As a rule, the sooner you refinance student loans, the better. When you refinance, the lender pays your existing loans with a new one with a lower interest rate. This will save you money in the long run – and from the very first payment.
When you need to refinance student loans, it depends on whether you find a bet that will change your life. For example, a private student loan of $ 30,000 with an interest rate of 8% will give you a monthly payment of $ 364 for 10 years. Refinancing up to a 10-year loan term at 5% per annum will save you a total of $ 5494 and $ 46 per month – this is enough to invest a fee for electricity, cable or telephone.
But not everyone can or should refinance. As a rule, you need a higher education, good credit and income, which allows you to comfortably pay your expenses and cover your debt payments.
Can you refinance student loans?
You can refinance both federal and private student loans – even if you have already consolidated or refinanced. You cannot transfer private loans to the federal government, but you can refinance federal student loans through private lenders. However, refinanced federal loans will not be eligible for government loan programs, including on the basis of repaying income and forgiving loans.
With private student loans, you have nothing to lose if you qualify for a lower rate. Unlike federal student loans, you will not lose any government loan benefits if you refinance private student loans.
If you are refinancing federal student loans, private student loans, or both, lenders are looking for borrowers who have:
- Good credit. You typically need a credit score that’s in the high 600s at least. Many lenders cater to borrowers who have scores in the 700s or higher. If you have bad credit, you may still be able to qualify by applying with a co-signer.
- A history of on-time loan payments. Lenders will likely dig into your credit report to find evidence that you’ve paid your debts regularly in the past.
- Enough income to pay your debts. Lenders will also look at your capacity to repay the refinanced student loan. Some calculate your debt-to-income ratio, or the amount of debt you owe relative to your income. The required debt-to-income ratio for student loan refinancing is generally 50% or lower. A DTI of 20% or less is excellent.
When to refinance student loans?
If this is right for you, refinancing can free up money every month and reduce the amount of interest you pay over time. Consider refinancing in the following circumstances:
- You have student loans with high variable rates. Interest rates are expected to rise through 2020, which means loans with variable rates will get more expensive to repay. Before they rise again, consider refinancing to lock in a fixed rate.
- You have private student loans. If you have private student loans, you have nothing to lose by refinancing because private loans aren’t eligible for federal loan programs.
- Your credit has improved. If refinancing doesn’t make sense right when you graduate, consider it once you’re on sturdier financial footing. If you were rejected for refinancing in the past, try again after you’ve paid off credit card debt, for instance, or gotten a raise.
- The savings will make a difference. It’s not necessary to wait until you have perfect credit to refinance, as long as you can qualify for a better rate than you have now. You can always refinance again in the future to get an even lower rate.
Can you refinance student loans while still in school?
For most people, refinancing after finishing school makes sense: It gives you some time to land a job and build the credit and payment record needed to qualify for the best possible rate. Many lenders also require you to have a degree, but some will refinance student loans if you haven’t graduated.
If you built great credit while in school and quickly find a job that more than covers your bills, you could refinance before your payments start.
When you shouldn’t refinance student loans?
You generally can’t or shouldn’t refinance if:
- You have federal loans and could see a drop in income. If there’s a chance you’ll make a career change, leave the workforce for a period of time or go freelance, keep federal loans out of your refinancing plans. You may need to take advantage of income-driven repayment, which lowers federal loan payments to a percentage of your income.
- 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.
- You recently declared bankruptcy. It’s not impossible to refinance student loans if you’ve declared bankruptcy, but it’s more difficult. Many lenders require that a certain amount of time — anywhere from four to 10 years — must have passed since your bankruptcy.
- You’ve recently defaulted on student debt. A default in your past is a red flag for lenders. If the default is wiped from your credit report, which typically takes seven years, you could qualify as long as you meet the credit, income and other underwriting criteria.
- You’ll take much longer to pay off loans. Refinancing to a low monthly payment could mean a longer loan term and paying more interest. Say you’re five years into a 10-year loan term and you refinance to a new 10-year loan. You’ll pay more in interest overall because you’re repaying loans for 15 years total, rather than 10.