If you’re working on paying off your student loans, you might be asking yourself: Should I refinance? Answering this question isn't always straightforward, since a lot depends on your unique financial situation. This guide will help you make an informed choice about whether refinancing your student loans is the right move for you.
How student loan refinancing works
Student loan refinancing involves combining all of your student loans into a single refinance loan. This new loan ideally has a lower interest rate and better repayment terms to help make paying off your student debt cheaper and easier.
The refinancing process generally involves researching different lenders, comparing their offers, ensuring you meet their eligibility requirements, and submitting an application. If you’re approved, the lender then pays off your old student loans and replaces them with a new loan.
When should I refinance my student loans?
Refinancing might be a good idea depending on your unique circumstances. Here are some situations where it might be a smart choice:
You have private student loans
While you can refinance both federal and private student loans, there are major differences in these two types of debt.
Federal loans offer special benefits like income-driven repayment plans, the ability to change your payoff plan as needed, generous forbearance and deferment options, and even loan forgiveness in some instances. But if you refinance these loans, you turn them into a form of private debt and will permanently lose all those perks.
Private student loans, however, don't offer those protections. That means there's less generally less risk in refinancing private loans, since your not altering your loan type or losing out on special perks.
You have stable income and good credit
Private student loan lenders typically consider both your income and credit score when deciding if you’ll get approved for a refinance loan. If you don't meet the lender’s income and credit requirements, you probably won't be able to refinance — unless you have a qualified cosigner who can fulfill those requirements. Not all private lenders allow a cosigner, so be sure to do your research first.
You qualify for a lower interest rate
It generally doesn’t make sense to refinance your student loans if you can't lower your interest rate. If you take out a refinance loan at a higher interest rate, you’ll end up increasing your borrowing costs and making your debt even more expensive.
You want to make smaller monthly payments
Refinancing can make it possible to reduce your monthly payments. When you refinance at a lower interest rate or extend your repayment term, the amount you pay each month naturally becomes smaller. But it’s important to note that by extending your repayment term, you’ll risk paying more interest over time, even if your monthly payments are smaller.
You want to remove a cosigner
If you have a cosigner on your existing private loans and your lender doesn't offer cosigner removal, refinancing could be a way to absolve your cosigner of responsibility for your debt. However, this means you’d need to qualify for a new refinance loan based on your own credit and income credentials.
When is it a bad idea to refinance?
There are also circumstances where it might be a bad idea to refinance your student loans. Let’s explore these scenarios:
You have federal student loans
Refinancing may not be the best choice if you have federal student loans because you would lose out on federal protections and benefits, such as loan forgiveness programs, income-driven repayment plans, and generous deferment and forbearance options.
For example, if student debt is forgiven in the future, only federal loans would be included, and you could lose out on the opportunity. The government also paused federal student loan payments during the COVID-19 pandemic. Refinancing federal loans would mean you wouldn’t benefit from any potential future pauses from the government.
Your finances are unstable
Refinancing lenders typically look at your credit score, income, and debt to determine whether or not to approve you for a refinance loan. If you have unstable finances, there’s a good chance you won’t qualify. You might also risk defaulting on the new refinance loan, which could damage your credit score and cause other financial problems moving forward.
Learn More: Can I Get a Student Loan With Bad Credit?
You can’t get a lower a interest rate
Interest is the cost of borrowing. If you increase your interest rate through refinancing, you increase your overall costs. Refinancing to extend your payoff time and lower your monthly payments might make sense if you’re struggling with your current plan — but in most cases, it’s best to avoid refinancing to a loan with a higher interest rate.
Am I eligible to refinance?
Every refinancing lender has its own eligibility criteria. Most lenders require a good credit score, which usually means a FICO score of at least 670 for either you or your cosigner. Other common requirements include:
- You have a stable income.
- You have a low debt-to-income ratio (which measures income relative to debt).
- You earned a degree using the loans you're refinancing.
- You can meet your lender's minimum and maximum loan limits.
Most lenders allow you to check your eligibility and prequalify for a rate online, often without affecting your credit.
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How much money can I save?
The amount of money you can save by refinancing varies depending on what your previous interest rate was compared to your new rate, the amount of debt you have, and the new repayment timeline you select.
To get an estimate of your potential savings, use a student loan refinancing calculator.
Student loan refinancing rates in 2023
Student loan refinance rates have increased for five- and 10-year refinance loans in recent years. Take a look at this comparison for borrowers with a credit score of 720 or higher who used the Credible marketplace to select a loan:
- For the week beginning Nov. 2, 2020, the average interest rate for a 10-year fixed-rate refinance loan was 3.96%, and the average interest rate for a five-year variable-rate loan was 3.45%.
- For the week beginning Nov. 6, 2023, the average interest rate for a 10-year fixed loan jumped to 7.65%, and the average interest rate for a five-year variable loan was 5.68%.
Keep in mind that rates fluctuate over time. The important thing is to always consider the costs of your new refinance loan versus your old student loan before deciding to move forward. This will help you make the right financial choice.
