Should I refinance student loan debt?
It often seems like a good idea, especially if interest rates are lower, but it’s not always wise.
Refinancing student loans can cause you to lose certain protections the Department of Education offers, making it challenging to repay your loans and potentially ruining your credit.
Here’s what you must know.
Should I Refinance Student Loan Debt: What This Means
Refinancing student loans can make sense in the right situation, but it doesn’t always. When refinancing student loans, you pay off your existing loan using the proceeds from a new loan. The new loan may have a more attractive interest rate, monthly payment, or more affordable terms.
But, if you have federal student loans, you could lose certain protections it has, leaving you with fewer benefits.
So when you wonder if you should refinance your student loans, many factors must be considered.
How to Refinance a Student Loan
If you decide to refinance student loans, here are the steps.
Start With Your Own Financial Audit: Be Prepared
To determine if you should refinance your student loans, take inventory of your loans. Determine how much you owe and what type of loans you have.
If you need more clarification, check with your school’s financial aid office to determine which federal student loans you have. If you need help determining what private loans you have, pull your free credit report and see which lenders you owe.
Get a good grasp on all the student loans you owe, their repayment plan, and any benefits they have, such as loan forgiveness programs.
Use a Student Loan Refinance Calculator
Consider using a student loan refinance calculator to determine if refinancing student loans makes sense. This will help you determine your payments and whether it’s worth refinancing.
Remember, if you lengthen your loan’s term, you’ll increase the amount of interest you pay. So don’t look only at the monthly payment, but at the big picture, including how much the loan will cost.
Find the Best Company to Refinance With
If you decide refinancing student loans makes sense, get quotes from several lenders. You can use a loan marketplace to prequalify for loans and get offers from several lenders. This is the best way to compare your loan payments, interest rates, and total loan cost.
The key is to pick the company that offers the best terms and helps you pay the loan off with the lowest costs.
Refinance Student Loans for a Lower Interest Rate
If your main goal is lower monthly payments, refinance student loans for a lower interest rate. Compare offers from lenders, looking closely at the interest rate and monthly payment to make it more affordable.
Assess and Choose the Right Refinance Terms
When focusing on student loan payments, you can consider the interest rate, but look at the other terms too. For example, if you refinance for a lower interest rate but extend the term, the loan will cost more in the long run.
Make sure when you consider the lower interest rates that they allow you to pay the loan off in the same or less amount of time.
Documents Needed to Refinance
To refinance student loans, you must provide the lender with proof you can afford the loans. This may include:
- Approval to pull and review your credit score
- Proof of income and employment
- Proof of a degree
- A government-issued ID
Qualifications to Refinance a Student Loan
Every lender has different qualifying requirements for student loan refinancing. Most lenders, however, look at your credit score, debt-to-income ratio, and the school you graduated from.
If you don’t have great (or any) credit or don’t have a long employment history yet, consider adding a cosigner. Having someone on your loan with a solid employment history or an excellent credit score can increase your chances of approval.
You can get quotes from multiple lenders, giving you a greater chance of qualifying for a loan with more attractive terms. You can try another if one lender doesn’t like your qualifying factors.
Refinancing Government Student Loans Key Details
If you have federal and private loans, be sure to consider the factors in refinancing each type to ensure it’s the right decision.
Federal Student Loan Refinancing
Federal student loan borrowers have protections from the government. For example, many borrowers qualify for income-driven repayment plans or public service loan forgiveness if they work in the public service sector.
Refinancing federal student loans may cause you to lose those protections, not to mention the government’s support provided during the pandemic, pausing all student loan payments. You lose those protections when you pay off the federal student loans with a private loan.
Private Student Loan Refinancing
Private student loans don’t have the same protections as federal student loan debt, so there isn’t a risk you’ll lose them, but your servicer may offer other benefits.
Before refinancing private student loans, look at the big picture. How much time is left on the term? Will you extend it by refinancing and cost yourself more interest? Will you lose any other benefits?
If you’ll use a cosigner, understand the loan servicer’s cosigner release guidelines. Not all private lenders allow cosigners to be released even when you prove you can afford the loan without them.
Benefits of Refinancing a Student Loan
There are good and bad sides to refinancing student loans. Understanding both sides can help you determine what’s best for you.
Some of the most significant benefits include the following:
- You might get a lower interest rate – If you can save money on interest without extending your term, you’ll pay less for the loan over the long term.
- You may be able to refinance from a variable-rate loan to a fixed-interest-rate loan – Variable-rate loans are risky. You don’t know how much your payment will be from one year to the next. If you have a high credit score and consistent income, you may qualify for a fixed interest rate and have a more stable payment.
- Consolidating student loans may help you save money – If you consolidate federal student loans with private student loans, you might decrease the overall term and repay your loan sooner.
- You may release a cosigner – If a family member cosigned your loan with you, but now you can afford it yourself, refinancing student loans may allow you to release them from the debt.
Of course, the largest benefit of refinancing your student loans is to save money. Whether you have lower monthly payments or save money with a shorter term, you’ll have more money to invest in other things, such as buying a house, saving for retirement, or saving an emergency fund.
The Downfall of Refinancing a Student Loan
It’s not always smart to refinance your student loans. There are some downsides to consider:
- You could lose federal protections – If federal student loan borrowers refinance federal student loans, you could lose any help they’d provide, including loan forgiveness or stopping payments during times of financial need.
- They are difficult to qualify for most people – Private student loans are more challenging to qualify for than the federal student loans you got when you went to college. To qualify, you must have good credit and a stable income with a low debt-to-income ratio.
- You can’t switch plans – When you have federal student loans, you can change your plans should you need income-driven repayment plans to make your payment more affordable. With private student loans, your only option is the loan you choose unless you refinance again.
Determining If You Should Refinance Student Loans
So how do you determine if you should refinance student loans? Here are some factors to consider.
When Someone Should Consider Student Loan Refinancing
Consider student loan refinancing in any of the following situations.
You Can Get a Lower Interest Rate
If your credit score is high enough and your debt-to-income ratio low enough, you may qualify for lower interest rates than you have now. This allows you to save money on your student loan debt.
Before you refinance your student loans, ensure you understand the rate and how it works. For example, is it a variable-rate loan? If so, the rate will change, and you may not save as much as anticipated.
You Have a Great Credit Score
Consider refinancing if your credit has improved since you originally borrowed student loans. You may qualify for a more attractive interest rate or better terms, saving you more money.
You Want One Loan
If you have multiple lenders and loans, staying on top of your student loan debt can get confusing. However, if you have good qualifying factors, you might qualify for a loan with a low-interest rate and affordable terms, making it easier to get out of student loan debt.
You Want to Release a Cosigner
If you used a cosigner to get your private student loans, you might consider refinancing your student loans to release them. Not all lenders allow you to remove cosigners from your loan; if they do, they have strict requirements. Refinancing your student loans may be an easier way to release them.
When Someone Should Avoid Student Loan Refinancing
It doesn’t always make sense to refinance your student loans. In these situations, leave them alone.
Only Having Federal Student Loans
If you only have federal student loans, you’ll lose all protection if you refinance. Before refinancing your student loans, ensure you won’t need any benefits, such as income-driven repayment plans or loan forgiveness.
You Do Not Have A Cosigner
Qualifying for student loan refinancing is difficult. You must have a higher-than-average credit score, low debts, high income, and stable employment. In addition, it may not be easy to qualify if you don’t have a cosigner.
Potential Rates Are Too High
If you don’t qualify for lower interest rates, it doesn’t make sense to refinance your student loans. Higher interest rates mean higher monthly payments and higher costs.
Your Payments Are Not up to Date
You likely won’t be eligible to refinance your student loans if your payments are late. So, consider other options, such as income-driven repayment plans to make your payments more affordable.
Alternative Refinance Options
Getting out of student loan debt is important, but refinancing student loan debt doesn’t always make sense. Here are some alternatives.
Make Extra Payments on Your Loans
Making extra payments on your loan decreases the principal faster and saves money on interest. Most loan providers allow you to make additional payments without penalties or fees. You can pay as much or as little as you want extra toward the loan without getting penalized.
Bring Your Payments up to Date
If your payments are behind, focus on getting caught up. With on-time payments, you likely will qualify for student loan refinancing. So instead, bring them current and try refinancing when you have better credit.
Income Drive Repayment Plans
Income-driven repayment plans keep your payments affordable in comparison to your income. Of course, you must reapply for the program annually to ensure your payment is in line with your income, but this helps you pay the loan off faster if your income increases.
Debt Payoff Plans
If you have a lot of student loans, consider a debt payoff plan. For example, you can use the debt snowball or debt avalanche program to get out of consumer debt, including credit card debt.
The debt snowball method pays off debts in order of loan balance, smallest to largest. This is great for borrowers who need ‘quick wins’ to stay motivated. The debt avalanche method attacks loans with the highest interest rate first, helping you eliminate the most expensive loans first. This method is effective but takes longer to see results and doesn’t work for everyone.
Inquire About Alternative Payment Plans
Private lenders don’t have income-driven repayment plans or deferment options; however, you can ask for alternative payment plans if necessary. They’ll typically work with you if you’ve lost your job or have another financial situation that makes it challenging to keep up with your loans.
Consider a Student Loan Consolidation Instead
A student loan consolidation may be a better option if you have federal loans. With this option, you don’t lose your protection benefits but can combine your loans into one monthly payment.
With federal student loan consolidation, your interest rate is the weighted average of the rates on all your loans. So you may not have a lower interest rate, but you’ll have only one loan and keep the protection the DOE offers federal loan borrowers.
How to Consolidate Student Loans
You may be eligible to consolidate your federal or private student loans. Here’s how.
Federal Student Loan Consolidation
You don’t need to worry about qualifying factors to consolidate federal student loans. As long you’ve graduated or left school, you can usually qualify. To consolidate federal loans, you must complete the Federal Direct Consolidation Loan Application and Promissory Note, confirming the loans you want to include in the student loan debt consolidation.
Private Student Loan Consolidation
When you consolidate private student loans, it is more like refinancing student loan debt. You must qualify for the loan with your credit score and debt ratio. In addition, you must prove you have enough income to support the payment and a stable job. In many cases, you may also need a cosigner to help you get approved.
Key Difference Between Loan Consolidation and Loan Refinancing
Loan consolidation for student loans is more like transferring multiple loans into one. It works only with federal loans. If you currently have federal and private student loans, you’ll refinance the loans into a single private student loan with one payment and one interest rate.
When you consolidate school loans, your interest rate is the weighted average of all loans, but you may only include federal loans. Refinancing student loan debt can consist of federal and private student loans, and your interest rate doesn’t have anything to do with the rates you pay on your outstanding loans.
Should I Consolidate Student Loans or Refinance Them: How to Decide
Always give careful consideration before refinancing and consolidating student loans. If you refinance federal student loans, you lose your benefits. Refinancing may make sense if you don’t see yourself using the income-driven repayment plan. However, if your career isn’t stable yet or you worry about not being able to afford the standard payment, keep your federal loans and consider consolidating versus refinancing.
When you consolidate federal loans, you have one payment versus several. This can help you keep track of due dates and pay the balance down faster by having only one loan to consider.
What Types of Student Loans Qualify for Student Loan Refinancing?
You can refinance any student loan, but each type has different consequences. Private student loan refinancing doesn’t have adverse effects, especially if you get lower interest rates. Federal loans, however, should only be refinanced if you aren’t using the support provided by the DOE to make your payments more affordable.
How Do I Know if My Finances Are Stable Enough for a Refinance?
To be eligible for student loan refinancing, you must have a stable income and employment AND prove your income is high enough to cover your student loan and other debts. Each lender has a maximum debt-to-income ratio for their student loan refinancing program. Shop around and see what lenders require to see if your income qualifies you to refinance.
Who Should Refinance a Student Loan?
Determining if you should refinance your student loans is a big decision. It makes sense if you have a strong credit score, can lower your monthly payment, or have variable-rate loans. You must prove you can afford the loan payments and pay your current student loans on time.
Do I Need to Have Completed My Degree for College Loan Consolidation or Refinancing?
No, you can refinance or consolidate student loans if you no longer attend school or attend less than part-time, as well as when you graduate.
Can Student Loans Be Forgiven After You Refinance?
Once you refinance student loans, you lose your chance for student loan forgiveness. If you think you’re eligible for student loan forgiveness, talk to your loan servicer about your income-based repayment options to work toward forgiveness.
When Does It Make Sense to Refinance a Student Loan?
It makes sense to refinance student loans when you have good credit, a stable income, and can afford the payments without an income-based repayment plan. In addition, if you want to get out of student loan debt faster with fewer payments, refinancing can help you reach your goals.
When Does It Make Sense to Consolidate Student Loans?
Consolidating federal loans makes more sense if you want to keep your federal student loan protections. You’ll have one loan to manage but won’t lose your protections, including income-based repayment options or loan forgiveness.
Should I Refinance Student Loan Debt – Final Thoughts
So – Should I refinance student loan debt?
Give careful consideration before refinancing student loan debt. It only makes sense in a few situations when you know you can comfortably afford the loan payments. For example, refinancing may make sense if you can qualify without a cosigner and feel better knowing you can repay the loan faster with a shorter term. Otherwise, consider consolidating student loans or applying for an income-driven repayment plan.
Samantha Hawrylack is a personal finance expert and full-time entrepreneur with a passion for writing and SEO. She holds a Bachelor’s in Finance and Master’s in Business Administration and previously worked for Vanguard, where she held Series 7 and 63 licenses. Her work has been featured in publications like Grow, MSN, CNBC, Ladders, Rocket Mortgage, Quicken Loans, Clever Girl Finance, Credit Donkey, Crediful, Investing Answers, Well Kept Wallet, AllCards, Mama and Money, and Concreit, among others. She writes in personal finance, real estate, credit, entrepreneurship, credit card, student loan, mortgage, personal loan, insurance, debt management, business, productivity, and career niches.