Should I Refinance My Student Loans?

Want to know more about whether or not you should refinance your student loans? Keep reading because we’re going to cover that and more!

Main image courtesy of CNBC.

Whether you’ve recently graduated and have just started to pay back your student loans, or have been dealing with student loans for years, you know it can be difficult sometimes to make payments. You’re not alone in wondering if there’s a way you can lower your monthly payments. When many students get out into the real world, they find it hard to land a job that pays them enough to ensure that they can pay all their bills, plus make their student loan payments.

But what if there was something you could do to lower your monthly payments, or give you a better interest rate so you can pay off your debt faster? If this sounds like something you’d be interested in, chances are you’ve considered refinancing your student loans. But how do you know if you should refinance your student loans, and do you even qualify? We’re glad you asked, because in this article we’re going to cover topics like:

  • What refinancing is when it makes sense with your student loans
  • How to know when refinancing is right for you
  • Other options you have available to lower your payment or rate

What is Refinancing and When Does it Make Sense with Student Loans?

Is refinancing your student loans really worth it, and can it save you money in the long run?

person opening their wallet

Should you refinance your student loans? Before you decide, make sure you have all the facts! Image courtesy of EndThrive.

When we talk about refinancing your student loans, it is the process of taking out a new loan with another lender with a better interest rate. You’ve probably heard of people who have refinanced their mortgage in order to get a lower interest rate, and essentially, refinancing your student loans is the same thing. If you’re interested in getting a better interest rate so you can pay off your loan faster, you may want to consider refinancing. However, it’s also important to keep this in mind:

  • You should have good finances. When you’re considering whether or not to refinance, you should always first take a good, hard look at your financial situation. Are you able to make on time payments consistently? Do you have a steady and reliable stream of income? Can you afford your payments for bills and necessities each month? If you’re able to answer yes to those questions, you may be a good candidate for refinancing your student loans. 

If you answer no to any of those questions, this might not be the right time to refinance, especially if you have federal student loans. Once you refinance, your loans will be owned by a private company, so you will no longer have access to helpful programs such as forbearance and deferment. 

  • The new loan will save you money. Just like if you were refinancing a mortgage on a house, it only makes sense to take out a new loan if it’s going to save you money. There’s no sense of going through all the work to take a new loan out if you’re going to be paying the same amount. After all, the whole point of refinancing is to get a better interest rate so you can pay down the amount of your principal faster—and get out of debt sooner. 

  • You are able to qualify. In order to qualify for a refinance, you’ll need to make sure you have a good credit score, and you have your finances in good order. Like we mentioned above, this means that you’re not living paycheck to paycheck, where an unexpected expense could throw off your student loan payment. 

Typically people want to refinance in order to make lower monthly payments, save money on a lower interest rate, and to lower their debt to income ratio. Student loan refinancing can save you money in the long run if you do it under the right set of circumstances. So how can you be sure that refinancing is the right move for you?

When is Refinancing the Right Move?

It’s always good to know when (and when not) to refinance your student loans

college student doing work

Make sure you’re in the right place financially before refinancing your student loans. Image courtesy of PCMag.

It can be tempting to put in your information into the many student loan refinancing calculators available and see what rate you can get. But you should always be aware, there’s a little more to it than just plugging in your numbers. You need to be aware that refinancing is a choice you should only make if it’s really going to make a major difference in your payments. We recommend you consider refinancing your student loans if:

  • You currently have private loans. As we previously brought up, refinancing is really only a good idea if you have private loans already. If you have federal loans, it might be worth it to stay where you are and look into other types of repayment plans if you find yourself struggling. Private loans are not eligible for income-driven repayment plans, nor do they typically offer deferment or forbearance (some private lenders may offer this). 

That’s why if you have private loans, you may as well check into what kind of rates you qualify for. You can refinance your loans as many times as you want, so if you’re ready to get a better interest rate and pay off your loans faster, consider refinancing. 

  • You’re dealing with high interest rates. This is the biggest reason you may want to refinance your student loans. And this is especially true if you have student loans that have variable interest rates. Variable rates mean that the interest rate can change, but how often that occurs is based on your lender. Some adjust it monthly, while others every few months. It can be enticing to see an interest rate offered that is well below the interest rate set for federal loans, however, just understand that very few people qualify for that specific rate. 

The lower rates of variable rate loans are built into the first years of your loan, and you can expect them to increase as time goes on over the course of your repayment plan. This means you could be paying a much higher interest rate down the road. You might want to consider refinancing if you can find a fixed interest rate that will allow you to lock it in for the lifetime of your loan. That way, you’ll always know what you’re paying each month with no surprises. 

  • The economics say it’s a good time to refinance. Sometimes outside factors may make it a good time to refinance. When the Federal Reserve has cut interest rates, it could be the right time to look into refinancing. 

When not to refinance your student loan

Although there are plenty of reasons why refinancing your student loan is a good idea, there are times when you may want to think twice about it. 

  • Your finances aren’t as stable as you’d like. When thinking about refinancing, you’ve got to be sure you’re ready to take this on financially. This is especially true if you think your income is not as stable as you’d like, and could potentially drop. Stay with your federal loans so you are able to apply for programs such as income-driven and income-sensitive repayment plans, as well as deferment and forbearance.

  • You may need student loan forgiveness. If you’re in a public service or teaching position and have considered applying to the student loan forgiveness program, don’t refinance your loans. This will make you ineligible for that program.

  • You have declared bankruptcy. If you’ve had a bankruptcy, you may need to wait several years before being able to refinance your student loans.

Other Options to Lower Your Student Loan Payment

Try out these other options besides refinancing if you want to lower your monthly student loan payment

college student at his computer

There are other ways you may be able to reduce your student loan payment besides refinancing. Image courtesy of Lifewire.

If you’re  looking for ways to reduce your monthly student loan payment, but refinancing isn’t right for you at this time, you do have options! Whether you want to keep the programs and protections of your federal loans, or just aren’t on very stable financial ground, there are ways to make sure you have a payment you can afford. Instead of missing payments, make sure you reach out to your lender to discuss how you can keep making monthly payments and stay out of default.

Get on the right payment plan

If you’re having problems making your payment and are looking to lower it, consider checking out the income-sensitive, income-driven, or extended payment plans available to those with federal loans. These programs are designed to help borrowers continue to make payments that they can afford, and stay out of default. It’s important that you speak to your lender and discuss which one of these plans can lower your monthly payment. 

Consolidate all loans

Consolidating your loans is also a good idea. If you have a few loans with different interest rates, consolidating them will put them into one loan, one payment, and one interest rate. This can not only make things easier for your track and manage, but may help lower your interest rate.

Consider checking with your employer

More and more employers are signing on with student loan repayment assistance. As a part of this program, employers are able to put a certain amount of money towards your student loan repayment each year to help you out. If your employer doesn’t do this, check with them to see if they might be interested!

Student loan refinancing is a good option if you have private loans and want to lower your interest rate. It’s important to take a look at your overall financial situation first, and see if refinancing will really save you money. 

Bridget Houlihan
Bridget is a writer based in Pittsburgh, PA.
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