When Is Refinancing Student Loans a Good Idea?March 3, 2020
Updated June 2, 2022
When is it the right time to refinance your student loans? This can be a tough question to answer because everyone’s situation is unique. There are certain situations in which refinancing student loans is a good idea and certain situations in which refinancing is a bad idea. In this blog, we’ll explain the factors that can help you determine whether now is the time to refinance student loans, along with a few signs that it isn’t the right time.
When To Refinance Student Loans
Refinancing student loans may be a good idea if you meet the common student loan refinancing eligibility requirements listed below. Factors to consider include:
- Credit score and credit history
- Income and employment status,
- Debt-to-income ratio
- Remaining student loan balance
- Education and degree type
- Whether or not there is a cosigner
Here are signs that now may be a good time to refinance your student loan debt.
You will save money on interest or loan terms
One of the primary benefits of refinancing student loans is the ability it gives you to potentially save money on interest or shorten your loan term. A few scenarios in which refinancing could save your money on interest include if your current loans are high-interest, or if your current loan term is fairly long.
Take some time to examine your current interest rates compared to rates offered by student loan refinancing lenders – saving just 1-2% over the life of your loan could result in thousands of dollars saved. Shortening your loan term also typically goes hand-in-hand with a lower student loan interest rate. Using a student loan refinancing calculator is a great way to estimate savings from student loan refinancing to help determine if refinancing is worth it.
You will benefit from one payment
One of the added benefits of refinancing often means you get to consolidate student loans. While it’s true you can still refinance partial loans, lumping them all together with a nice bow on top not only helps you feel empowered to pay them off but also reduces the likelihood you’ll miss a payment due to the sheer number of them floating around out there.
You have private student loans
When you have private student loans, you do not have to worry about losing federal student loan benefits when refinancing them, such as income-driven repayment programs or federal benefits like those included in the CARES Act passed in 2020. Thus, if you can secure a lower interest rate that allows you to save money monthly or over your loan term, refinancing may be a good option for you. By refinancing, you can decide whether you want to shorten your loan term and pay off your student loans faster or extend your loan term to reduce your monthly payment.
You have high variable interest rates
While most variable student loan interest rates are currently low, there is potential for interest rate increases in the future. If your student loan is currently a variable-rate loan, you may want to consider refinancing should your interest rate increase.
Switching to a fixed rate also offers the benefit of locking in a lower rate without the risk of it increasing over time. Learn about fixed vs. variable rate student loans and determine which is best for you when refinancing.
Learn More: How to Lower Student Loan Interest Rates
You have a good credit score and credit history
Many people simply aren’t aware that average student loan interest rates are not dependent on your financial circumstances. There are a few factors involved, but the credit history of the borrower isn’t one of them. If you’ve been on time with your credit card, mortgage, car loan, or any other debt, and maintained a good debt to income ratio, you’ve likely got a high credit score. When you refinance your student loans with a private lender that credit score helps determine your interest rate, and that in return can help save some money.
You’re up to date on your loan payments
If you’ve been consistent about making your student loan payments on time every month, you are more likely to be a prime candidate for refinancing student loans.
Having a strong payment history shows lenders that you are a responsible borrower who will make your loan payments, which will also help lower your interest rate. Having made between 90-97% of payments on time is considered average, but a payment history with 98-100% of payments made on time is ideal and makes you a prime refinancing candidate.
You are employed with a steady income
Sometimes you can’t pay student loans even with a steady income. Even though you’re earning good money you will have to face the music and pay off the education that helped get you to the position you’re in. Refinancing your student loans often means a better interest rate and the option to choose a better term.
You have a good debt-income ratio
A term commonly used by lenders, the debt-to-income ratio is also a key factor in showing borrowers your ability to take on debt. Your debt-to-income ratio, also known as DTI, is a number that shows how your total monthly debt compares to your gross monthly income.
Most lenders require a DTI below 65%, with many requiring a ratio below 55%, with different requirements based on your income, degree type, and loan amount. If your debt-to-income ratio is in the 50% range or lower, you are likely a great candidate for student loan refinancing and may be able to secure a lower interest rate in the process.
You know which student loans to refinance and why
When entering the refinancing process, it’s important to know which of your loans you want to refinance and why. Different student loans have their pros and cons, varying from borrower benefits to their interest rates.
For example, federal student loans offer certain borrower protections, as well as Income-Driven Repayment (IDR) plans. For some borrowers, refinancing private student loans that have high interest rates without borrower protections makes the most sense, while other borrowers may decide to refinance their federal student loans as well due to having a large amount of debt and wanting to save over their loan term.
If you’re not sure which loans you want to refinance, check out our guide to student loan refinancing to help make these decisions.
Your grace period is ending
Some student loans, such as federal student loans, typically have a grace period following graduation to allow borrowers to get on their feet before making payments. Federal student loans offer a six-month grace period. Once this period is over, payments will begin.
Refinancing your student loans may be a good idea once your grace period is coming to an end. However, keep in mind that some lenders will honor your previous loan’s grace period when refinancing.
Interest Rates are Low
Student loan refinancing rates, much like other interest rates, are typically tied to economic factors that cause the Federal Reserve to increase or decrease rates. The Federal Reserve will typically decrease interest rates during an economic downturn or recession to stimulate the economy, and will likewise increase interest rates during times of strong economic growth. When interest rates are low, you may want to take advantage of them by refinancing your student loans during an economic downturn.
When Is Student Loan Refinancing a Bad Idea?
In some cases, student loan refinancing may not be for you. It’s important to note that some of these factors are temporary and may allow you to refinance later on, while other factors are more permanent.
Here are the factors that may indicate that now is not the right time to refinance your student loans.
If it won’t lower your interest rate, save you money, or help you meet specific goals
While it may seem obvious, refinancing may not be a good idea if it won’t lower your interest rate or help you meet specific financial goals such as lowering your monthly payment, paying off your loans faster, or saving money over your loan term. If you attempt to prequalify for refinancing and the rate you are given is higher than your current one, or if you only have a few years left on your loan term and refinancing will extend it, you may want to forego refinancing. However, if your main goal is to simply lower your monthly payments, you may find that refinancing to a longer term is right for you – but this may not be best for you if you can afford your current monthly payments.
If you are pursuing Public Service Loan forgiveness or want Income-Driven Repayment
If you’re in public service and know you’ll qualify for Public Service Loan Forgiveness after making ten years of qualifying payments, refinancing student loans may not be for you because it will disqualify you from the program – however, be sure to verify that you qualify for loan forgiveness. Check out this student loan forgiveness guide for more information.
Additionally, refinancing with a private lender will not allow you to participate in the Income-Driven Repayment plans offered with federal student loans. If you prefer to have these student loan repayment methods, now may not be the time to refinance.
If you have bad credit
If you have a less than optimal credit score, now is probably not the time to try to refinance student loans. As stated earlier, lenders are typically looking for credit scores in the mid-600s at a minimum, while many borrowers who are approved have FICO scores in the 700s having a score in the 800s is ideal though. Having a lower credit score when refinancing may force you into adding a cosigner in order to qualify, which may negatively impact them if you are not able to keep up with your loan payments. Look into ways to improve your score and tips to get an 800 credit score.
You’re struggling with student loan payments or defaulted
If you’ve had some difficulty making your student loan payments on time in the past or have defaulted on your student loans, now may not be the best time to refinance. Missed payments negatively impact your credit history, which is a key factor in qualifying for student loan refinancing.
By reestablishing a history of on-time payments, you can improve your credit score along with your credit history, which could qualify you to refinance down the road.
You expect a decrease in your income
If you are preparing to switch to a lower-paying job or have found yourself facing unemployment, it may not be wise to refinance your student loans, especially if they are federal student loans that come with income-based benefits.
You’ve declared bankruptcy
Filing for bankruptcy negatively impacts your ability to refinance student loans. Most lenders will require borrowers to wait a specific amount of time following bankruptcy before qualifying to refinance. If you’ve declared bankruptcy within the past 4-10 years, now may not be the right time to refinance your student loans.
Is Student Loan Refinancing Right For You?
Student loan refinancing can offer many benefits if done in the right circumstances. It’s important to assess your situation in detail and do your research before making a decision.
If you have questions about student loan refinancing or need assistance in making a decision, reach out to Education Loan Finance. Our Personal Loan Advisors are experts in student loan refinancing and can address your questions, provide the guidance you need, and help you make the decision that is in your best interest. If you’re ready to refinance your student loans, learn more about student loan refinancing with ELFI and prequalify to see your rate in minutes without affecting your credit score.