With President Biden’s plans for student loan relief still in limbo, some borrowers saddled with debt have begun seeking other options. One way to make student loan debt easier to manage — and potentially lower your interest rate and/or switch up your repayment term — is through student loan refinancing. Refinancing involves moving your existing student loans into one new loan, which can streamline how many different payments you are juggling each month.
This may sound appealing, particularly “with the Federal Reserve cutting its benchmark interest rate in September by half of a percentage point,” ushering in a “new rate environment,” said Money. However, while “several lenders are advertising rates that are slightly lower than they were at this time last year,” on the whole, “refinance rates are still well above where they were a few years ago.”
So should you or shouldn’t you pursue refinancing? Here is what to consider.
When is refinancing your student loans worth considering?
There are a few scenarios where refinancing your student loans can make a lot of sense. You may want to pursue this option if:
You have private student loans. While technically you can refinance private or federal student loans, it makes the most sense with private loans. “You pretty much have nothing to lose by refinancing private student loans because these loans aren’t eligible for federal loan programs that can lower your monthly payment or put you on track for loan forgiveness,” said NerdWallet.
You have solid credit and a steady income. To qualify for student loan refinancing, you will usually need a good to excellent credit score of at least 650 and a “steady income to meet your new loan’s monthly payment,” said LendingTree. Other factors that will impact your eligibility include your debt-to-income (DTI) ratio and your loan balance — “lenders set minimum and maximum borrowing amounts for refinance loans, and if your remaining balance is too small or too large, you may not qualify,” said CNN Underscored.
You can get a lower interest rate. “Not every refinancing scenario will help you save money,” but if you have run the numbers and see a “clear financial benefit,” then you might consider moving forward, said CNN. Just be wary of securing lower payments by extending your repayment term, as this will lead to paying more overall.
When should you avoid student loan refinancing?
You may want to rethink refinancing your student loans if the following apply:
You have federal student loans. If you have federal student loans, think twice before refinancing, as “by doing so, you’ll lose access to government protections like income-driven repayment plans, student loan forgiveness programs and deferment and forbearance,” said LendingTree. For instance, if you have been working toward loan forgiveness and decide to refinance, you would “lose federal forgiveness eligibility and would have to repay the entire balance,” said CNN.
You have declared bankruptcy or defaulted on your loans. “In many cases, borrowers with defaulted student loans are not eligible for refinancing,” said CNN, and “similarly, most lenders won’t consider your application if you have a bankruptcy on your credit reports.”
You will not save by refinancing. “If your new loan has a higher interest rate than you currently pay, you may not see any financial benefit from refinancing,” said CNN. You might also think twice if a lender charges steep fees that “outweigh the savings,” said Bankrate. For instance, “if you have relatively little left to pay on your student loans, those fees could end up being more than what you’d save in interest.”
What are other options for managing student loan debt?
Of course, refinancing is not your only option to get a handle on student loan debt. Alternatives include:
Loan consolidation: For those with federal loans, consolidation allows you to combine your loans without losing access to federal benefits and protections.
Employer assistance programs: “Some employers offer student loan repayment assistance as part of their benefits package,” said Bankrate. To find out if yours is one of them, ask your HR department.
Income-driven repayment plans: Though only available for federal loans, these repayment plans allow you to “base your monthly payment on your income and family size” and potentially “even qualify for loan forgiveness after 20-25 years of payments,” said Bankrate.