If you’re making payments on private or federal student loans – or a combination of both – you may have considered refinancing to save money or make payments easier.
Refinancing can potentially help you lower your interest rate, reduce your monthly payment, simplify your finances or pay off your loans faster. But refinancing isn’t automatically the right choice for everyone. So, how do you know when the timing is right?
In general, you need to be in the grace period or repayment on one or more student loans after graduating or leaving school before you can refinance. Once you’ve reached that point, there are several situations when refinancing may make sense:
1. When interest rates are lower than your existing rate(s).
One of the most common reasons to refinance student loans is to potentially get a lower interest rate.
- Start by taking a look at the interest rates on your current loans. If you have multiple loans, you may have several different rates – and even a small difference in interest can add up over time.
- Your credit and financial situation may also have changed since you first borrowed. If you’ve built a stronger credit history, increased your income or paid down other debt, you may qualify for a more competitive rate than you did when you originally took out your loans.
- It’s also important to know whether your current loans have fixed or variable interest rates. A fixed rate stays the same for the life of the loan, while a variable rate can change over time.
When comparing refinance options, don’t just look at the advertised rate. The rate you actually qualify for will depend on factors such as your credit history, income, debt and other lender requirements.
You can use a student loan refinance calculator to estimate how a different interest rate could affect your monthly payment and total interest costs.
Keep in mind: A lower interest rate doesn’t automatically mean you’ll save money. If you extend your repayment term, for example, you could end up paying more interest over the life of the loan (more on that below). Look at the complete loan offer—including the interest rate, repayment term, monthly payment and total cost—before making a decision.
See current refinance rates and estimate your potential savings.
2. When you want to shorten or extend the length of time you’ll be making payments.
Refinancing can also give you an opportunity to change your repayment term.
Maybe your current monthly payment is difficult to manage. Choosing a longer repayment term could lower your required monthly payment by spreading your balance over a longer period of time.
For example, if you refinance your loans from a 10-year repayment term to a 15-year term, you’ll have more time to repay the balance, which could reduce your monthly payment. However, you’ll generally pay interest for a longer period of time, which could increase the total amount you pay over the life of the loan.
On the other hand, you may be in a better financial position now than when you first borrowed. If you can afford a higher monthly payment, choosing a shorter repayment term could help you pay off your student loans sooner and potentially reduce the amount of interest you pay.
Before choosing a shorter term, make sure the higher monthly payment fits comfortably within your budget.
You may also be able to pay off your existing loans faster without refinancing. If your current loans don’t have prepayment penalties, making extra payments toward your principal can help you pay down your balance sooner and reduce the amount of interest you pay over time.
The right repayment term depends on your budget and goals. A lower monthly payment may provide more flexibility today, while a shorter term could help you become debt-free sooner.
3. When you want all your student loans under your own name.
When you first borrowed for college, you may not have had much credit history or income. That’s common for students, and it can make it difficult to qualify for a private student loan on your own.
As a result, you may have needed a cosigner, such as a parent, grandparent or another creditworthy adult. Or, if a parent borrowed a federal Parent PLUS loan to help pay for your education, that debt is in the parent’s name.
As you graduate and establish your career, your financial situation may look very different.
If your private student loan has a cosigner release option, you may be able to remove your cosigner after meeting the lender’s requirements. But not every loan offers cosigner release, and requirements vary.
Refinancing is another option to consider if you want to move eligible student loan debt into your own name. If you qualify for a new private refinance loan based on your own credit and financial profile, you may be able to pay off your existing loans and take responsibility for the new loan yourself.
A refinance may allow you to:
- Remove a cosigner from an existing private student loan
- Move eligible student loan debt into your own name
- Potentially qualify for a better interest rate based on your improved financial profile
- Combine multiple loans into one monthly payment
If you’re thinking about refinancing federal student loans, it’s important to understand the trade-offs. Refinancing federal loans with a private lender means giving up federal benefits and protections that may be available with your current loans. Make sure you understand what you’re giving up before deciding to refinance.
Is now the right time to refinance?
There’s no single answer that applies to everyone. The right time depends on your current interest rates, financial situation and goals.
Take a close look at what you have now and compare it with what you may qualify for. Consider the interest rate, monthly payment, repayment term and total cost of the new loan—not just one factor.
And remember, you don’t have to wait until you’re struggling with your student loans to explore your options. If your financial situation has changed since you originally borrowed, it may be worth checking your refinance options to see if you could put your loans in a better position for the future.
*Important: Please remember that federal loans do offer certain benefits and protections that do not transfer to a private loan. By refinancing your federal student loans to a private loan you will lose any federal benefits that may apply to you. Please review this important disclosure for more information.
Loans subject to credit approval and additional criteria. Carefully consider whether consolidating your existing student loan debt is the right choice for you. Any reduction in your monthly payment may result from a lower interest rate, a longer repayment term, or both. Extending the loan term could increase the total interest paid over time.
