When To Refinance Student Loans: 9 Signs It’s Time

March 3, 2020

Updated August 24, 2020

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 option if you meet certain criteria listed below. Factors to consider include your credit score and credit history, your current loan status, your employment status, your debt-to-income ratio, your current interest rates, among others. Here are nine signs that now may be a good time to refinance your student loan debt.

You have a good credit score and credit history

Your credit score is an important factor in determining whether you should refinance student loans. Having a good credit score makes you a prime candidate for refinancing because it will allow you to receive more favorable interest rates when you refinance, allowing you to save more money over the life of your loan.

Additionally, having a well-established credit history is another good indicator to lenders that you are a responsible borrower, which will also help you receive a better interest rate. Many lenders require a minimum FICO score of 650 to 680 in order to qualify.

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

When you apply for refinancing, your lender will require you to report your income. Having secure employment with a steady income also makes you a good candidate for refinancing student loans. Lenders prefer borrowers who can comfortably make their loan payments, even in the case of a financial emergency.

Finding a job with a higher salary may help you qualify for a better interest rate, even if you have already refinanced your student loans in the past. See how often you can refinance your student loans for more information.

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.

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 interest rate. We recommend using our student loan refinancing calculator to calculate your potential savings to help determine if refinancing is worth it.

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.

You know how to find a good lender

Before refinancing your student loans, you need to know the qualities of a good student loan refinancing lender.

A few things to look for include a lender that offers personalized customer service and can help you navigate the student loan refinancing process, low competitive interest rates, the opportunity to prequalify to see your rate without affecting your credit score, and borrower protections in the case of financial hardships.

When should you not refinance student loans?

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 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 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 credit score if this applies to you.

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’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.

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 it won’t lower your interest rate or will extend your loan term

While it may seem obvious, refinancing may not be a good idea if it will increase your interest rate or cost you more by extending 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.

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.

What To Know Before Refinancing Student Loans

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