Should I Refinance My Student Loans?
Updated: Aug 3, 2022
You should consider refinancing student loans if you find a lower interest rate and you want to merge some or all of your student loan payments into one. While refinancing is a good idea in many cases, it's not best for everyone—especially those who need to take advantage of federal student loan protections.
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When you refinance student loans, lenders consider:
Credit score. Your credit score is the biggest determining factor in getting approved for student loan refinancing. Since you’re taking out an unsecured loan, lenders largely base your likelihood of repayment on a solid credit score, like a score of at least 670.
Income. You’ll need to prove you earn enough money to comfortably repay your loans. This also shows that if you have a financial emergency, you won’t fall behind on payments.
Debt-to-income (DTI) ratio. DTI is how much debt you have compared to how much money you earn. If you have a high DTI, you might not have enough money to repay your loan. A low DTI means lenders trust you’ll make on-time payments.
Total student loan balance. Some lenders have a maximum loan balance they’re willing to refinance.
Education background or type of degree. Depending on the lender, you might not be able to refinance your student loans if you didn’t graduate. Others require borrowers to have attained a specific degree, such as a bachelor’s.
Whether you have a co-signer. If you don’t have a longstanding credit history, you may need to include a co-signer on your loan. Some lenders don’t offer the option to apply with co-signers, so this could limit your options.
How Much Will Refinancing My Student Loans Save?
If you can secure a lower interest rate on a refinance loan, it could ultimately save you hundreds or even thousands of dollars.
As an example, let's say you have $30,000 in student loan debt with a 10-year repayment plan and an average interest rate of 6%. Your monthly payment would be $333, and you'd end up paying $9,967 in total interest over the life of your loans.
Now, let's say you were to refinance the loans into a new one right out of college with a 4% interest rate and the same repayment plan. Your new monthly payment would be $304, which doesn't sound like a big difference. But over 10 years, that reduced payment would save you $3,519 in interest.
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Are you eligible to refinance?
There’s no set eligibility standard that all lenders use for refinancing. To see if you’re eligible to refinance, prequalify with a few lenders and consider things like:
Your credit score. A high credit score means that you’re likely to be eligible to refinance with many lenders and choose the best one for you. Most lenders look for scores over 650, though scores on the lower end will result in higher interest rates.
Your debt-to-income ratio. Your DTI is what you owe in debt compared to your overall income. The lower your DTI, the more enticing you are to lenders. It means that if you ever have an emergency, you’re still able to make payments on your loan every month. The higher your DTI, the riskier you look to lenders. Try to keep your DTI under 50 percent.
Your monthly income. Even if they don’t advertise it, many lenders have a minimum income threshold. You will likely have to submit pay stubs or otherwise prove that you hold a steady job in order for lenders to consider you. In many cases, the minimum income threshold is around $35,000.
What is not a good reason to refinance student loans?
Many borrowers don't feel comfortable losing this protection and this is one of the most common reasons not to refinance student loans. If you lose your job or have to take a pay cut, making student loan payments can become more difficult, especially because private lenders don't offer much support in times of need.
What Are the Risks of Refinancing Student Loans?
One consideration is basic to most loans: Do you have a contingency plan if lose your job or otherwise can’t pay?
This is especially true of refinancing federal student loans, which provide benefits and protections that are not available from private lenders.
Can you refinance federal student loans? Absolutely! But before using private lenders to refinance, you need to determine how important the benefits attached to federal loans are to you and whether it’s worth giving those up.
Some federal student loans provide lower monthly payments to low-income students, which you can’t get from private lenders.
The federal government also offers the Federal Direct Consolidation Program, by which you can consolidate multiple federal student loans into one. The new rate is an average of your current rates. This probably won’t lower your payments, but consolidation simplifies your debt by giving you only one monthly payment. Consolidations also offer a longer time to repay, as much as 30 years, though – again! – that means paying more in interest on your loan.
Federal loans offer forgiveness for borrowers based on hardship or depending on their employment. Those in government jobs, military, teaching and some nonprofit work may be able to have large portions of their federal loans forgiven. No private lender offers that.
It doesn’t happen often, but the U.S. Department of Education may forgive loans if your school defrauded you or has closed.
There are other benefits and protections for federal student loans, but they all go away if you choose to refinance through a bank, credit union or online lender.
Can refinanced student loans be forgiven?
You'll miss out on federal student loan relief options, as well as government programs like income-driven repayment. You're pursuing student loan forgiveness. Refinancing federal loans makes them ineligible for federal loan programs including Public Service Loan Forgiveness and Teacher Loan Forgiveness.
Can you negotiate a lower interest rate on student loans?
Negotiate with your lender. If you have private student loans, you may be able to negotiate a lower interest rate with your lender. This is especially true if you're struggling to keep up with your monthly payments or if you plan to refinance and want to give your lender a chance to match.
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