Refinancing your student loans with the right lender could help you save money on interest and pay your debt off faster. But when does it make sense to refinance student loans? Should you always refinance if you qualify for a lower interest rate? What if you have federal student loans? Or private?
Here, we’ll go in-depth on the top signs that it does—or doesn’t—make sense to refinance your student loans.
You qualify for a lower interest rate
Most people refinance their student loans because they qualify for a lower interest rate. A lower rate can mean that, depending on the term, you'll pay less in interest overall. You also might benefit from a lower monthly payment and be able to pay your loans off sooner.
If you originally took out loans with a high interest rate—either because of market conditions or your credit score—refinancing when you can get a lower rate could save you money. Remember that the interest rate you qualify for depends on several factors, including your debt-to-income ratio (DTI), credit history, and current market rates.
Your credit has improved since you took out your loans
If your credit score is in better shape than when you took out your student loans, that may be a sign you should refinance.
Your credit score plays an important role in the loan terms you’re offered. A better credit score can mean qualifying for a lower interest rate and ultimately saving money. And if your credit score has improved, chances are your finances are in better shape and you might be able to pay the loans off faster, whether by choosing a shorter term or making an extra payment here and there.
You have private student loans
Refinancing could be an easy decision if you have private loans. Private student loans don’t come with the same perks as federal student loans, such as the option to switch to an Income-Driven Repayment (IDR) plan, or potentially qualify for Public Service Loan Forgiveness (PSLF), forbearance, or deferment. For this reason, refinancing private loans—if you can get better terms—might not come with many downsides. By refinancing your private student loans, you may be able to lower your interest rate and reduce your monthly payments, without any significant disadvantages.
You have federal student loans
While refinancing private student loans can be an easy decision, the same isn’t always true for federal student loans. Federal loans come with benefits you’ll lose once you refinance to private loans, including access to PSLF, IDR plans, deferment, and forbearance. So, even if refinancing can offer a better interest rate, it isn’t always the right move if you have federal student loans.
If you’re thinking of refinancing your federal student loans, consider all your options and research federal programs that can help alleviate the burden of student debt.
You can’t qualify for a lower interest rate
Refinancing usually isn't worth it if you can’t qualify for a lower interest rate. While you can refinance your student loans for a shorter term and the convenience of a single payment, the main point of refinancing is typically to save money with a lower interest rate.
There are a few reasons why you might not be able to get a lower interest rate—it usually has to do with your finances, credit score, or current interest rates. If your credit history or other financial factors, such as DTI or income, are preventing you from qualifying for a lower interest rate, it may be worth taking some time to improve your credit score or financial circumstances before refinancing. If interest rates have increased since you took out your loans, it can make sense to wait for interest rates to decrease.
