When To Refinance Student Loans - All You Need To Know

Looking to ease your burden of debt? Refinancing is a good option but it isn't for everyone. Here is an in-dept understanding about when you should consider refinancing.

Updated by Jason Joy Manoj on 6th October 2020

Refinancing your student loans is the process where a lender takes the initiative of replacing your existing student loans with a new one by repaying them with a newly furnished loan. This new loan will have a lower rate of interest. This lowered interest rate will help you save money in the long run.

You must always refinance your private student loans when you find a lender who will refinance the existing loans with lower interest rates. You can refinance when you have a good credit score and a steady income. 

To refinance or not will always depend on the interest rate you pay after refinancing, and if this rate obtained help you in your repayment journey.

How soon should you go ahead for refinancing? And are you financially ready to go ahead with it? Even after this refinancing might still not be a good idea, let’s find out.

Table of contents

Can you refinance your student loans?

You can refinance both federal and private loans, even consolidated loans can be refinanced. The department of education does not provide a refinancing option, it is only done with the help of private lenders.

When you refinance your federal student loans you will lose federal protection benefits like loan forgiveness, discharge, etc. So it is important to know where you are heading when you refinance your student loans. 

When you refinance your private student loans you won’t have to worry as much as, you will only have to check if you qualify for a lower interest rate. Private loans are not eligible for any governmental benefits anyways. 

To refinance your federal or student loans, the lenders look at the following factors before refinancing

1 - Good credit - It’s been noted that a majority of lenders who have scores above 700 are usually preferred as it is a good indicator that you will be able to repay the loan. It is important to maintain a score above 600. In case you do have a bad credit score then you should apply with a co-signer who has a good credit score.

2 - On-time payments - Maintaining a history of on-time payments is important as it is evidence that you have dealt well with debt in the past. This shows in your credit history increasing your creditworthiness. 

3 - Steady income - Income is checked before you receive approval to refinance. The debt to income ratio is an important factor that your private lender considers. You must maintain a low debt income up to 50% below. The better income higher the chance of having a loan approved. 

Should you refinance your student loans?

Deciding to refinance or not can be tricky. Concluding to refinance without having complete information about refinancing can be an unwise decision. Please be aware that refinancing has disadvantages and you do not want to be losing money and other benefits by doing so. There can be occasions where not refinancing your loans can be more favorable. Therefore before you go ahead and refinance your student loans or even take it into consideration to refinance -- ask yourself these questions mentioned below 

1) How much to pay each month towards repayment?

Use a student loan repayment calculator to try and understand how much you will have monthly payment can be. Compare and consider factors like losing federal protection benefits before you refinance.

Based on the repayment amount you can decide on a repayment term. Here are your two options:

  • A longer student loan repayment term will have lower monthly payments to be met which is beneficial to borrowers with lower income, high living costs, etc

  • A shorter repayment plan will have higher payments to be met but you can get out of debt faster

2) Will you need the federal loan repayment options?

When you refinance you replace your federal student loan, private loans, or both with a single loan from a private lender. When you decide to refinance your student loan, bear in mind that this action is irreversible and you will lose federal benefits attached. 

Some of these benefits offered along with federal loans are:

  • Loan forgiveness programs 

  • Deferment and forbearance under federal rules

  • Alternative repayment plans, including income-driven repayment plans

The whole point of these benefits is to try and assist the borrower during his/her repayment journey. So if you are confident that you can keep up with payments in the future then you can give up these protections offered by the government.

3) Do you need a co-signer? Can you release my co-signer?

Your credit score is an important factor of consideration while getting approved for refinancing. If you have a bad credit score there is a high chance of getting rejected, so if you do have a bad credit score then you should apply for refinancing with a co-signer. 

  • Your co-signer needs to meet the lending requirements as shown by the lender

  • There are instances where when borrowers refinance their student loans and get an offer which doesn’t make much of a difference in terms of the overall payments to be made

  • But there are cases when they apply with a co-signer and they get a better repayment offer

If you have a co-signer attached to your loans from the previous arrangement then you can release your co-signer by refinancing your loans. While refinancing you can replace the old loans with a new loan that doesn’t include the co-signer. Consider the situation where a borrower would have taken a loan with their parents as a co-signer and after graduating the borrower may secure a job with a steady income then it would be a good idea to remove them as a co-signer. 

4) Will you receive flexible payment options?

When you refinance you lose your federal repayment options and benefits, and apart from that with an unpredictable future ahead of us you can never determine when you will face financial difficulty. So it is always better to keep or have flexible payment options in hand.

  • Always consider refinancing with borrowers that offer borrower protections like deferment and forbearance

  • See if the policies offered by them will allow adjustment to your payments if given the unfortunate situation where you incur a particular financial problem and are struggling to repay

  • SoFi is a private lender that provides unemployment protection for their borrowers that allows a pause in the monthly payments to be made if the borrower has incurred a loss of a job

  • Other private lenders like Laurel road agree with their borrowers to honor the grace period

If you opt to refinance right after graduating you will get some free time before you enter into repayment.

5) Support and service you can expect from your lender?

While refinancing it is important to get the initial terms and rates right.

  • Apart from the technicalities of the loan got after refinancing it is also important to check the experience one can expect to get from the lender during the term of the loan

  • We have read on online forums and discussions which talk about poor customer service which only adds on to the stress on your loan

Lenders with strong customer-oriented service objectives can help in managing student debt more efficiently and resolve any issues that may occur.

6) Interest rates you can expect while refinancing?

If you require a lower interest rate you need to first figure out what your current rates are and how much lower you need it to be for comfortable monthly payments. 

Based on a survey taken for the rates in the past 10 years the interest rates have ranged from 3.40% to 8.50% depending on the loan and offered rate at the time of the origination. Private student loans ranged between 4% to 15%. If you find a private student loan lender offering lesser variable interest rates, any benefits, or make offers suitable for your financial situations you can consider refinancing with them, for which thorough studies must be performed from your end. 

How soon can you refinance your student loans?

Most people jump right ahead to refinance their current loans. They look at any opportunity available to reduce the loan interest and get a better repayment plan along with ease of repayment of loans 

Here are two major factors you need to evaluate before you jump right into refinance:

  • Check your credit score - if you have a credit score above 700 then you have a very good chance of landing a refinancing option by a lender 

  • Keep a low debt to income ratio - a low debt to income ratio is a good indicator to a lender. This debt in this ratio is not just your student loan debt but also includes your credit card debt, etc

To refinance you are asked to first build a steady income, get your credit score higher, and build a good payment record. But this takes a lot of time and with loan debt, over your head, it is difficult to build these requirements hand in hand.

If you have the opportunity to build a good credit record while you are still in school.

If the job can cover more than just your bills you could start your refinance process before your payments start. 

But before you start it is important to check the grace period and whether the lender will honor the grace period. Certain lenders such as SoFi, Earnest, and CommonBond honor the remainder of the grace period.

Certain lenders will not let you refinance your loans while you are still at school. Most lenders have a requirement that the borrower should have a degree to refinance.

                                          Worried about your college tuition? Learn more about Best student loans

Where do you refinance my student loans?

If you have evaluated your current situation and feel like refinancing is the right way to go then you need to decide who and where to go to to get your loans refinanced. Here are a couple of lenders to consider while planning to refinance:

1) Earnest 

If you are looking for an income-repayment plan then Earnest offers the closest to what you can get to an income-repayment plan from a private lender. The borrower is given the freedom to set the monthly payment as per his/her convenience. Setting a monthly payment allows the borrower to pay off a loan as fast or as slow as he/she would find it convenient.

Apart from this feature, borrowers who refinance their loans with Earnest also are given in-built employment protection to its borrowers given an unfortunate situation where the borrower has the option to skip one payment a year if he/she loses their job.

Learn more about Earnest student loan reviews

2) SoFi

They are known for their competitive rates as they provide variable rates as low as 2.43 percent which is a hard rate to beat as compared to the other private lenders. The repayment plans offered by them vary from 5 to 20 years, this is an attractive option along with the interest rate offered because you can pay off your debt at a much lower cost when compared to repayment plans at a 7 percent interest rate. To qualify for refinancing with SoFi, you need to have a good job with a good repayment history. SoFi also offers refinancing options and also to combine your private and federal student loans. On autopay options, interest rates can be reduced by a small percent. 

Learn more about SoFi student loan reviews

3) Sallie Mae

Sallie Mae offers private student loans for undergraduate, graduate students, and parents. They also provide consolidation and refinancing of both federal and private student loans. Their Fixed APR varies from  4.74% to 11.85%, whereas the variable interest rates vary from variable APR from 1.50% to 9.66%. Sallie Mae is considering to be one of the best private student loan lenders who provide competitive interest rates and have credibility in the student loan market. They also provide Free FICO credit score reports.

Learn more about Sallie Mae student loan reviews

4) College Ave

Like Sallie Mae, College Ave provides student loans to undergraduates, graduate students, and parents, and also offers student loan refinancing. Like other lenders, College Ave also provides an auto-pay option which provides a 0.25% interest rate reduction. Their interest rates vary from Fixed APR - 3.49% - 12.99% , Variable APR - 1.24% to 11.98%

Learn more about College Ave student loan review

You have multiple other lenders who can help you in the process of refinancing your student loans. Here is a list of the other best student loan refinancing lenders to help you decide on whom to go ahead to refinancing your student loans. 

Is Refinancing student loans a bad decision?

If your student loans have high-interest rates then refinancing your current loans with a new one with a lower interest rate sounds great. But let’s dive deeper into the decision making of whether to take up refinancing or not. 

We need to understand that refinancing is not the best option for everyone and isn’t the solution to everyone's student loan repayment woes. Some borrowers need to play the waiting game as they have to build up their credit score and get a stable income. 

In some cases the borrower would be better off not refinancing his/her loans at all, an in-depth understanding of the risks involved with refinancing is required. Given below are the downsides of refinancing your student loans:

1)Interest rates will not be lowered 

One of the most common reasons to refinance student loans is to lower their current interest rates. All student loan interest rates are compounded daily so upon lowering the interest rates you could save a lot of money over the overall life/term of the loan. 

But as per historical recordings, the student loan interest rates have already been on a historical low for several years so there is a high chance that the interest rate you are currently repaying with is already quite low. So upon refinancing you won’t get a much lower rate. And in terms of payments, although most refinancing lending companies do not charge an origination fee or an application fee most of them do so this could lead to additional payments to be made which could harm your savings. But at the same time, we cannot negate the fact that any reduction in interest rate will lead to saving some money over the life of the loan.

2) You lose access to federal benefits 

since all the refinancing is done by private lenders you lose out on certain benefits like loan forgiveness and loan repayment. Why do these benefits matter? If allowed to get rid of your loans you would at the drop of a hat. Loan forgiveness allows you to have your loans forgiven if you are enrolled for the forgiven program and make on-time payments. 

During the time of repayment, you can go through any kind of financial distress with an unpredictable future and market swings. You will need help with your repayment journey loan repayment options are a boon. 

Refinancing is a great way to about your student loans but it is not for everyone. Everyone has a different situation financially and situations can vary, it is always important to check all the options you can make use of to help you and have an in-depth knowledge of the pros and cons of each of the options you have access to. 

Frequently Asked Questions

  • 1.How much student loan debt can be refinanced?

    You can refinance a student loan debt of $5,000 to $500,000 of your current federal, private, and Parent Plus loans. The limit of refinancing depends on the amount borrowed by the borrower.

  • 2.What credit score is needed to refinance student loans?

    Generally, a credit score of more than 600 is required to qualify for refinancing. If the borrower fails to meet this then a cosigner with a good credit score that is between 650 to 680 is needed for refinancing student loans.

  • 3.Does everyone qualify for student loans?

    No. Not everyone qualifies and you need a degree, good credit score, and a regular income that lets you meet your expenses otherwise you will not be able to refinance your student loans

  • 4.Which loans can be included in refinancing?

    You can include all the loans that you have taken for your education but you cannot include debt from mortgage or credit card even if you have used those loans to pay educational expenses.

  • 5.Is there any risk of refinancing?

    Yes.There is a big risk that comes with refinancing. Extending payment loans makes you pay a lot of interest on your student loans. It’s better to compare the payment you pay over time with your total loan costs before refinancing. If it would be high then its better to rethink refinancing.

  • 6.When is the best time to refinance?  

    Its better to refinance when you get lower interest than the present interest rate on your student loans. before refinancing if you are using an in-school deferment option or grace period you will move into full repayment once your loans have been refinanced.

  • 7.Can a student loan be refinanced when he/she is still in college?

    No.Most lenders do not allow you to refinance your student loans when you are in school. You need to be close to your graduation and likely to start repayment immediately then only the lender allows you to refinance your student loans.