans, those fees could end up being more than what you’d save in interest.

How much will refinancing your student loan save you?

Refinancing your student loans could save you a few dollars every month or hundreds of dollars a year. How much you save depends on what you’re currently paying and what you could be paying when you refinance.

For example, let’s say you have a $20,000 balance remaining with a 5 percent interest rate and a five-year repayment term. In this scenario, you’ll have a $377.42 monthly payment. If you refinance into a new loan with the same repayment term but a 4 percent interest rate, your monthly payment will be $368.33. That’s a monthly savings of $9.09 a month but an overall savings of $545.37 over the life of the loan.

And that’s just a drop of a single percentage point; if you can get a significantly lower rate, you could see savings of thousands of dollars. To find out more, try using a student loan refinancing calculator.

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. Some lenders allow good or poor credit, but you could end up paying a higher interest rate. This could cost you more in the long run, and refinancing might not be worth it.
  • 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 means that if you ever have an emergency, you’re still able to make payments on your loan every month. The higher your DTI, the riskier you look to lenders.
  • 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.

Is now the best time for you to refinance?

Refinancing might be good for many borrowers, but take a step back before making this move. If you have federal student loans, the COVID-19 crisis has caused a temporary pause to payments through Sept. 30, 2021. Because of this, refinancing federal student loans is doubly risky now — if you refinance, you’ll need to start making payments immediately.

If you have private student loans and excellent credit, however, you might qualify for a much lower interest rate than what you’re currently paying, since the coronavirus has caused refinancing rates to plummet to record lows. In these instances, look into lenders that offer few fees, flexible repayment terms and interest rates lower than what you’re paying now.

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Written by
Dori Zinn
Contributing writer
Dori Zinn has been a personal finance journalist for more than a decade. Aside from her work for Bankrate, her bylines have appeared on CNET, Yahoo Finance, MSN Money, Wirecutter, Quartz, Inc. and more. She loves helping people learn about money, specializing in topics like investing, real estate, borrowing money and financial literacy.
Edited by
Student loans editor