Refinancing student loans can be a great idea, but it is not the best option for everyone. Refinancing student loans allows you to pay a lower interest rate while merging your payments into one.
You should not refinance your loans if you need to take advantage of federal student loan protections.
It may be a good idea to refinance student loans if you are a private student loan borrower, but it is generally not a good idea if you are a federal borrower.
This article describes refinancing student loans, when it is a good idea, and the pros and cons of refinancing student loans.
What Does It Mean to Refinance Student Loans?
To refinance student loans is to take out a new loan that replaces an old loan (or more than one loan).
By taking out a new loan, your old loans will be paid off, but you still have to make payments towards your new loans.
The new loan will give you new terms, a new lender (sometimes), and most importantly, a new interest rate.
Should I Refinance My Student Loans?
When deciding whether or not to refinance student loans, take into account the following factors:
- Your current loan interest rate. High-interest private student loans can be a challenge to pay off. If you want to lower your interest rates, and thus lower your monthly payments and your total loan amount, you should consider refinancing.
- How much money you would save. You should only refinance if it allows you to save money on your interest rate, monthly payments, and overall loan payment.
- Your credit score. A solid credit score will make you more eligible for student loan refinancing. It should at least be above 670. The higher your credit score, the more likely lenders will work with you and offer you lower rates. You also need a solid credit score because new credit applications will trigger a hard credit inquiry, which will limit your ability to apply for other types of credit such as credit cards, auto loans, and mortgages.
- If you need a co-signer. Some lenders will allow you to have a co-signer. Having a co-signer can help you qualify for student loan refinancing. It is a good idea to opt for a loan that will release the co-signer after a certain number of on-time payments.
- Your payment history. Lenders will look at your payment history. This is the determining factor in your credit score. Lenders may not allow you to take out a new loan if you are having trouble affording your current student loans.
Who Qualifies to Refinance Student Loans?
To qualify to refinance your student loans, you must have a good credit score. A credit score is the determining factor to get approved for student loan refinancing.
Lenders need to know how likely you are to repay your loans, and they get this information from your credit score.
You also need a steady income to refinance student loans. When you take out a loan, you must prove you earn enough money to repay it. If you have a reliable income, you are showing that you will eventually repay your loan and that you won’t fall behind on payments, even if financial emergencies happen.
To qualify for student loan refinancing, you must also have a low debt-to-income ratio.
A debt-to-income ratio represents how much debt you have compared to how much money you earn. You want this ratio to be low, so lenders trust that you can comfortably pay off the loan.
Private Student Loans vs. Federal Student Loans
The majority of borrowers are federal student loan borrowers – about 92% of borrowers. Private student loan borrowers make up the rest.
When it comes to refinancing your student loans, which type of borrower you are will determine whether or not it is a good idea.
Both federal and private student loan borrowers can refinance their loans, but federal loan borrowers have payments on freeze right now because of the pandemic. Federal loan borrowers would lose this benefit if they refinanced.
Until September 2021, federal student loan borrowers are not charged monthly payments and their interest rate is set to zero. Since the only reason to refinance is to get lower interest rates, it is not a good idea for federal borrowers to refinance at this time.
Federal loans also come with other benefits such as income-driven repayment plans that can lower monthly payments and Public Service Loan Forgiveness for working at non-profits, government agencies, etc.
If you refinance federal loans, you lose these benefits. Even when payments resume for federal loans, you should only refinance federal loans if you don’t think you will ever use the other benefits offered.
If you believe your income will be stable throughout your loan payments and you won’t qualify to be forgiven, then you can refinance your federal student loans.
Another aspect to consider when refinancing federal loans is President Biden’s plan to cancel student loan debt.
While no plan has been passed yet, federal student loans could be forgiven at least in part. If you refinance your loans, you will no longer be eligible for forgiveness.
On the other side, it is a good idea for private loan borrowers to refinance right now to take advantage of low interest rates. If you have taken out private student loans and are paying too high of an interest rate, it may be a good time to take advantage of low interest rates from private lenders.
Private student loan borrowers who want to refinance should choose a lender that offers fixed APRs. This will lock in your low interest rate.
Refinancing student loans may help you get a lower interest rate and reduce your monthly payments. However, it may not be the best way to get out of debt. Refinancing is not the best idea for every borrower.
|WHEN TO REFINANCE YOUR STUDENT LOANS:|
|You should refinance if you want to pay off your loan sooner. You can pay off your loans quicker by lowering your interest rates.|
|You should consider refinancing if you are not making progress in paying off your loans. If you are struggling to keep up with monthly payments and interest, refinancing can help you start to make more progress each month.|
|You should only refinance your student loans if your income and credit are good. These factors are necessary to qualify for student loan refinancing and will help you qualify for lower interest rates.|
|Another great reason to refinance is that market interest rates are at a historic low. Private student loan borrowers can take advantage of low market interest rates by refinancing|
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