When Should You Refinance Student Loans?

Refinancing your student loans can help you lower your interest rate, reduce your monthly payment, or both. However, deciding when to refinance isn't always straightforward. Timing matters and the choice depends on your financial goals and situation.

In this guide, learn when refinancing makes sense, when it doesn't, and how to decide if it's the right choice for you.

Current private student loan refinance rates

What is student loan refinancing?

Student loan refinancing involves taking out a new loan, ideally with a lower interest rate and monthly payment, to pay off your existing loan. At the end of the transaction, you might have an easier time managing your monthly payment or possibly set yourself up to pay less interest over the loan term.

See Also: How Often Can You Refinance Student Loans?

When should you refinance student loans?

Generally, refinancing makes sense in the following situations:

Your financial situation has improved

Lenders base your interest rate on factors like your credit score, income, and debt-to-income ratio.

“Refinancing is ideal when your financial health has improved, such as a better credit score, stable income, or reduced debt-to-income ratio. This can secure you a lower interest rate or convert a variable rate to fixed, saving you money,” says Iqbal Ahmad, director at Britannia School of Academics.

Lower interest rates are available

You don't need a significantly improved financial situation to take advantage of lower interest rates. Favorable market conditions can also open the door to savings, especially if you have high-interest private student loans.

Since the federal funds rate impacts borrowing costs, keeping an eye on rate trends can help you decide if it's the right time to refinance. If your current rate is high, shopping around for a better offer could lead to huge savings.

You want to change your repayment term

Refinancing can help adjust your monthly payment to fit your budget better. For example, if you need more flexibility to cover expenses like a mortgage or retirement savings, extending your repayment term through refinancing can lower your monthly bill.

Keep in mind, though, that while a longer term can lower your monthly payment, it often increases the total interest you'll pay over the life of the loan.

When to avoid refinancing student loans

Refinancing isn't always the right decision. Here's when it might not make sense:

You have federal student loans

Refinancing federal student loans with a private lender means losing valuable borrower protections. Federal loans offer benefits like income-driven repayment plans, deferment and forbearance options, and potential eligibility for forgiveness programs.

Before refinancing, consider whether you might need these federal benefits in the future. If you're relying on a forgiveness program or need the flexibility of an income-driven plan, keeping your federal loans intact is likely the better option.

You're working toward forgiveness

If you're on track for federal student loan forgiveness, refinancing into a private loan is likely not the best move. Federal programs like Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness, and income-driven repayment forgiveness can eliminate your remaining balance after meeting specific requirements.

Refinancing would disqualify you from these programs, so it's essential to weigh how close you are to achieving forgiveness before making a decision. If you're nearing the finish line, it's usually better to stick with your federal loans.

Your financial situation isn't strong

Refinancing typically requires a solid credit score and steady income to secure a lower interest rate. If your financial profile isn't strong, refinancing might not be the right move. While some lenders offer refinancing options for borrowers with bad credit, you may struggle to qualify for competitive rates.

“Avoid student loan refinancing if you're financially unstable,” says Brett Holzhauer, a certified personal finance counselor who says he's refinanced his own student loans six times. Holzhauer adds, “If you're unable to project money coming in, adjusting your student loan terms won't help your situation much.”

Should I refinance my student debt?

Deciding whether to refinance starts with running the numbers.

An online student loan refinance calculator can help you estimate potential savings, but don't just focus on the monthly payment. Look at the loan term and total interest costs as well.

Refinancing to a longer term with lower monthly payments might offer budget relief, but it often means paying more in interest over time. If you can avoid extending your term, you'll save more in the long run. However, if you need smaller payments to stay afloat, the trade-off might be worth it.

“If you currently have public student loans, there are protections you have in case of financial hardship,” says Holzhauer.

“However, if you refinance from public to private loans, you will lose all of those protections, and your student loan doesn't have any protection. It becomes a quasi-personal loan that you must pay, or could face significant financial issues,” he adds.

Federal loans often provide borrower protections and forgiveness opportunities that private loans lack. While refinancing federal loans into a private student loan is an option, giving up the borrower protections could lead to less support during times of future financial distress.

Steps to refinance student loans

If you've decided refinancing is the right choice, follow these steps to get started:

• Check your credit: Start by checking your credit score. Generally, the best time to refinance student loans is after you've seen a significant improvement in your credit score because it could help you unlock lower rates.
• Gather your financial documents: After confirming your credit is in good shape, collect your financial information. Most lenders want to see pay stubs, tax returns, proof of residency, proof of graduation, and a government-issued ID.
• Compare lenders: Each refinance lender sets its own rates and terms. You can use an online comparison marketplace like Credible to view current rates and prequalify with multiple lenders at once.
• Complete an application: After choosing a lender, complete your application. Processing times vary, but it typically takes a few days to finalize the refinance.

Continue making payments on your existing loans until your new loan is processed. Once the refinance is complete, confirm that your old loans have been paid off to avoid any confusion.