Paying student loans isn’t fun. But there are ways to make managing your student loans easier and more affordable. If you’re wondering: “Should I refinance my student loans?” Read on.
At the very least, refinancing your student loans can make your life easier by consolidating multiple loans into one, low-interest, monthly payment. In the best-case scenario, you may be able to save money and pay off your student loans faster if you’re able to get a refinance loan at a lower interest rate than you’re currently paying. You can use our student loan refinance calculator to estimate your savings or explore our recommended student loan refinance options.
Here, we’re going to talk about whether or not you should refinance your student loans right now. With student loan debt piling up for Millennials, rising benchmark rates mean that variable interest rates on student loans are going up too.
In most scenarios, it’s best to refinance at a fixed interest rate as soon as possible when interest rates are going up. But let’s first unpack what you need to know before refinancing.
What’s Ahead:
Let’s start with when you shouldn’t refinance
While student loan refinancing can help organize multiple student loans, refinancing can cancel out a lot of important programs that federal loans offer.
You should avoid refinancing if:
You want to qualify for federal forgiveness programs
Federal loans offer federal forgiveness programs that’ll help you pay off your student loan debt.
Refinancing your loans means paying off your old loans with a new loan, given by a private company rather than the federal government. This means that the federal repayment opportunity will disappear.
If you work in the public service sector (government or nonprofit work) and plan to continue to do so for a while, you could qualify for loan forgiveness after you’ve made 120 payments towards your loan. This also applies to teachers that work at low-income schools, some doctors (and nurses) in certain states, and those who are or were in the military.
You want a repayment plan based on your income
Income-based repayment plans or pay-as-you-earn plans are essential for some borrowers. If your income is an issue, you could qualify for very low payments, or even put off payments until you’re in a more financially stable place.
Like the loan forgiveness program, if you refinance your loans through a private company, this payment plan is no longer an option.
You have bad credit
If you have bad or no credit like so many younger adults do, qualifying for refinancing can be difficult. You’re taking out another loan, and loans require good credit.
Of course, there’s always the one way around the bad credit situation—finding a co-signer. With student loans, however, finding a co-signer might be more difficult because that person is agreeing to pay the mass amount of student debt you owe if you fail to make payments. That can be a big responsibility.
Even with poor credit, if you can show that you’ve at least been paying off your student loans regularly (even if you haven’t been paying off some other things), refinancers might take that into consideration. Here’s what to do if your refinancing application is rejected.
So when should you refinance?
As soon as you have a stable income (and good credit)
The sooner you refinance the more you save on the interest of your loans. And a higher credit score means a better interest rate.
If you can get a lower interest rate immediately you can save thousands of dollars in interest payments and pay off the loan quicker.
This probably means you won’t be able to finance right after you graduate. Jobs most people take right after graduation are likely not permanent and, depending on the job, don’t pay a whole lot.
Right after graduation is also when most people take advantage of the income-based plans—so take that into consideration before you think of refinancing.
If you have loans with high interest rates
As I’ve said, refinancing student loans sooner rather than later is important because you’ll save on interest. This is especially important in the current economic world because the Federal Reserve has just raised variable interest rates.
What does that mean for your student loans?
It means that the rate banks charge each other when they exchange money overnight is going up, therefore the interest on your loans is also going up.
Luckily, this variable rate mostly applies to private loans. Federal student loans no longer offer a variable rate (if you have loans that originated before 2006, you might still have a variable rate), but rather a fixed rate that isn’t subject to change.
You have multiple, expensive loans
If you less than $10,000 in loans, refinancing probably isn’t worth it. Since most borrowers have much more debt than this, lenders offer lengthy plans that allow you to pay smaller amounts over time with an interest rate that won’t force you to pay tens of thousands of dollars more than you borrowed.
Related: Should You Pay Off Student Loan Debt Early?
After grace periods
Federal student loans offer a six-month grace period right after you graduate from your undergraduate program. You can also defer paying your student loans if you go to grad school (this should not be the only reason you go to grad school).
These grace periods exist for a reason—chances are you will need them. Many people take on extra loans when they go to graduate school, so avoiding payments from previous loans as long as you can will be helpful. And the six-month period is about how long it takes most recent graduates to find a job.
Am I ready to refinance?
Check your credit
You can check your credit through sites like Credit Karma or Credit Sesame where checking your score won’t affect it. If you’ve got 700 or better, your score is likely good enough to qualify for the refinancing loan.
Keep a debt-to-income ratio is low
If you’re making more than you have in debt, that is obviously a good thing.
Your debt doesn’t just include student loans, it also includes credit card debt, car loan payments, and mortgage payments, among others.
Say you have recurring monthly debt payments of $2,000 and your monthly income is $5,0000—your debt-to-income ratio is 40%. The lower this percentage, the better.
Where to refinance
Now that you think you might be ready to refinance your loans, who do you refinance with? Read more about student loan refinance options or check out these recommended lenders:
Credible
Credible like to say they are the “Kayak” of student loans. Credible’s free and easy-to-use website lets you pre-qualify for student loan refinancing in a few easy steps. If you qualify, you can compare actual interest rates and monthly payments from dozens of leading student loan lenders. Compare student loan refi rates at Credible now.
Credible Credit Disclosure - To check the rates and terms you qualify for, Credible or our partner lender(s) conduct a soft credit pull that will not affect your credit score. However, when you apply for credit, your full credit report from one or more consumer reporting agencies will be requested, which is considered a hard credit pull and will affect your credit.Plus, Money Under 30 readers who refinance their student loans with Credible can get a $100 bonus! All bonus payments are by gift card. See terms
SoFi
SoFi offers variable loan rates ranging from 3.99% - 8.24% APR (including auto-pay discount of 0.25%). With 5-20 year plans, you’ll be able to pay off your debt at a fraction of the cost than if you stuck with your 7% interest rate.
If you have a good job and a history of reliable student loan payments, you can refinance with SoFi at a very competitive rate. See if you qualify for a SoFi refinance loan now without affecting your credit score.
All rates, member figures, estimates, terms, state availability, and savings calculations are current at the time this article was written. All of the above may update in the future. For the most up-to-date information, visit SoFi.com.
Earnest
Earnest offers APRs on both fixed and variable student loans
- Fixed APR – 4.96% - 8.99% APR (includes 0.25% autopay discount)
- Variable APR – 5.15% - 8.94% APR (includes 0.25% autopay discount)
Earnest also offers the closest to an income-based repayment plan as you’re going to get if you refinance. You can set your monthly payment—meaning you can pay off your loan as fast (or as slow) as you want.
With other features such as built-in employment protection if you lose your job and the ability to skip one payment a year, Earnest is one of the best student loan refinancing options available now. Check your refi rates with Earnest now.
Earnest SLR Disclosure - Actual rate and available repayment terms will vary based on your income. Fixed rates range from 5.21% APR to 9.24% APR (excludes 0.25% Auto Pay discount). Variable rates range from 5.40% APR to 9.19% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. The maximum rate for your loan is 9.13% if your loan term is 10 years or less. For loan terms of more than 10 years to 15 years, the interest rate will never exceed 9.21%. For loan terms over 15 years, the interest rate will never exceed 9.24%. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account.
Summary
Knowing when it’s time to refinance your student loans is an important step towards saving money and making the whole payment process less of a headache.
The bottom line is—if you have multiple student loans, a good paying job, and decent credit (or a cosigner), refinancing your loans is probably the right answer. However, if you rely on one of the federal programs, such as income-based repayment, it’s best to stick with that until you’re in a stable financial place.
Read more:
How much could you save by refinancing your student loans?
Check your rate and payment with Credible—it’s fast, free, and won’t affect your credit score:
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