Refinancing student loans can be a smart move. Refinancing student loans can reduce your interest rates, lower your monthly student loan payment, allow you to consolidate payments and help get you out of debt quicker. But there are pro and cons to refinancing and how do you know when you should refinance your student loans?
Here are some common situations where it makes sense.
You Have a Stable Income
First of all, you should be in a comfortable financial position. You should have a good paying job or profitable business and be confident that you’ll be able to consistently make payments for the foreseeable future. Otherwise, you may run into trouble if you have any difficulty making payments. So, having a stable income is a must. Plus, consistent income is one of the most important requirements for student loan refinancing.
You Have a Good Credit Score
Next, your credit score must be high enough to qualify for refinancing. The exact number you need depends on the lender, but it should be around 650. If your credit score is lower than this, you’ll likely want to postpone refinancing until you’re able to raise it. But if it’s in the 700s or higher, you become very appealing to most lenders and have a great chance of being approved.
You Currently Have High Interest Rates
The main motivator for refinancing student loans is to reduce interest. Therefore, it’s important to check your current rates and compare them with what a potential new lender can offer. Credible allows you to compare rates from multiple lenders at the same time.
Use our Student Loan Refinancing Calculator to estimate how much you could lower your total and monthly loan payments by refinancing your student loans.
If the new lender’s interest rates are significantly lower, then refinancing might be a good idea. Keep in mind, the better your credit score is, the lower your new interest rate should be.
You Want to Change Your Loan Terms
When you refinance your student loans, you could possibly change your loan term and monthly payment. Earnest, for example, offers an option to customize your payment to work with your budget. You can also opt for biweekly payments, and adjust your due date to whenever you’d like. College Ave has 16 different options for loan terms, ranging from 5 to 20 years.
You Want to Remove a Cosigner
Many borrowers need a cosigner when initially taking out student loans. Some lenders, such as Sallie Mae, allow for a cosigner release. But if your lender doesn’t offer that or you don’t qualify, refinancing your loan can do the trick. As long as you get your new student loan in your name, the cosigner should be off the hook.
Some lenders, such as SoFi, allow parents to refinance Parent PLUS loans in their child’s name.
You Don’t Qualify for Student Loan Forgiveness Opportunities
If you have federal loans and could potentially qualify to have your student loans forgiven, refinancing would take that option away, including any widespread forgiveness. When you refinance your federal loans with a private lender, those loans are now a completely new loan and are now a private loan. Many public service jobs qualify for Public Service Loan Forgiveness. These include nurses, teachers, first responders, military, doctors, lawyers, veterinarians and more. There are even loan forgiveness options for volunteering. If you aren’t going to qualify for any of these opportunities, you may want to consider refinancing.
You Aren’t Taking Advantage of Federal Loan Benefits
If you have federal loans and you refinance, there are specific benefits you will lose. These include an option for income-driven repayment plans, which limits your monthly payment to a percentage of your income and forgives the remaining balance (which is taxed) after 20 or 25 years, depending on your plan. You also lose the chance for student loan forgiveness as well as generous deferment options during times of unemployment or economic hardship.
You Want to Switch Your Type of Interest Rate (Variable or Fixed)
If you currently have variable interest rates, there’s always the chance they could increase down the road. By refinancing, you can lock in a fixed rate that won’t change based on changing economic conditions. That way you’ll know exactly how much interest you’ll be paying and won’t get caught by any surprises.
Alternatively, if you have a fixed interest rate and are planning to rapidly pay down your student loans, you could consider switching to a variable rate. Variable rates are appealing because they are often significantly lower. However, the trouble is they could rise, even higher than whatever the fixed rate was. So variable rates could be an option if you know you are able to throw a lot of extra money at your loans to eliminate them fast, like this couple that wiped out more than $100,000 in student loans. Otherwise, it could be a risk.
You Want to Streamline Payments
Another scenario where it makes sense is when you’re currently making multiple payments to different lenders. By refinancing, you can combine payments into one monthly payment. As a result, you won’t have to deal with the hassle of ensuring multiple lenders are paid on time. Instead, you only have to concern yourself with one, which can simplify your life. This can also help reduce late payments.
Before you refinance your student loans, really understand your current and prospective situation and understand your student loans. Compare lenders for refinancing to see who is right for you.
Credible allows you to compare rates from 10 lenders without impacting your credit for free. Splash Financial is a student loan refinance marketplace that matches you with a lender with a low interest rate.
At Savingforcollege.com, our goal is to help you make smart decisions about saving and paying for education. Some of the products featured in this article are from our partners, but this doesn’t influence our evaluations. Our opinions are our own.