Refinancing your student loans can have multiple benefits, including lowering your monthly payment and saving thousands over the life of your loan.
But is it the right move for you? The answer depends on several things. Refinancing your student loans can save you a lot of money, but it shouldn’t be a snap decision—especially if there are federal loans in the mix.
When should I refinance my student loans?
There are a few times when it’s an especially good idea to refinance your loans. These include:
When you can score a lower interest rate
Most people refinance their student loans for this primary reason. It doesn’t take much to make refinancing worthwhile—a rate just a point or two lower could save you thousands over the life of your loan.
For instance, let’s say you have a $35,000 loan on a 15-year term. At 5% interest, you’ll pay an additional $14,819.80.
Reduce that rate to 4%, and you’ll pay $11,600.39—a savings of $3,219.14. That’s a pretty good payoff for about 15 minutes worth of time.
When you’re struggling with your monthly payment (on private loans)
While the government offers income-driven repayment plans and other programs to reduce the monthly payment on your federal loans, your existing private lender may not have a uniform program for doing this.
Refinancing your private loans is a way to reset your term to a longer period, which will reduce your monthly payments. If you can reduce your interest rate at the same time, you'll really start to save some money.
When you have a good credit score
Private lenders reserve their best interest rates for people with good credit. So if your credit score is high, you stand a good chance of getting a rate that will make refinancing worth it.
Federal student loan interest rates aren’t determined by your credit score—but private loan interest rates are. If you had a less-than-stellar credit score when you took out your private student loans, you can fix that by refinancing those loans after you’ve rehabilitated your credit.
When you have great job prospects
Every lender will assess your situation differently—but if you’re on track for a lucrative career (for instance by being in a medical residency), you may look like a great prospect to lenders, even if you’re not earning much at the moment.
When is it not a good idea to refinance?
Refinancing may still be a good decision for you in some of these circumstances, but if one of these is true for you, you may need to weigh your options more carefully.
When you can’t get a better interest rate
Getting a lower interest rate is the name of the game for refinancing.
When refinancing won’t score you a lower rate—either because you have less-than-ideal credit or your current interest rate is already low—you miss out on that big advantage. Although there are other reasons to do it—like resetting your loan term or switching lenders if you're unhappy with the lender you have.
And, you might be surprised at the interest rates some lenders offer. Some of the newer, cutting-edge lenders--SoFi is one example—look at more than your credit score to determine your rate. It can’t hurt to fill out some initial applications and see.
When you’re taking advantage of Public Service Loan Forgiveness
This program will forgive your federal student loans after 120 qualifying payments (a period of about 10 years), as long as you work for a qualifying employer and jump through all the hoops.
You can only get forgiveness on federal Direct loans. So if you’ve been paying under PSLF for a while and then refinance your federal loans, you lose out on getting your loans forgiven. This is true of other federal forgiveness programs, too.
When you qualify for income-driven repayment
Income-driven repayment plans reset your monthly payments to a percentage of your discretionary income (ranging from 10-20%). These plans have their own pitfalls, but also perks—such as student loan forgiveness after 20-25 years. You lose access to income-driven repayment if you refinance your federal loans.
That said, as you'll see if you click on the link in the paragraph above, it's possible to get such a low monthly rate in your income-driven repayment plan that you accumulate interest faster than you pay off the loan. For people who don't realize they're in that situation, the results can be disastrous.
So income-driven repayment isn't always the best long-term option. If you’re considering refinancing your federal loans to get a longer term and reduce your monthly payments, it may be a good idea to weigh your income-driven repayment options along with refinancing offers and see which is a better idea for you.
Can I refinance my student loans?
You can refinance your student loans at any time—either private or federal.
The first step is to fill out an online application with a lender. They’ll do a “soft pull” to decide on your offer—this won’t show up on your credit. After they do that, they’ll give you a preliminary interest rate offer.
Do the math and see if the new interest rate is worth it—you should do this for several lenders. Once you’ve picked one, let the lender know you accept.
They’ll do a “hard pull” to give you a final offer, and then they’ll handle all the paperwork to transfer your existing loans into one single loan under them.
Want to see how much you could save by refinancing? Check out this Student Loan Refinancing Calculator.