If refinancing your student loans could save you money or make your monthly loan payments more manageable, it may be time to consider a refinance. When you refinance student loans, you replace your existing loans with a new loan from a private lender. Ideally, the new loan would have better rates and terms, if you can qualify for them.
Refinancing isn’t always the right choice, however. There are times when it may not be in your favor. If you’re wondering, should I refinance my student loans?, here’s what you need to know.
Key Points
• Refinancing student loans can potentially save borrowers money through lower interest rates and reduced monthly payments.
• A good credit score is needed to qualify for the best refinancing offers and terms.
• Borrowers who want to switch from variable to fixed interest rates (or vice versa) can do so by refinancing.
• Refinancing federal loans results in losing eligibility for federal forgiveness and income-driven repayment programs.
• Weighing pros and cons is crucial, especially for those with federal student loans, to determine if refinancing is beneficial.
When to Refinance Student Loans
There are several situations in which refinancing student loans makes sense, including these instances:
You Have Private Student Loans With High Interest Rates
If you took out private student loans to help cover the cost of school and the interest you’re paying is high, refinancing may help you get a lower rate. This is especially true at times when interest rates are lower overall and/or when your financial history is solid.
If you qualify for an interest rate that’s even just a few points lower than your current rate, you could potentially save thousands of dollars. This could be one of the times when to refinance student loans. A student loan refinancing calculator can help you crunch the numbers to see what your specific savings might be.
Or perhaps you need to lower your monthly payment to help save money. One way to do this is to refinance your student loans with a longer loan term. This will reduce your payments, however, you will end up paying more in interest over the life of the loan. You could also lower your payment by getting a lower student loan refinancing rate, if possible, and keeping the term the same.
Your Credit Score is Good
Your eligibility to refinance student loans depends in part on your credit score. If you’ve spent time building your credit and you have a stable job, you may qualify for lower student loan refinancing rates.
You can also consider applying for a student loan refinance with a cosigner. If your cosigner has a stronger credit profile than you, you may be able to land a better rate on your refinance.
You can usually refinance student loans right after graduating, and as often as you want after that. Most lenders charge no fees to refinance.
You Have Multiple Loans
If you have several different student loans, refinancing allows you to combine them all into one loan. Basically, when you refinance, you take out a new loan, and that loan is used to pay off your existing loans. You then make payments on the new loan. It streamlines the repayment process since you have just one loan payment to make each month.
You can refinance both federal and private student loans, or a combination of both types, but be aware that refinancing federal loans with a private lender will forfeit your eligibility for federal benefits and protections.
You Qualify for Refinancing
Whether you qualify to refinance student loans depends in part on your credit score, as noted, along with your financial history, employment, and debt-to-income ratio (your monthly income vs. expenses). If you qualify, and ideally, if you can get a lower interest rate, you can save money by refinancing.
You Want to Remove a Cosigner
If you have a cosigner on your student loans and you’d like to remove them, refinancing is one way to do that — as long as you have the credit and financial history to qualify to refinance on your own. To remove the cosigner, take out the refinance loan in your own name only. The cosigner will not have any responsibility for the new loan.
You Want to Switch to Fixed Interest
If you have student loans with variable rates, and you’re concerned that interest rates will rise, you may want to consider refinancing to lock in a fixed rate on the new loan.
You Are Willing to Give Up Federal Benefits
Borrowers with federal student loans need to understand that refinancing these loans into a private student loan will eliminate the ability to participate in income-driven repayment plans, Public Service Loan Forgiveness, and federal deferment and forbearance.
If you are using these benefits or you plan to, it’s not recommended to refinance your student loans. Instead, you could consider student loan consolidation vs. refinancing. A federal student loan consolidation combines multiple loans into one, with the interest rate being the weighted average of the loans you are consolidating rounded up to the nearest one-eighth of a percent.
IMPORTANT: The projections or other information generated by this quiz regarding the likelihood of various outcomes are hypothetical in nature, do not reflect actual results, and are not guarantees of offers.
When Not to Refinance Student Loans
Just like there are times when refinancing may be a wise choice, there are also times when it’s best not to refinance your student loans. You’ll generally want to rule out refinancing in the following situations.
You Want to Use a Federal Loan Forgiveness Program
If you have federal student loans and you’re planning on taking advantage of federal loan forgiveness programs that cancel some of your debt after you meet certain qualifications, refinancing is not the right option for you. Refinancing federal loans into a new private loan makes them ineligible for federal benefits and programs.
You Work in Public Service or Education
Borrowers working in a public service job or as a teacher or educator should think twice about refinancing. If you keep your federal student loans, you may be able to qualify for Public Service Loan Forgiveness (PSLF) or Teacher Loan Forgiveness. With PSLF, eligible borrowers who work in public service for a qualifying nonprofit organization or government agency may qualify for forgiveness from their remaining loan balance after making 120 qualifying payments.
With Teacher Loan Forgiveness, if you teach for five consecutive years in a low-income school or educational service agency and meet certain other qualifications, you may be eligible for forgiveness for up to $17,500 on certain federal student loans, including Direct Subsidized and Unsubsidized Loans.
Refinancing federal student loans means you lose access to these forgiveness programs.
You Need Flexible Repayment Options
If you need a payment plan that could make it easier to repay your federal student loans, income-driven repayment (IDR) is an option to consider. IDR plans base your payments on your discretionary income and family size. The repayment period ranges from 20 to 25 years on these plans.
There are three IDR plans borrowers can currently enroll in via an online application: the income- based repayment (IBR) plan, the income-contingent repayment (ICR) plan, and the Pay As You Earn (PAYE) repayment plan. On one of these plans, the IBR plan, the remainder of your student loan debt may be forgiven at the end of the repayment term.
If you refinance student loans, you will not be eligible for IDR plans.
You Have Poor Credit
Borrowers need good credit to qualify for refinancing, and they need good or excellent credit to be eligible for lower interest rates. If your credit is poor, it may be wise to hold off on refinancing and work on building your credit instead. You could always refinance later, when your financial situation improves and your credit is stronger.
The Takeaway
Knowing when and when not to refinance student loans is important. Refinancing your loans can make sense if it saves you money or helps you get more favorable loan terms. But if your credit isn’t strong enough to get a lower interest rate, or you have federal student loans and want to pursue federal programs like loan forgiveness, refinancing isn’t recommended.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQ
Can refinancing student loans reduce the cost of your total debt?
Yes, refinancing your student loans may reduce the total cost of your debt by reducing the amount of interest you pay over the life of the loan. You can do this by getting a lower interest rate (and keeping your loan term the same) and/or shortening your loan term.
What credit score do you need to refinance student loans?
The minimum credit score needed to refinance student loans varies from lender to lender, but according to FICO, a “good” credit score is 670 or higher. To get the best student loan refinance rates, you’ll want to have a good credit score and low debt-to-income ratio. If you don’t meet those requirements, you may want to consider refinancing with a cosigner or waiting until you build your credit.
How do I qualify for student loan refinancing?
To qualify for student loan refinancing, you need strong credit, a low debt-to-income ratio, and stable employment and a steady income. Some lenders may also require you to have your degree in order to refinance. If you don’t meet the refinancing qualifications, you could add a creditworthy cosigner to your loan application or wait to refinance when your financial situation improves.
What are the benefits of refinancing student loans?
The benefits of refinancing student loans include saving money if you can qualify for a lower interest rate, lower monthly payments if you extend your loan term, switching from a variable rate loan to a loan with a fixed rate, and removing a cosigner from your loan if that is something you are looking to do. Just be aware that refinancing federal student loans makes them ineligible for federal programs and protections.
Can student loans be forgiven if you refinance?
No, student loans cannot be forgiven if you refinance. Refinancing federal loans into private loans makes them ineligible for forgiveness. If you have federal student loans and you would like to pursue federal loan forgiveness, refinancing is not the recommended option for you.
SoFi Student Loan Refinance SoFi Loan Products
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).
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