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Refinancing your student loans gives you the opportunity to get a new loan with a better interest rate, which can help you save money while you work to pay off your student loan debt.
Although there is no good time to refinance student loans, this may make more sense in some situations. Keep reading to find out when is the best time to refinance your student loans, when refinancing might not make sense, and how to refinance your student loans.
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When is the best time to refinance your student loans?
When you refinance your student loans, you take out a new loan to pay off your original loans. You will then have a monthly payment to follow, and the new loan will ideally come with a lower interest rate or more favorable loan terms.
It’s easy to see why refinancing can be attractive. Although each borrower has a unique financial situation, it could be advantageous to refinance student loans in these situations:
When you can get a better interest rate
Getting a lower interest rate when refinancing student loans is not a guarantee, but if you can get a lower rate, you might be able to save a decent amount of money on interest for the term of your loan.
If you have a variable rate loan, you may be able to refinance it into a fixed rate loan, which will give you the same interest rate for the life of the loan. This can be easier to budget for than a variable interest rate loan, which can change over time. Since variable rate loans generally start with a lower interest rate and gradually increase over time, you could end up paying more for a variable rate loan than a fixed rate loan.
STUDENT LOAN REFINANCING CAN POTENTIALLY SAVE BORROWERS $5,000 WHILE FIXED RATES ARE LOW
When you want a smaller monthly payment
If you can get a lower interest rate or longer repayment term on a refinance loan, you can potentially lower your monthly payment amount. If you’re on a tight budget after leaving school, a lower monthly payment can make managing your finances much less stressful. You can also continue to pay your original monthly payment amount to speed up the repayment process while having the flexibility to stick to the lower payment when you have other expenses you need to focus on.
When you have a stable income
If you graduated and earn a steady income, or recently got a raise at work, now could be a good time to refinance your student loans. When you refinance private student loans with a private lender, they will want to see proof of income. Lenders will also look at your debt-to-equity ratio, or DTI — the amount of your monthly income that goes toward paying off debt — to make sure you’ll be able to repay your new loan.
Just keep in mind that when you refinance federal loans into a private student loan, you’ll lose access to important federal benefits, like student loan forgiveness programs and income-driven repayment plans. If your employment situation is still unstable, it’s usually best to keep your federal student loans so you still have access to these benefits.
When your credit has improved
If your credit score has improved since you originally took out your private student loans, or you now have a co-signer with a high credit score, refinancing may be beneficial. The higher your credit score, the more likely you are to qualify for a lower interest rate. If your credit score is significantly higher than when you originally took out private student loans, you could qualify for a much better interest rate and save a lot of money.
You can compare student loan refinance rates using Credible, and it won’t affect your credit score.
When you want to simplify your monthly payments
One of the main advantages of refinancing is that it allows you to consolidate multiple loan payments in one convenient monthly payment.
If you want consolidate federal student loans without refinancing them into private loans, you can combine them into a direct federal consolidation loan through the Department of Education. Your interest rate will be a weighted average of all your existing loans, so your new rate may not be lower. But having just one monthly payment to track can make managing your debt much easier.
It should be noted that you cannot consolidate private student loans into a federal direct consolidation loan.
When your adjournment ends
With federal student loans, if you are experiencing financial hardship, you may qualify for a deferral or forbearance, which allows you to temporarily suspend student loan payments. The US Department of Education generally offers more deferment options than private lenders. But once your deferment period is over, you may find it’s a good time to refinance, because you no longer have to worry about missing out on that federal benefit.
STUDY: 31% OF LARGE COMPANIES CONSIDER OFFERING STUDENT LOAN ASSISTANCE
When you’re not at school
Federal student loans generally have a grace period of six months after you graduate or quit school when you are not required to make payments (although it is worth confirming your lender’s specific repayment terms). Since federal borrowers are generally not required to make payments until they leave school, it generally does not make sense to refinance before then, as this will initiate the repayment process.
However, if you have private student loans, you’ll likely start repaying your loans as soon as you graduate. It’s worth checking with your private lender to see if they offer a grace period on student loan repayment.
When not to refinance your student loans
Now that you know when it might be worth refinancing student loans, let’s look at some times when it might not be beneficial, or even possible, to refinance student loans:
- You recently filed for bankruptcy. Filing for bankruptcy can negatively impact your credit report for 10 years. Having a damaged credit rating will hurt your ability to get a new loan, so it may be best to put refinancing on hold if you’ve recently filed for bankruptcy.
- You have defaulted loans. If you fail to repay your student loans, your credit score will suffer and you are unlikely to be able to get a better interest rate by refinancing. You may not even be able to find a lender who will approve you for refinancing if your current loans are in default.
- You’re still working on your credit and you don’t have a co-signer. If your credit score hasn’t improved since you first took out your loans and can’t find a co-signer with good credit, refinancing may not save you money and may not necessarily be worth it (especially if you lose access to federal protections).
- Your loans are suspended or forbearance. If you have federal loans that are deferred or forborne and you refinance with a private lender, you will lose this break in payments, which will not benefit you since you will have to start paying off your refinance loan. a way. It’s best to skip refinancing if you currently have suspended or forborne loans.
- You have federal student loans and are making payments toward student loan forgiveness. When you refinance federal loans to private loans, you lose federal benefits. If you are currently working on canceling your student loan under the Public Service Loan Forgiveness Program (PSLF) or an income-driven repayment plan, refinancing to a private loan will make you lose the credit for all payments you made for loan cancellation. .
- Your loans are almost paid off. Applying for a private student loan refinance typically triggers high credit demand, which can temporarily lower your credit scores by a few points. Many private lenders also charge an origination fee for processing the new loan, which is deducted from your new loan amount. If you’re close to paying off your student loans, refinancing probably won’t save you much interest, and any savings probably won’t be worth paying fees or adding a hit to your credit report. .
WHAT TO KNOW ABOUT STUDENT LOAN CONSOLIDATION
How to refinance your student loans
If you decide that refinancing is right for you, you will typically follow these steps to refinance your student loans:
- Shop around and compare rates. When researching refinance options, you should compare rates and terms offered by three to five different lenders to see which loan will save you the most money. In addition to comparing new offers, you should also compare all of these offers to your existing student loans, because you won’t want to refinance if it comes with less favorable rates and terms than you already have.
- Apply with the lender you choose. Once you have chosen a lender to work with, you will complete a refinance application. Each lender has their own eligibility requirements and refinance loan application process, but they have support staff who can help you if needed.
- Continue to pay on your original loans. Unless your current student loans are in grace, deferment, or forbearance, you must continue to make payments on your original loans until your new lender notifies you that they have repaid your loans. existing. At this point, you will start making payments on the new loan.
- Set up automatic payments for your new loan. Refinancing multiple loans into one can make it easier to manage student debt. To make things even easier, you can set up automatic payments for your new loan. Many private lenders also offer an autopay discount for setting up autopayments. Just make sure you keep enough money in your bank account for this automatic payment to go through, and you’ll never have to worry about accidentally missing a payment.
If you’re ready to refinance, use Credible to quickly compare student loan refinance rates from various lenders, all in one place.