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 indept understanding on when you should consider refinancing, how soon you should refinance your current loans and much more.

Updated by Jason Joy Manoj on 28th February 2020

Refinancing your student loans is the process where a lender takes an 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 interest rate. This lowered interest rate will help you save money in the long run.

Whether to refinance or not will depend on the rate you get after refinancing, and whether this rate got will help you in your repayment journey.

How soon should you go ahead for refinancing when you start repaying? And are you financially ready to go ahead with refinancing? You should choose to refinance when you get good credit and a stable income. Even after this refinancing might still not be a good idea, let’s find out.

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Can I refinance my 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 eligibility to certain federal benefits like loan forgiveness, discharge, etc. So it is important to know what you are getting into when you refinance your 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 rate. Private loans are not eligible for any governmental benefits. 

In order to refinance your federal or student loans, the private lenders look at the following factors for consideration before refinancing:

  • 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.

  • 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.

  • Steady income - your income is another indicator of whether you will be able to repay the refinanced loan. Your debt to income ratio is an important indicator of the lender. You need to try and maintain a low debt to income, preferably below 50%.

Should I refinance my student loans?

Before you go ahead and refinance your student loans or even take consideration to whether you should refinance your loans ask yourself these questions:

1) How much can I pay each month towards my loan repayment?

Use a student loan repayment calculator to try and understand how much you will have to shell out each month. Compare how much you will have to shell out before you refinance with how much you will have to shell out after 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 I need federal loan repayment options in the future?

When you refinance you replace your federal student loan, private loans or both with a single loan from a private lender. When you refinance you need to understand this action undertaken is irreversible and you will lose federal benefits.

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 os 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 I need a co-signer? Can I 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 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. Upon 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 the lender who refinances my loan give me 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 job. 

Other private lenders like Laurel road enter into an agreement 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) What is the kind of support and service I can expect from my 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) What are the interest rates I can expect while refinancing?

If you are in need of 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%.

Learn more about student loan interest rates

How soon can I refinance my student loans?

In order 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.

There are certain lenders that 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 in order to refinance.

Am I ready to refinance my 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.

Where do I 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 in order 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 the he/she would find it convenient.

Apart from this feature, borrowers who refinance their loans with Earnest also are given an 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.

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.In order to qualify for refinancing with SoFi you need to have a good job with a good repayment history.

3) Credible - with a user-friendly and easy to use the website you can pre-qualify for a refinancing program with Credible in a few easy steps. Once qualified you to have the option to compare actual interest rates and payments to be made with other lenders in the student loan market.

Here is a list of the other best companies to refinance your student loans to help you decide on whom to go ahead with.

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 by that much - One of the most common reasons to refinance student loans is to lower their current interest rates. All student loan interest rates are compounded on a daily basis so upon lowering your 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 rate which is much lower. 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 given an opportunity 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.