On a pretty regular basis I get the question, “Should I refinance my student loans?” It’s a hot-button topic and for a good reason – there are 44.7 million student loan borrowers in the U.S. with a total of $1.49 trillion worth of college debt.
The average borrower has $30,000 in student loans. But, plenty of people have much more than that, think $100,000+. I had just under $40,000 in student loans… I get how much they suck.
The stress of student loan debt can completely overwhelm you, which makes many people ask if refinancing is the right choice.
The short answer is that it is for some, while not at all for others. Read on to see if it’s the right choice for you.
Should I refinance my student loans?
First, let’s talk about what refinancing means
Refinancing your student loans is when you work with a third party company to have a completely new loan issued. You use those funds to pay off your existing loans. The idea is that you get a lower interest rate in order to save money over the life of the loan and/or lower your monthly payment.
So when you refinance, you are replacing one loan (or a number of them) with one entirely new loan. It can simplify your payments and save you money with a reduced interest rate.
When it makes sense to refinance your student loans
A good candidate for student loan refinancing will meet these three qualifications:
1. Your finances are stable
When you have federal student loans (you can refinance both federal and private loans), there are a few protections that benefit people who find it difficult to make the minimum monthly payments.
These are things like:
- Income-driven repayment plans (IBR, PAYE, IBR, and ICR)
- Graduated or extended plans
- Deferment or forbearance
When you refinance federal student loans, you lose all of those protections because you are borrowing a private loan.
To be a good candidate for student loan refinancing, you should be able to make your full monthly payments and know that you can continue doing so until your loans are paid off.
2. Refinancing will actually save you money
If you are a borrower with a high-interest rate, then refinancing might be a good option for you.
Here’s an example: Let’s say you have $40,000 in student loans with an average 9% interest rate, and your loan term is for 10 more years. At that rate, you would pay $20,804 in interest alone.
If you refinance at a rate of 5% for the same 10-year term, you would pay $10,911 in interest. Refinancing would save you $9,893 over the course of your pay off.
But, that’s contingent on the next factor…
3. You qualify for student loan refinancing
Here’s the thing, not everyone who wants to refinance will qualify. The biggest factor is your credit score. Ideal candidates have a score in the high 600s, at the very least, but you’ll get better rates with an even higher score than that.
You still may be able to refinance with a co-signer; however, that puts them at risk if you aren’t able to make your payments. Good news though – there are ways to improve your credit score.
How refinancing helps or hurts you in different situations
Like I’ve said, not everyone is going to benefit from a refi. Actually in some situations, like when you have federal loans, refinancing can hurt your finances because you will lose any benefits and protections (ie. income-based payments).
Let’s take a look at some specific situations to see when it makes sense to refinance…
I have $120,000 in student loans, should I refinance?
For those with a high student loan balance, refinancing can really help reduce the amount of interest you pay. That’s the case even if you reduce your interest rate by just a 1-2%.
Say your loan term is 10 years and your current rate is 7% – you refinance at 6% for the same term. You can save nearly $8,000 in interest charges. Still, make sure your credit is good and that you can make your payments.
I’m trying for Public Service Loan Forgiveness, should I refinance my student loans?
No, because PSLF is something the federal loan program offers certain student loan borrowers. When you refinance, you are leaving the federal loan program for a private lender.
With that being said, there are strict qualifications you’ll have to meet to qualify for PSLF, and the majority of people aren’t accepted – only around 1% of applicants qualify.
I’m struggling to make my minimum monthly payments, should I refinance my student loans to lower them?
Okay, refinancing can lower your monthly payments (in the first refi example, those payments would have gone from $507 to $424/month). But, remember you are losing any of the federally mandated programs that lower your payments based on what you are currently earning.
If you aren’t making enough to afford your monthly payments, rather than refinancing, I recommend two things:
I have high-interest rate private student loans, should I refinance them for a lower rate?
With private student loans, you really have nothing to lose as long as your credit is good enough to qualify you for a lower rate.
What to do when you’re ready to refinance your student loans
1. Pay attention to your credit score
I’ve mentioned this a couple of times, but it’s important enough to bring up again – your credit score is a major factor in qualifying for refinancing and receiving the best interest rates. If your credit currently isn’t great, first figure out why. You can learn all of that with a free credit report… that link is what the FTC recommends using. But, you can also sign up for Mint (for free!) and receive a free credit report from the three major credit reporting agencies. These come every few months.
If your credit isn’t great, start attacking your consumer debt – credit card debt and auto loans are the worst IMO. Once you start lowering your credit utilization rate (the amount of credit you are using, and ideally you keep it under 30%), you’ll start to see your credit score increase, which will help you get a better rate on refinancing.
2. Get your monthly finances in order
No matter what your financial situation is, you will benefit from a budget… even though I’m debt-free, I still keep a budget. Having a budget will show you how much money you can put towards your student loan payments and how you can make choices to allocate more money towards them.
There are a number of free budgeting apps and money tools to make it easier, and you can read about more options in these articles:
- YNAB vs. Mint 2019 – Which Budgeting App is Best?
- Personal Capital vs. Mint 2019 – Which Money Tracking Tool is Best?
- Best Budgeting Apps and Personal Finance Tools of 2019
3. Start looking at lenders
The internet has made it much easier to research and find different options for lenders to refinance your student loans through. And because there are so many different choices, I did my due diligence and spoke to a number of companies to find which one will best help M$M readers.
After personally meeting with the folks at Credible (a student loan refinancing marketplace), I know that they are a great option for student loan refinancing. With Credible, you input your information and they find you lenders and help you compare to rates.
Should I refinance my student loans – my final word
If you’re a good candidate for student loan refinancing (have stable finances, know you’ll save money, and qualify), you can save a significant amount of money over the course of your pay off. However, not everyone is a good candidate, and that’s okay.
It’s just like every other financial choice you make. It has to do with your personal situation… that’s even true when it comes to buying a latte. Know your situation, and do what’s best for your finances.
Personally, I didn’t refinance when I paid off my nearly $40,000 of student loan debt in 18 months. I paid them off by using extreme frugality… think renting a 10’x10’ room from my in-laws, and using the debt avalanche method.
Destroying that debt was one of the best things I’ve ever done, but if I could do it all over, I would have worked on increasing my income rather than relying on extreme frugality… those 18 months kind of sucked. Still, it’s part of why M$M is here today.