You may have lower monthly payments and pay less interest when you refinance student loans but sometimes you’re better off waiting.
Experts say you should refinance your student loans as soon as you can.
Refinancing student loans means a lender will pay off your existing student loan debt, then you’ll pay back the lender by taking out a new loan with a much lower interest rate.
The total amount your lender paid to get rid of your student loans will become the balance you owe on your new loan.
If you have multiple student loans, a refinance will consolidate all of them so you’ll only have one payment to make to your lender each month.
Dropping your interest rate with a refi will not only decrease your monthly payments but also lower the total interest you’ll pay for your loan overall.
Though these benefits seem pretty fire, refinancing student loans isn’t right for everyone.
When To Refinance Your Student Loans
You can refinance both federal and private student loans, and both if you have them.
There’s no “right” time to refinance your student loans.
But as with all new loans, your chances of approval and scoring a low interest rate all depend on your creditworthiness.
And that means the best times to refinance student loans are when:
Your loans have high or variable interest rates
Interest rates on student loans average between 3% and 15%.
If your loans carry a fixed interest rate on the high end of this scale, a refi should bring your rate down to the lower end. Dropping your interest fees will then help you save money.
If your student loans have variable interest rates, they may be getting more expensive to pay back since these rates rise and fall with the market.
Refinance your student loans and you could lock in a much lower fixed rate that won’t jump around during the life of your loan.
Whichever you choose, always make sure your new interest rate is lower than the rate on the loans you’re refinancing. The higher your current interest rate, the more money you’ll save refinancing to a lower one.
You’ve displayed creditworthy behavior
Lenders like borrowers who know how to manage and pay off their debt.
If you’ve been paying your bills on time, never get sent to collections, improve your credit utilization ratio, and display other signs of financial adulting, you’ll be a perfect candidate for approval.
Your credit score is 650+
You don’t need perfect credit to qualify for a refi, but higher credit scores display trustworthy borrowing behavior and lenders dig that.
If your credit is less-than-awesome, you may not qualify for the lowest interest rates reserved for applicants with credit scores above 750.
As long as your interest rates are lower than they were, a refi still makes sense.
You can always refinance again in the future for an even better rate when your credit score improves or you pay off other debts.
You have a steady job and stable income to repay your loan
Lenders will check your debt-to-income ratio to compare how much you owe versus how much you earn. This will show them all your outstanding debt from mortgage payments to credit cards, medical bills, and more.
Having a higher income is a definite plus for lenders come approval time while lower salaries may require more scrutinizing.
So if you land a decent job post-graduation, lenders will have more confidence in your ability to pay them back and offer a refi approval.
If you have the potential to earn a higher income but don’t currently, like if you’re still in medical school, you may get approval for a refi based on your future earnings.
You want to release a cosigner
If one of your parents or guardians originally cosigned on your student loans with you, and now you want to pay off your debt solo, a refi will get them off the hook.
However, since refinancing creates a new loan, you’ll need to make sure you can qualify for one on your own.
You have private student loans
Refinancing public or federal student loans comes with a few downsides (more on this next). But refinancing a private student loan carries almost zero risks. So you have nothing to lose and a lower monthly payment to gain.
If you find yourself in any of these scenarios, refinancing your student loans may be a smart option.
The opposite may be true for these next cases.
When You Should Wait to Refinance Your Student Loans
They say timing is everything and the same goes for refinancing student loans.
It may not be the best move to refinance your student loans if:
You have federal student loans
Public student loans entitle you to loads of benefits and alternative payment plans, such as income-driven repayment and loan forgiveness.
But when you refinance a public student loan, a private company will pay off your loan and you’ll start a new loan with that private company.
That means you won’t be eligible to receive all those benefits public student loans offer.
You’re still in school or recently graduated
Lenders want applicants who can repay their loans. If you’re still in school or working temp right out of college, it may be harder for you to prove your income is high enough for a new loan.
Certain lenders won’t even refinance student loans if you’re still a student.
Don’t despair; you can always apply later when your income is higher and you can show off your creditworthiness.
This rule doesn’t apply if you’ve been working while attending school, have great credit, and a decent income. Give refi a shot and you could score a lower rate before your very first payment.
Your refinance will take longer to pay off than your current student loans
Lenders lower monthly payments if you agree to longer terms. This helps lenders make money but it costs you more in total interest.
Say you have a 10-year student loan of which you’ve been paying off for five years. You only have five more years worth of payments left.
If you refinance your student loans for another 10-year loan to qualify for low monthly payments, you’ll be adding 10 years to the five years of payback you’ve already done. That’s five extra years of paying interest, or a total of 15 years worth of interest charges.
This will negate any low interest rate you may receive with a refi because you’ll be paying interest longer despite a lower monthly payment.
You have bad or no credit
Poor credit history is the biggest obstacle people face during a refi approval. Since it’s the factor most tied to whether you’ll be able to repay your loan debt, lenders have to take your financial past seriously.
You should wait to apply for a refinance if:
- You don’t have any credit history. Some lenders consider a lack of credit just as sketchy as bad credit.
So start building up your credit with a low-interest credit card and don’t spend more than 30% of your limit. In six months you’ll have a credit score and history for lenders to use during your refi approval.
- Your credit score is less than 600. Lenders will set minimum credit requirements around the 600 to 680 mark. Anything less than this may not win an approval. The lowest interest rates are saved for people with credit scores in or above the 700-750 range.
- You have a high debt-to-income ratio. Lenders like a DTI ratio between 30% and 40%. This means your debt cannot be higher than 40% of your annual salary. Owe more than this and lenders may not approve your refi.
- You’ve declared bankruptcy within the last four to 10 years.
- You defaulted on a student loan before. Defaulting on a loan makes lenders worry you’ll do the same to them. It takes seven years to wipe a default from your credit report so you can either wait or work extra hard to show lenders you can handle a refi loan.
Then again, lenders each use different criteria to approve applicants for loans.
One lender may approve your refi while another takes a pass. The only way to know your fate is to compare all your options.
Compare Your Options for Refinancing Student Loans
The best time to refinance your student loans is when you can qualify for lower interest rates. This generally requires a credit score above 650, a stable income, and stellar displays of creditworthiness.
But since each company uses different criteria to approve applicants for loans, you should compare all your options from multiple lenders online before choosing one.
Check out our Student Loan Calculator here!
This intelligent robot wizard will figure out the best refinance terms, rates, monthly payments, and estimated savings for you.
Then you can use those numbers as a guideline for what to look for in a refi.
Time your application right and you should be able to lower your monthly payments, pay less interest, and get rid of your student loan debt sooner than later.