When is the best time to refinance your student loans?
Refinancing your student loans can help you lower your interest rate or pay off your loans sooner, but it doesn’t make sense in every situation
Refinancing your student loans gives you the chance to secure a new loan with a better interest rate, which can help you save money as you work toward paying down your student loan debt.
While there’s no one right time to refinance student loans, it might make more sense in certain situations. Keep reading to learn when is the best time to refinance your student loans, when refinancing might not make sense, and how to refinance your student loans.
Visit Credible to learn more about student loan refinancing and see your prequalified rates.
- When is the best time to refinance your student loans?
- When not to refinance your student loans
- How to refinance your student loans
When is the best time to refinance your student loans?
When you refinance your student loans, you take out a new loan in order to pay off your original loans. You’ll then have one monthly payment to keep track of, and the new loan will ideally come with a lower interest rate or more-favorable loan terms.
It’s easy to see why refinancing can be appealing. While every borrower has a unique financial situation, it could be beneficial to refinance student loans in these situations:
When you can get a better interest rate
Securing a lower interest rate when refinancing student loans isn’t a guarantee, but if you can get a lower rate, you may be able to save a decent amount of money on interest over the life of your loan.
If you have a variable-rate loan, you may be able to refinance to a fixed-rate loan, which will give you the same interest rate for the life of the loan. This can be easier to budget for than a loan with a variable interest rate, which can change over time. Because variable-rate loans typically begin with a lower interest rate and increase to a larger one over time, you may end up paying more for a variable-rate loan than one with a fixed rate.
STUDENT LOAN REFINANCING CAN POTENTIALLY SAVE BORROWERS $5K WHILE FIXED RATES ARE LOW
When you want a smaller monthly payment
If you can get a lower interest rate or a longer repayment term on a refinance loan, you can potentially lower your monthly payment amount. If you’re on a tight budget after leaving school, a lower monthly payment can make managing your finances a lot less stressful. You can also keep paying your original monthly payment amount to help speed up the repayment process while also having the option to stick with the lower payment when you have other expenses you need to focus on.
When you have a steady income
If you’ve graduated and are making a consistent income, or you’ve recently gotten a raise at work, it could be a good time to refinance your student loans. When you refinance private student loans with a private lender, they’ll want to see proof of income. Lenders will also look at your debt-to-income ratio, or DTI — the amount of your monthly income that goes toward debt payments — to make sure you’ll be able to repay your new loan.
Just keep in mind that when you refinance federal loans into a private student loan, you’ll lose access to important federal benefits, like student loan forgiveness programs and income-driven repayment plans. If your employment situation is still unsteady, it’s generally better to keep your federal student loans so that you still have access to these benefits.
When your credit has improved
If your credit score has improved since you originally took out your private student loans, or you now have a cosigner with a high credit score, then refinancing may be beneficial. The higher your credit score is, the more likely you are to qualify for a lower interest rate. If your credit score is significantly higher than when you originally took out private student loans, you may qualify for a much better interest rate and can save a lot of money.
You can compare student loan refinance rates using Credible, and it won’t affect your credit score.
When you want to simplify your monthly payments
One of the major benefits of refinancing is that it allows you to consolidate multiple loan payments into one convenient monthly payment.
If you want to consolidate federal student loans without refinancing them into private loans, you can combine them into a federal Direct Consolidation Loan through the Department of Education. Your interest rate will be a weighted average of all your existing loans, so your new rate may not be lower. But only having one monthly payment to keep track of can make it much simpler to manage your debt.
It’s worth noting that you can’t consolidate private student loans into a federal Direct Consolidation Loan.
When your deferment ends
With federal student loans, if you run into financial difficulties, you may qualify for a deferment or a forbearance, which allows you to temporarily pause making student loan payments. The U.S. Department of Education typically offers more deferment options than private lenders do. But once your deferment period ends, you may find that’s a good time to refinance, as you no longer need to worry about missing out on that federal perk.
STUDY: 31% OF LARGE COMPANIES PLAN TO OFFER STUDENT LOAN ASSISTANCE
When you’re out of school
Federal student loans generally come with a grace period of six months after you graduate or leave school when you aren’t required to make payments (although it’s worth confirming your lender’s specific repayment terms). Because federal student loan borrowers aren’t typically required to make payments until they leave school, it usually doesn’t make sense to refinance before then, as doing so will kick-start the repayment process.
However, if you have private student loans, you’ll likely begin repaying your loans as soon as you graduate. It’s worth checking with your private lender to find out whether it offers a grace period on student loan repayment.
When not to refinance your student loans
Now that you know when it can be helpful to refinance student loans, let’s look at some times when it may not be advantageous, or even possible, to refinance student loans:
- You’ve recently filed for bankruptcy. Filing for bankruptcy can negatively impact your credit report for up to 10 years. Having a damaged credit score will hurt your ability to secure a new loan, so it may be better to hold off on refinancing if you recently filed for bankruptcy.
- You have loans in default. If you default on your student loans, your credit score is going to take a hit, and it’s unlikely you’ll be able to get a better interest rate by refinancing. You may not even be able to find a lender who will approve you for a refinance if your current loans are in default.
- You’re still working on your credit and you don’t have a cosigner. If your credit score hasn’t improved since you first took out your loans, and you can’t find a cosigner with a good credit score, then refinancing might not save you any money and won’t necessarily be worth the effort (especially if you’ll lose access to federal protections).
- Your loans are in deferment or forbearance. If you have federal loans that are in deferment or forbearance and you refinance with a private lender, you'll lose out on that pause in payments, which won’t be beneficial to you since you’ll have to start repaying your refinance loan right away. It’s best to skip refinancing if you currently have loans in deferment or forbearance.
- You have federal student loans and are making payments toward student loan forgiveness. When you refinance federal loans into private loans, you lose federal benefits. If you’re currently working toward student loan forgiveness under the Public Service Loan Forgiveness Program (PSLF) or an income-driven repayment plan, refinancing into a private loan will cause you to lose credit for all the payments you’ve made toward loan forgiveness.
- Your loans are almost paid off. Applying for a private student loan refinance generally triggers a hard credit pull, which can temporarily lower your credit scores by a few points. Many private lenders also charge origination fees for processing the new loan, which are deducted from your new loan amount. If you’re close to paying off your student loans, refinancing likely won’t save you all that much in interest, and any savings probably won’t be worth paying a fee or adding a hard pull to your credit report.
WHAT TO KNOW ABOUT STUDENT LOAN CONSOLIDATION
How to refinance your student loans
If you decide that refinancing is right for you, you’ll usually follow these steps to refinance your student loans:
- Shop around and compare rates. When you research refinancing options, you need to compare the rates and terms offered by three to five different lenders to see which loan will save you the most money. On top of comparing new offers, you also need to compare all these offers to your existing student loans, as you won’t want to refinance if it will come with less-favorable rates and terms than you already have.
- Apply with the lender you choose. Once you choose a lender to work with, you’ll complete a refinancing application. Each lender has its own eligibility requirements and process for applying for a refinance loan, but they’ll have support staff who can assist you if needed.
- Continue paying on your original loans. Unless your current student loans are in a grace period, deferment, or forbearance, you need to keep making payments on your original loans until your new lender informs you that it has paid off your existing loans. At that point, you’ll start making payments on the new loan.
- Set up automatic payments for your new loan. Refinancing multiple loans into one loan can make managing student loan debt easier. To make things even simpler, you can set up automatic payments for your new loan. Many private lenders also offer an autopay discount for setting up automatic payments. Just make sure you keep enough money in your bank account for that automatic payment to be made, and you’ll never have to worry about accidentally missing a payment.
If you’re ready to refinance, use Credible to quickly compare student loan refinance rates from various lenders, all in one place.