Refinancing student loans can save money but it’s important to get the timing right. (iStock)
Refinancing student loans means taking out a new loan (preferably at a lower annual percentage rate or APR) to pay off existing private student loans. This is different from a federal student loan consolidation, in which multiple federal loans are combined into one.
There are different reasons to refinance (including the potential to save thousands of dollars) but it's important to consider whether it's the right move before diving in. The coronavirus pandemic has driven down private student loan rates (August rates on 10-year fixed-rate loans averaged 4.31%), thus making refinancing even more appealing — so, you may be asking yourself, "Should I refinance my student loans now?"
If you're looking to lock in some of the lowest fixed rates ever, then the answer is likely yes. Multi-lender marketplace Credible can help you compare private lenders at once to determine if now is the right time to refinance, based on your loan type, loan amount and more.
When to refinance student loans
It's a good idea to refinance your student loans (especially right now), if you're looking for the following:
- You want to lock in a lower interest rate
- You want to simplify or lower monthly payments
- You want to remove a cosigner from your loan
1. You can lock in a lower interest rate: You should refinance when your credit score allows you to obtain a lower interest rate or if interest rates have dropped, said Logan Allec, a CPA and owner of personal finance blog Money Done Right. Either way, refinancing to a more favorable rate could translate to saving money. The same may be true if the APR on a variable rate loan is set to adjust. Switching to a fixed interest loan could help you lock in a lower rate.
If you can qualify for a student loan refinance at a lower rate than you're currently paying, there are often no downsides to refinancing. You can use Credible to compare student loan refinancing rates from multiple private lenders at once without affecting your credit score.
You should also use a student loan refinance calculator to view your potential monthly payments and ensure the new loan’s payment is within your budget.
2. You can simplify or lower monthly payments: You may also lean toward refinancing if you took out multiple loans at varying interest rates and you have a large balance. Combining several loans into one can simplify your monthly payment obligations.
Not only can a refinance decrease your interest rate, it can also lower your monthly payments altogether. See what your estimated monthly payments would be with a refinance using Credible, which allows you to compare rates from up to 10 student loan refinance companies.
3. You want to remove a cosigner: Refinancing may be the only option for removing a cosigner if your current private lender doesn't offer cosigner release.
In terms of timing, refinancing earlier in your loan repayment term typically makes more sense than waiting until later. Like other loans, private student loans are structured in a way that you're paying more in interest in the early part of the loan term, with more money going toward the principal as time goes on.
When you shouldn’t refinance student loans
You should try to avoid a student loan refinance if any of these apply to you.
- You have federal student loans
- You’re using benefits/protections of federal student loans
- You want the option of using an income-driven repayment plan
- You’ve recently defaulted on a student loan
1. You have federal student loans: Refinancing can help with saving money on private student loan rates but it may not be the best choice if you also have federal student loans. That's because there are more things to think about than just interest rates when refinancing federal loans.
2. You're using benefits/protections of federal student loans: "The only true refinancing you can do is to transfer your federal loan into a private loan," said Allec. "But by doing so, you miss out on some benefits and protections on federal loans." Those include the ability to qualify for deferment and forbearance periods if you need to temporarily pause your monthly payments.
3. You want the option of using an income-driven repayment plan: You also lose the option to enroll in an income-driven repayment plan when you refinance federal loans into private loans. And depending on your career choices, refinancing federal loans into private ones means you'd no longer be eligible for public service loan forgiveness. Also, remember that this only goes one way — you can't refinance private student loans into federal loans.
4. You've recently defaulted on a student loan: It's not impossible to refinance student loans in default, but it's going to be extremely hard to qualify and you're already likely facing long-lasting repercussions. So, it's probably not a good idea to apply for a new loan on top of that.
To find out if you qualify for a student loan refinance, enter your estimated credit score and other simple personal information into Credible's free online tools.
The more common option with federal loans is consolidation, which allows you to combine all of your loans into a single loan. The interest rate you pay would be based on the weighted average of the rates for each individual loan you consolidated. You wouldn't necessarily be saving money but it could make managing your monthly payments easier.
How to refinance student loans
If you're considering refinancing student debt, the first step involves researching private lenders.
When comparing student loan refinance companies, consider:
- Minimum amounts required to refinance.
- Maximum borrowing limits.
- APR range and whether rates are fixed or variable.
- Whether you’ll pay any fees, such as an origination fee or prepayment penalty.
- Any special perks or benefits, such as deferment periods or interest rate discounts.
Also, remember to check your credit score and finances against the lender's minimum requirements. It may be necessary to enlist the help of a cosigner to qualify for refinancing at the best interest rates.
Rates vary greatly between lenders, so be sure to use a tool like Credible to shop around and view rates tables from several lenders.
If paying for college is a struggle (or you're still drowning in student loan debt decades later), then you also may want to consider reaching out to a financial advisor for guidance to discuss your personal finance and whether you should refinance your student loans or if you should consider other ways to chip away at your student debt — such as the debt snowball or debt avalanche methods.