Should I refinance student loans?
Student loan refinancing lets you take existing debt and renegotiate the terms and interest based on your current financial situation.
Unlike federal direct loan consolidation, which is exclusively used for federal debt that is being bundled into a single payment, refinancing lets you get better rates for both private and federal loans.
Most importantly, refinancing your student loans is a great way to get back your financial autonomy and power. For most students, getting a student loan requires having a cosigner with good credit--usually a family member or trusted friend. While it is a great deed from a loved one, it’s also a financial burden. Refinancing lets you choose a new lender, find a better interest rate, and most importantly, it releases your cosigner from repayment responsibilities.
When you refinance your loan, the lender you’re working with will pay off your existing loan and give you a new one at lower interest rates, or with reduced monthly payments. In many cases, you can find significantly better student loan refinance interest rates, and save hundreds and even thousands of dollars over the lifetime of your loan.
Additionally, you can often choose between variable and fixed rates, delivering the option for obtaining lower interest. Finally, refinancing grants you the opportunity to set a repayment term that works with your personal timeline. Instead of a fixed term, many lenders let you choose repayment periods that range from 5 to 20 years when you refinance private student loans and federal aid. Keep in mind, though, that if you refinance your federal student loans, you’ll lose the opportunity to apply for public service loan forgiveness and other federal income-driven repayment options.
How Do I qualify for Student Loan Refinancing?
It’s worth noting that while refinancing is a great way to improve the terms of your student loan, it also requires some effort and financial responsibility on your part. Refinancing, much like other loans, are a financial risk for lenders, so they do have some stringent standards to qualify.
Even so, there are some steps you can take to improve your odds of being approved:
- Build a strong credit score: This is perhaps the most important aspect of your refinancing, and it can be the difference between a high interest rate or better terms. The goal is to have at least 600, but preferably a much higher score.
- Have a stable budget: While lenders won’t look at your monthly spending, they will see how responsible you are at paying off your monthly obligations such as utilities and existing debt. A history of steady repayments is a big plus for lenders.
- Make sure your debt-to-income ratio is right: This measure of how much debt you’re repaying monthly against your income is an important consideration for lenders. Having a low debt-to-income ratio means that you can safely repay more without putting a strain on your finances.
- Have a steady job: Most importantly, lenders want to know that you can reliably afford to pay your debt down every month over a long period. Having a stable job or even a written job offer can significantly improve the likelihood that you’ll get approved at favorable terms.
Private Refinancing vs Bank Refinancing?
The lending industry has changed significantly over the past decade, and as banks continue to favor the status quo, new private lenders that specialize in student loans while offering better service and rates have emerged. Even so, banks remain relevant today for a reason, and they deserve a closer look.
One of the most important trust factors a lender can give its customers is the financial institution that backs it. For many private lenders, this will vary between banks and other private capital. For bank underwriters, however, the backing is always clear, and offers the stability of a highly regulated financial institution.
This comes with its own benefits and convenience. For instance, if you have a bank account with the same bank, you can automate your payments and often get small interest rate discounts. Nevertheless, banks tend to have less flexibility when it comes to repayment terms, have steeper borrower requirements to be eligible, and have higher interest rates.
On the other hand, private lenders provide services that are designed to help borrowers refinance private student loans and federal aid. These include everything from community outreach and online forums to educational resources and budgeting apps. Moreover, they can offer lower rates in some cases, leading to better refinancing opportunities in general.
When Is Best to Refinance Your Student Loans?
While it may be tempting to dive into refinancing your loan immediately when you can start paying it, you should take some time to consider if it’s really the best call. There are arguments to be made for waiting and doing it as soon as possible, but they largely depend on your specific circumstances.
These are some good reasons why you should refinance:
- There are favorable economic conditions
For example, the US Federal reserve is currently maintaining historically low interest rates. Refinancing right now could lock you in at a much more favorable interest rate.
- Your finances significantly improved
Refinancing only makes sense if you can guarantee better terms for your repayment. If you have a better job or your credit score has improved, you may be able to refinance at much lower interest rates.
- You have high variable rates
If you choose variable rates, they may experience sharp increases over time. To avoid paying more, it may be better to simply refinance at a fixed interest rate that locks in for the rest of your repayments.
On the other hand, you should reconsider refinancing in the following cases:
- Your finances haven’t improved
If you haven’t managed to boost your income or improve your credit, your refinancing terms may not provide much of a benefit. They may even give your worse terms.
- Your debt-to-income is too high
If you’re paying off large chunks of debt every month, even a high income may not be enough. Lenders worry when your debt repayments are already a significant portion of your paycheck.
- You may qualify for federal student loan forgiveness
Better rates are great, but if you have federal student loans, you may qualify to have some of your debt forgiven for a variety of reasons. If you refinance, you’ll lose any access to these programs.