If you’re struggling to make your monthly student loan payments, you may be considering ways to lower them. By refinancing for a lower interest rate or a longer payment term, you could reduce your payments to a more manageable number.
Of course, you might benefit from refinancing your student loans even if you don’t have trouble making your payments.
But student loan refinancing isn't the right choice for everyone. Ask yourself these seven questions to see if it’s your best move.
1. Will your loan balance qualify?
Some lenders have a minimum balance requirement on private loans—often $5,000 or more.
If your balance is considered too low to refinance, but you’d still like a savings strategy, consider paying a little more than the minimum due each month—especially on high-interest loans—and asking your loan servicer to put the extra toward the principal.
You’ll lower your balance more quickly without drastically increasing your monthly payments.
2. How good is your credit score?
Your credit score determines what interest rates and terms you can receive. A history of on-time student loan payments improves your score. Lenders generally look for a score between 690 and 850.
If your score is too low, you might need a cosigner to insure your student loans in the case of default. If you’ve built a good credit score since taking out loans, you may be able to release a past cosigner from their obligation if you refinance.
One word of caution: when you apply to refinance, the lender will check your credit report. If you apply to several lenders to shop for rates, these inquiries will show on your credit report and could briefly lower your score. Try to limit your loan shopping to less than 15 days to reduce the impact.
3. Would you ever take advantage of federal loan repayment programs?
If you refinance a federal student loan with a private lender, you could lose eligibility for:
Also, if you have federal student loans and you teach, work in the public sector, or are currently eligible for income-driven repayment, you may qualify for student loan forgiveness—something you’d lose if you refinance. Find out before you make your decision.
In some cases, you may be more interested in reducing your interest rate than maintaining the federal repayment options. And if you do refinance your federal student loans, the new lender may offer flexible repayment plans that could impact your monthly payments and possibly reduce the amount you pay over the life of the loan.
4. Do you have a steady source of income?
Having a steady full-time job shows lenders you’ll probably be able to make your payments on time, which can help qualify you for a lower interest rate when you refinance.
If your income stream is less certain, you may need a cosigner.
5. What interest rate are you able to get?
Interest rates on federal student loans can range from less than 4% to more than 7%, depending on the loan type. Private loan rates can be even higher, topping out at over 14%.
If your current interest rates are high, you can probably save money by refinancing.
If the interest rate on your potential new loan is variable (which means it can fluctuate), make sure you find out how it’s calculated, how often it’s adjusted, and whether there’s a limit on how high it can go.
Fixed rates are less risky because they stay the same over time. Variable rates often start lower but could rise based on their specific index.
6. What are the new payment details?
Getting into the nitty gritty can be tedious, but it’s a necessary part of any big financial decision, especially refinancing your student loans. The specific terms of one plan might work better for you or result in lower payments over the life of the loan.
Ask your potential lender these questions:
- When will my first payment be due?
- How much will I owe each month?
- How long will my repayment term be?
- Can I pay off more than the minimum each month? How?
- What will I pay in total?
You may also want to ask what happens if you lose your job or can’t make your payments.
7. Are there discounts or extra fees?
Some lenders offer discounts for behaviors they want to incentivize.
For instance, many provide a reduced interest rate if you opt for automatic debit, which helps ensure you make payments on time. If you’re relying on a discount, you may want to ask whether you could lose the discount under certain circumstances, like if you make a late payment.
Also, be sure to ask whether there are fees associated with refinancing. Some lenders charge a student loan origination fee or fees if you miss a payment, default on your loan, or even prepay.
See our picks for the best no-fee student loan refinance lenders.