Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.
If you’re like most borrowers, particularly those with six figures’ worth of student loans from graduate or professional school, you might find that looking at your student debt square in the face is a downer, but repayment can be managed.
Is refinancing a good idea? It can be. When? When you can snag a lower interest rate and in a few other situations.
Student Loan Repayment Plans
Chances are you set up a student loan repayment plan after graduation and figured you’d revisit it later — when you’re making more money, when your career is more secure, when you have more time. The standard repayment plan for federal student loans is 10 years. Direct Consolidation Loans have a repayment period of 10 to 30 years.
Putting off the repayment thought is understandable. After receiving your undergraduate or graduate degree, your focus is on other things (like building a career).
But if you let that nebulous “later” turn into “never,” the repercussions can be costly. At some point, refinancing your student loans could potentially save you a significant amount of money. You just need to figure out if it is the right move for you.
When to Finance Your Student Loans
1. Your Current Student Loans Have High Interest Rates
Look at the interest rates you’re paying on your student loans, particularly federal Direct Unsubsidized Loans (graduate or professional), federal grad PLUS loans, and/or private student loans.
Depending on how high your loan balance is and how much you could reduce the interest rates by refinancing one or more loans, your cost savings may be significant.
2. Your Financial Situation Has Improved Since You Took Out the Loans
Maybe you were a starving student when you took out federal or private student loans, but ideally your financial situation has improved with time. This is great news for your bottom line, because a higher credit score and income help a borrower qualify for lower interest rates.
If you expect to stay on an upward financial trajectory, you might even consider refinancing to a variable-rate student loan, which will have a lower starting interest rate than a fixed-rate loan. Variable rates are tied to market fluctuations, though, which means rates that are very low today are likely to go up at some point.
The upshot is that a variable-rate loan could be a good option for a qualified borrower who intends to pay off the loan at a relatively fast pace.
3. You Don’t Plan to Use Certain Federal Student Loan Benefits
Borrowers who go to work in the public sector may qualify for the Public Service Loan Forgiveness program. Some federal programs also offer relief for borrowers who experience financial hardships (such as student loan deferment and forbearance, income-driven repayment plans, and the graduated repayment plan).
If you expect your income to be unpredictable or you’re looking into qualifying public service employment, it probably wouldn’t behoove you to refinance federal student loans. But refinancing could make sense if you don’t plan to tap into any of the federal programs listed above and you can gain a lower rate.
Recommended: Looking for more guidance on your student loans? Explore SoFi’s Student Loan Help Center for tips, resources, guides, and more!
4. You’re Going to Take Out a Large Loan
For loans like mortgage loans, lenders will look at your debt-to-income ratio, among other things. DTI is your monthly debt payments per month, including your future mortgage payments, divided by your gross monthly income. A low DTI generally signals better odds of loan approval and better interest rates.
Decreasing your monthly student loan payment by refinancing, with, say, a long loan term, could lower your DTI.
It might make sense to refinance your student loans at least six months before buying a home or making any other large purchase. That will give you time to recoup the points lost after a hard credit inquiry.
Once the mortgage or other big loan has been secured, you could refinance again, this time picking the lender offering the lowest rate, not just the lowest payment. You can refinance student loans as many times as you wish.
If you think student loan refinancing may be a good option for you, the next step is to check out several refinancing providers to compare interest rates and other features.
Refinance Student Loans With SoFi
You can refinance both federal and private student loans into one new loan with SoFi in an easy, all-online process. You can get your rate in two minutes.
SoFi also offers access to an extensive member network through complementary member experiences like happy hours and dinners.
Which means you could gain more than cost savings when you refinance student loans.
When should I refinance my student loans?
It might make sense to refinance as soon as you have a stable income and good credit that can usher in a lower rate.
Can I refinance student loans after buying a house?
Buying a home creates new debt, and that can make refinancing student loans more difficult. But by waiting several months or even a year to refinance, the dust can settle on the mortgage decision.
Is refinancing my student loans a good idea?
If you’re struggling to repay federal student loans, you might consider an income-driven repayment plan or federal student loan consolidation.
But if you can qualify, your income is stable, and you would save money by refinancing federal or private student loans, that might be a smart move.
Student Loan Refinancing
If you are a federal student loan borrower you should take time now to prepare for your payments to restart, including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.) Please note that once you refinance federal student loans, you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans, such as the SAVE Plan, or extended repayment plans.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.