There’s no better time than the present to rethink your financial situation. You’ve probably heard that a student loan refinance could save you money, but is it the right move for you? To know for sure, you must consider how a student loan refinance could help and if you are in the best position to refinance your student loans.
Refinancing your federal or private student loans may be right if:
You need to save money. When you secure a loan with a lower interest rate, you’ll save money with each monthly payment and you may be able to pay down the loan faster. If you need more money in your budget now, you can also refinance for a longer term – spreading payments out to reduce your monthly obligation. You can also still consider refinancing your student loans even if you've consolidated already.
Your current interest rate is high. If your private or federal student loans carry interest rates of 6.5 percent or higher, you’re likely to save money by refinancing. Parents can also often get a good deal by refinancing parent PLUS loans, which typically have higher interest rates.
You don’t plan on taking advantage of federal repayment options. If you refinance your federal student loans, you’ll no longer be eligible for income-driven repayment plans like IBR or ICR. The federal government has created several income-driven repayment plans – including Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), Pay As You Earn (PAYE) and the Revised Pay As You Earn (REPAYE) plan – which lower monthly payments if you earn a low wage, lose your job or experience economic hardship.
You don’t work in public service, as a teacher or in a non-profit. If you’re a federal employee, teacher or work in a public service field, you may be eligible to have your federal student loans forgiven after making consistent payments over a set period. If you refinance, you lose this benefit. If you are eligible for any of these programs, it’s wise to consider whether student loan forgiveness or refinancing will save you more in the long run.
You're in a good position to refinance student loans if:
You or your co-signer have good credit. A strong credit score shows you’re a trustworthy borrower. FICO scores in the 690 to 850 range will give you the best shot at refinancing for a low interest rate. If your credit isn’t where you want it to be, a parent or other trusted adult with strong credit can co-sign for you, agreeing to take responsibility for the loan if you can’t pay it.
Your debt-to-income ratio is low. If your debt-to-income ratio is low, that signals to lenders that you are a good candidate for a lower interest loan to refinance your student loan debt. To get your debt-to-income ratio, add all your monthly debt payments (car payment, student loan payment, credit card payment) and divide that by your gross monthly income – what you earn before taxes. If you have a steady income and your debt-to-income ratio is in the 20-to-36 percent range, refinancing is a safe choice and lenders are likely to offer you a lower rate to refinance.
What are the next steps to a student loan refinance?
Once you’ve made the decision to refinance, these next two tasks should be first on your to-do list:
1. Use a refinance calculator to know what your savings should look like.
You can find several student loan-refinancing calculators online that allow you to estimate your potential savings. This one is a good place to start.
2. Shop around for lenders.
You can do a lot of legwork online to learn what terms and interest rates each lender offers to find your most money-saving, manageable option. Find out whether a lender provides flexible repayment options and discounts for things like automatic debit, and ensure its customer service department is reachable and responsive should you have questions or problems.
Think you’re ready to refinance but need a little more information? Find out what you need to know before starting the process.