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Should I Refinance My Student Loans?
Updated On September 5, 2023
Editorial Note: This content is based solely on the author's opinions and is not provided, approved, endorsed or reviewed by any financial institution or partner.
"Should I refinance my student loans?" may be a question you have been asking. The decision to refinance student loans is an important one, and it could save you thousands of dollars. Here’s how to decide whether you should refinance student loans and if student loan refinancing is the right choice for you.
Student loan refinancing means you can exchange your current federal student loans, private student loans or both for a new student loan with a lower interest rate. When you refinance student loans, you can save money and pay off student loans faster. The decision to refinance student loans should be based on your personal financial situation and your financial goals.
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Disclosures: SoFi | Earnest | NaviRefi | ELFI | Splash Financial | Citizens | Laurel Road | LendKey
In this guide, we will discuss:
- When you should not refinance student loans
- When you should refinance student loans
- Why should I refinance my student loans?
- What will my interest rate be when I refinance student loans?
- Can I get a lower monthly payment if I refinance?
- Can I pay off my student loans faster if I refinance?
- Does refinancing student loans save money?
- Do I qualify for student loan refinancing?
- Do I need a co-signer to refinance student loans?
- What credit score do I need to refinance student loans?
When You Should Not Refinance Student Loans
Let’s begin with when you should not refinance student loans. You should not refinance student loans if:
- You want access to federal student loan forgiveness programs
- You have bad credit
- You want an income-driven repayment plan
You want access to federal student loan forgiveness programs
If you have federal student loans, you have access to certain federal benefits, including the ability to qualify for certain federal student loan forgiveness programs. These student loan forgiveness programs include, for example, public service loan forgiveness and teacher loan forgiveness. If you plan to apply for either of these programs, you should keep your federal student loans outstanding because student loan forgiveness only applies to federal student loans. Of course, even if you work in public service, you can still refinance private student loans, even if you decide to keep federal student loans outstanding.
When you refinance student loans, your current student loans will be paid off and you will be issued a new student loan. This new student loan is from a private lender, since the federal government does not refinance student loans.
You have bad credit
If you have bad credit or no credit, and you want to refinance your student loans, the process can be challenging. Why? The best student loan lenders want to refinance borrowers with strong credit. They prefer borrowers who have a demonstrated history of financial responsibility. When lenders refinance your student loans, they are lending you money in the form of a new student loan. To minimize their risk, student loan lenders prefer borrowers with a high credit score of at least 650.
If you want to know how to refinance student loans with bad credit, you have several options. Among others, you can apply with a co-signer. If you don’t meet the qualifications, a qualified co-signer with strong credit and stable income can help you get approved for student loan refinancing and potentially receive a lower interest rate.
You want an income-driven repayment plan
If you think that you cannot afford your student loan payments – even after you refinance student loans – then student loan refinancing may not be for you. If you have federal student loans, you could enroll in an income-driven repayment plan, which bases your monthly student loan payment on your income, family size and other factors. If you refinance federal student loans, you would not have access to income-driven repayment plans. Why? Since the federal government does not refinance student loans, student loan refinancing is available only with private lenders. When you refinance student loans, you will only have a private student loan (and no longer will have any federal student loans).
When You Should Refinance Student Loans
Now, let’s address when you should refinance. If you want to know when to refinance student loans, you should refinance if:
- You qualify for a lower interest rate
- You have good credit
- You have stable income
- You have private student loans
- You want new loan terms
- You want a new lender or student loan servicer
You qualify for a lower interest rate
The main reason to refinance student loans is to get a lower interest rate and save money. If you can qualify for a lower interest, that is a good reason for when you should refinance student loans. Plus, there is no limit to how often you can refinance student loans. Student loan refinancing also has no origination fees or prepayment penalties, which means there are no fees to apply to refinance student loans or pay off student loans early.
You have good credit
Lenders want to refinance student loans for borrowers who have good to strong credit. That means a minimum credit score of at least 650 and preferably higher. When you have good credit, it shows lenders that you have a history of financial responsibility. If you have bad credit, you can always apply with a qualified co-signer who has good credit. If you or your co-signer have a credit score higher than the minimum, that can help increase your chance of being approved for student loan refinancing and could help you qualify for a lower interest rate.
You have stable income
In addition to good credit, lenders want borrowers who have stable and recurring monthly income. This gives lenders confidence that you can pay off your student loan debt consistently each month. You can also show a written job offer as proof of recurring income. Lenders also want to ensure you make enough income to pay your student loan debt, living expenses and other debt each month. A low debt-to-income ratio, which is a ratio of your monthly debt payments as a percentage of income, shows lenders that you have sufficient monthly cash flow. If you don’t have stable and recurring income, you can always apply with a co-signer who does.
You have private student loans
When you refinance student loans, you no longer will have federal student loans. That means you won’t have access to certain federal student loan benefits, such as public service loan forgiveness or income-driven repayment plans. Private student loans, however, do not have these benefits, so when you refinance private student loans, you don’t have to worry about losing these benefits. If you can receive a lower interest rate on your private student loans, then it’s a smart financial move.
You want new loan terms
Student loan refinancing helps you choose new loan terms. When you refinance student loans, you can choose a fixed interest or variable interest rate. In contrast, federal student loans only have fixed interest rates. Typically, variable interest rates are lower than fixed interest rates. However, variable interest rates can change over time, while fixed interest rates stay the same.
When you refinance student loans, you can also choose a new student loan repayment term. This new student loan repayment term can be from 5 to 20 years.A shorter loan term such as 5 years means higher monthly payments, but you can pay off student loans faster with less total interest. A longer student loan repayment term, such as 20 years, means lower monthly payments, but higher total interest because you would take more time to pay off student loans.
You want a new lender or student loan servicer
Student loan refinancing is a good opportunity to switch your lender or student loan servicer and receive better customer service.
Why Should I Refinance My Student Loans?
You may be asking, “Why should I refinance my student loans?” It’s important to understand why you should refinance your student loans. There are many reasons why to refinance student loans. Here are some popular reasons:
- Get a lower interest rate
- Consolidate student loans
- Pay off student loans faster
- Lower your monthly payment
Get a lower interest rate
Student loan refinancing is a great tool to get a lower interest rate.
Consolidate student loans
If you have multiple student loans, interest rates, lenders and monthly payment dates, student loan refinancing can combine your existing student loans into one student loan with a single interest rate and monthly payment.
Pay off student loans faster
When you refinance student loans, a lower interest rate means you can save money and pay off student loans faster. You can also choose a shorter student loan repayment term, which also can help pay off student loans faster.
Lower your monthly payment
If you have a high monthly student loan payment, student loan refinancing can help you lower your monthly payment in at least two ways. The first is with a lower interest rate, and the second is you can extend your student loan repayment term.
What Will My Interest Rate Be When I Refinance Student Loans?
When you refinance student loans, the goal is to get a lower interest rate. While a lower interest rate is not guaranteed, you can receive a lower interest based on several factors. For example, when it comes to student loan refinancing, lenders prefer borrowers who have:
- Good credit
- Stable and recurring monthly income (or a written job offer)
- Strong monthly cash flow
- Low debt-to-income ratio
Overall, lenders prefer borrowers who are creditworthy and demonstrate a history of financial responsibility.
Can I Get a Lower Monthly Payment if I Refinance?
Yes, refinancing student loans is one way to lower your monthly payment. If you feel your monthly student loan payment is too high, you can refinance student loans and receive a lower monthly payment. There are several ways to lower your monthly student loan payment.
First, you can save money when you get a lower interest rate, which will reduce the amount of interest you owe each month. Second, you could choose a longer repayment period. When you choose a longer repayment period, such as 15 or 20 years, you can pay a lower amount each month. However, when you choose a longer student loan repayment period, you will owe more in total interest, even if your monthly payment is lower.
Can I Pay Off My Student Loans Faster if I Refinance?
Student loan refinancing can help you pay off student loans faster. If you want to pay off student loans faster, you can focus on two ways. First, you can get a lower interest rate. This will help reduce the amount of interest each month, which lower your monthly payment. Second, you could choose a shorter student loan repayment period, such as five years. The advantage of a shorter repayment period is you pay less total interest and your pay off student loans faster. The disadvantage is that your monthly student loan payment can be higher. However, if your goal is to pay off student loans faster, it may be worth having a higher monthly payment to save money on interest.
Does Refinancing Student Loans Save Money?
When you refinance student loans, you can potentially save thousands of dollars.Why? Student loan refinancing helps you save money by giving you a lower interest rate.
This student loan refinance calculator shows you how much money you can save when you refinance student loans.
Do I Qualify for Student Loan Refinancing?
Each lender has its own qualifications for student loan refinancing. Lenders want to refinance student loans for creditworthy borrowers who have a history of financial responsibility. You can qualify for student loan refinancing if you have:
- A good or strong credit score
- Stable and recurring monthly income (or a written job offer)
- Strong monthly cash flow
- Low debt-to-income ratio
You can check your new interest rate for free in about two minutes with no impact to your credit score.
A good or strong credit score
Lenders evaluate your credit profile to ensure that you have good credit. Good credit comes from having a history of financial responsibility, including borrowing and repaying credit on-time and in full.If you have bad credit, you can always apply with a co-signer who has good credit to help you get approved.
Stable and recurring monthly income (or a written job offer)
Lenders want to ensure that you can pay off your student loans. Therefore, they require that you have stable and recurring monthly income. That means you are employed and receive a regular and consistent paycheck. What if you are graduating school and haven’t started work yet? You may be able to submit a written job offer as proof of recurring income.If you are unemployed or underemployed, it may be difficult to refinance student loans. However, you can apply with a co-signer who has stable income.
Strong monthly cash flow
If you have strong monthly cash flow, you generate enough income to pay your living expenses, student loan payment and other debt obligations. Lenders prefer to refinance student loans for borrowers who have strong monthly cash flow because it shows you are a less risky borrower.
Low debt-to-income ratio
A debt-to-income ratio measures your monthly debt payments as a percentage of your monthly income. Lenders will consider all your debt payments, which may include your student loans, mortgage, credit card debt, personal loans and auto loans, for example. Lenders prefer borrowers with low debt-to-income ratios to ensure they can be pay off student loans on-time and in-full. For example, a debt-to-income ratio less than 30% is preferred.
Do I Need a Co-Signer to Refinance Student Loans?
A co-signer is not required to refinance student loans. If you satisfy the qualifications to refinance student loans, then you can be approved for student loan refinancing without a co-signer. If you don’t meet the qualifications, you can apply with a co-signer who does. You can choose a co-signer such as a parent, spouse or other family member. A qualified co-signer can help you get approved for student loan refinancing and help you to receive a lower interest rate.
A co-signer has equal financial responsibility with you to repay the student loan. Therefore, a co-signer’s credit score could be impacted, for example, if you skip a student loan payment. However, some lenders offer a co-signer release option, which allows you to remove your co-signer from any financial responsibility so long as you meet certain requirements.
What Credit Score Do I Need to Refinance Student Loans?
Each lender has its own underwriting requirements, including credit score, to refinance student loans. Most lenders require a minimum score in the mid-600’s, such as a 650 credit score. Many borrowers who are approved to refinance student loans have a credit score higher than 700. Overall, lenders want to ensure that you are a creditworthy borrower who is financially responsible and will repay your student loan on time and in full.If you want to know how to refinance student loans with bad credit, you can apply with a co-signer who has a high credit score.
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