Should I Refinance My Student Loans?

Last Updated: August 7, 2021 by Melanie Hanson

Student loan refinancing may be a wise decision under certain circumstances. Changes in financial standing – gross income, credit score, education attainment, etc. – are reasons to explore refinancing.

Pie Chart: Borrowers Who Have Refinanced or Consolidated Student Loans; 66.7% never consolidated, 22.1% consolidated federal, 7.7% refinanced private and federal, and 3.5% refinanced private loans only.

Why Should I Refinance My Student Loans?

Most borrowers who refinance their student loans do so because they want reduced minimum monthly payments to match their budget. You may also consider refinancing to simplify monthly payments by combining multiple loans into one loan (with a single monthly payment).

A refinance loan offers the opportunity to borrow at a lower interest rate; this is strongly recommended should your financial status improve or if you decide to add a co-signer.

Further, refinancing is often the only way to release a co-signer from an existing student loan or borrow with a different co-signer.

It is usually not possible to transfer ownership of a student loan debt balance without refinancing. Moreover, some refinance lenders may allow you to combine debt with a spouse.

Do you have federal loans? Financial experts and refinance lenders caution student borrowers to consider potential federal student debt relief. Federal loans are currently in suspended payments at 0% interest until January 31, 2022, at which point some amount of debt cancellation may go into effect.

Can I Save Money?

Refinancing is most cost effective when a borrower has a high debt balance. This is why lenders require a minimum balance for refinancing. The most common minimum balance is $5,000, but they can run as high as $60,000.

The best way to reduce end costs is to pay loans off faster. For example, a $10,000 refinance loan with a 5-year term at 5.00% annual percentage rate ultimately costs $543 less than the same loan with a 10-year term at 3.50% APR.

How Much Can I Save?

The higher your debt, the more potential for savings. Financial experts strongly advise, however, careful use of a loan calculator to explore all possible outcomes of refinancing your student loans.

Can I Reduce Monthly Payments?

Refinancing allows borrowers to alter the terms of their debt. To reduce monthly payments, borrowers need a longer loan term or a lower annual percentage rate (APR). Extending a loan term means you’ll pay more interest in the long run. A reduced monthly payment, however, is preferable to account delinquency and default.

You may choose to refinance all of your loans, federal and private, combining them. Hence, you make one monthly payment instead of several. Fewer bills mean fewer opportunities to miss a payment that would harm your credit history. Refinancing is the only way to combine federal and private student loan debt.

Can I Lower My Interest Rate?

The better your financial standing, the more likely it is you’ll be able to refinance at the lowest rate. To qualify for refinancing, you need a good credit history and a FICO score of 700 or higher (or 650+ with a co-signer). For the lowest rates, your credit rating should be over 800 and nearer to the maximum 850.

Other factors that influence refinance loan rates and term offers is a steady income. Not all lenders consider freelancing or “gig” work a satisfactory source of reliable income. Some lenders may even prefer that you have a steady job with a slightly smaller income. Of course, steady work with an increased income is even better.

The completion of occupational training or advanced education may earn a lower interest rate, as well. Statistics indicate that employment and gross income directly correlate with educational attainment; workers with more advanced degrees have increased earning potential and are more likely to be promoted than their peers with less formal education.

Finally, sometimes the easiest (and fastest) way to lower your interest rate is to add a co-signer, especially if that co-signer exceeds the lender’s minimum qualifications.

Can I Modify My Contract?

Refinancing may be your only opportunity to release a co-signer, such as a parent, from an existing student loan. If a parent is the loan holder, your lender may also allow you to transfer ownership of an educational debt from parent to child (i.e., the benefiting student).

Many refinance lenders also have co-signer release clauses; this means you can secure a lower interest rate for your refinance loan by adding a co-signer, then after a few years of consistent repayment, you may apply to release that co-signer from their financial obligation.

Few student loan refinance program allow you to combine debts with a spouse. It’s more common for lenders to recommend spouses act as each others’ co-signers.

When Should I Refinance Student Loans?

The best time to refinance is as soon as you qualify for a lower interest rate. This usually happens any time your financial situation improves. For example, if your credit score increases, it may qualify you for a lower rate.

Your credit score is on a scale of 300 to 850. Refinance lenders generally allow a minimum credit score between 650 and 700. Borrowers with scores exceeding 800 will qualify for the best rates. Scores in the 700s are considered “good” by most lenders.

You may also choose to refinance your private student loans if you plan to lose income or otherwise face a hardship that may influence your ability to make payments. You may opt to extend the term of your loan to reduce monthly payments. Some refinance lenders are also willing to work with you if you need to reduce monthly payments temporarily. Note that federal loans already have income-sensitive payment plans and deferment options – you would only want to refinance private student loans in cases of income loss or hardship.

Are There Any Downsides to Refinancing?

Certain consumer credit laws apply to all student refinance loans, but federal student loans come with their own special protections that they lose through refinancing. If you’re in good shape financially, however, you may not need such protections. Many refinance lenders offer their own borrower protections, as well, including deferment opportunities and even income-based repayment plans (though the latter is rare).

Federal consolidation loans retain these protections. Consolidation applies a new fixed interest rate that is the weighted average of the original loans’ rates. Consolidation does not apply to private student loans. Federal consolidation also does not offer the opportunity to borrow at a lower interest rate.

When Should I Not Refinance?

If your financial situation is unstable, use extreme caution. You may choose to refinance only your private loans so your federal loans remain eligible for special protections (such as a temporary 0% interest rate freeze).

For more on when not to refinance, read Why You May Not Qualify for the Best Refinance Rates.

Sources

  1. U.S. Department of Education (ED) Office of Federal Student Aid (OFSA), Coronavirus and Forbearance Info for Students, Borrowers, and Parents
  2. ED OFSA, Income-Driven Repayment (IDR) Plan Request
  3. HubSpot, Rhode Island Student Loan Authority Annual Report, Fiscal Year Ended June 30, 2020 And Dated December 31, 2020