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You should consider refinancing student loans if you find a lower interest rate and you want to merge some or all of your student loan payments into one. While refinancing is a good idea in many cases, it’s not best for everyone—especially those who need to take advantage of federal student loan protections. Here’s how to know if you should refinance your student loans.
Who Can Qualify to Refinance Student Loans?
Refinancing is when you take out a new loan to replace an old loan or group of loans. When you take out the new loan, your old loans are paid off and you make payments toward your new one. You’ll have new terms, a new interest rate and sometimes a new lender.
When you refinance student loans, lenders consider:
- Credit score. Your credit score is the biggest determining factor in getting approved for student loan refinancing. Since you’re taking out an unsecured loan, lenders largely base your likelihood of repayment on a solid credit score, like a score of at least 670.
- Income. You’ll need to prove you earn enough money to comfortably repay your loans. This also shows that if you have a financial emergency, you won’t fall behind on payments.
- Debt-to-income (DTI) ratio. DTI is how much debt you have compared to how much money you earn. If you have a high DTI, you might not have enough money to repay your loan. A low DTI means lenders trust you’ll make on-time payments.
- Total student loan balance. Some lenders have a maximum loan balance they’re willing to refinance.
- Education background or type of degree. Depending on the lender, you might not be able to refinance your student loans if you didn’t graduate. Others require borrowers to have attained a specific degree, such as a bachelor’s.
- Whether you have a co-signer. If you don’t have a longstanding credit history, you may need to include a co-signer on your loan. Some lenders don’t offer the option to apply with co-signers, so this could limit your options.
Related: Compare Student Loan Refinancing Rates For 2024
Who Should Consider Refinancing Student Loans?
When you’re weighing your refinancing options, make sure your credit is in tip-top shape. To see if refinancing is worth it, consider your:
- Current loan interest rate. If you have high-interest private student loans, you may want to lower your interest rates to lower your monthly payments, as well as your total loan amount. “High” interest is relative based on what you’re paying; if you can stand to get a lower interest rate, refinancing might be worth it.
- Savings. Refinancing might not be a good idea if you can’t significantly save on your interest rate, monthly payments, overall loan payment or a combination of them all. In your refinancing calculations, make sure you’ll be able to cut costs in some way.
- Credit score. If you have a solid credit history, you’ll likely be eligible for more types of student loan refinancing. A good credit score is around 670, according to FICO, but the higher your credit score, the more lenders you’ll qualify to work with, and at the lowest rates offered.
- Immediate credit needs. Since new credit applications trigger a hard credit inquiry, you’ll need to limit applying for new types of credit, like a credit card, an auto loan or a mortgage.
If you’re not sure whether refinancing your loans can help you, use the student loan refinance calculator below. This allows you to estimate your potential savings if you lower your interest rate or shorten your loan term. You can also experiment with different scenarios. If you want to reduce your monthly payments, for example, you can see how it impacts the total interest you’ll pay over the life of your loan.
When Should You Avoid Refinancing Student Loans?
In the following situations, you may want to skip student loan refinancing and opt for an alternative to meet your needs instead.
You Have Only Federal Student Loans
Federal loans come with many benefits private loans don’t, including income-driven repayment (IDR) plans that lower your monthly payments based on a percentage of your income. They also offer:
- Public Service Loan Forgiveness (PSLF): PSLF is available for borrowers who work for nonprofits, government agencies or other qualifying entities in the public service sector. After 120 qualifying payments, the remainder of your loan will be forgiven.
- Generous deferment and forbearance: Student loan deferment and forbearance temporarily suspend your payments without penalty. Both accrue interest while payments are paused, unless you have subsidized loans, which the government pays the interest on during periods of deferment. When you opt for deferment or forbearance, your loan will still be considered in good standing, and federal loans typically provide more time to suspend payments than private loans do.
If you refinance federal loans, you will lose access to these options. That’s not so problematic if you don’t think you’ll need to use them in the future, but that may be hard to predict. Only refinance federal loans if you believe your income will be stable throughout your loan term and you don’t qualify for forgiveness options specific to federal loans.
You Can’t Find a Trustworthy Co-signer
Some student loan refinancing lenders allow you to take on a new loan with the help of someone else. A co-signer is someone who agrees to sign onto your loan and vouches for your creditworthiness—usually someone with a good or excellent credit score. If you can’t pay back your loan, your co-signer will be on the hook. If neither pays, your credit score will plummet, and so will your co-signer’s.
If you need a co-signer and can’t find one—or you found one, but their credit score isn’t so great—you might not qualify for student loan refinancing. Instead, focus your attention on improving your credit score so you can be eligible to refinance on your own in the future.
If you can only qualify by using a co-signer, make sure that person understands the potential risk they’re taking on. You can also consider opting for a loan that offers co-signer release after a certain number of on-time payments. That will ensure your co-signer isn’t responsible for payments until the end of the term if you can’t make them.
Your Potential Rates Are Too High
When you research lenders, many will offer the option to prequalify, letting you see what your potential interest rates and monthly payments would be within minutes. If you end up with a higher interest rate than what you have now, refinancing likely isn’t worth it.
You’re Behind on Payments
If you’re having trouble affording your student loans and you’ve missed a few payments, lenders will notice. Payment history is the biggest determining factor in your credit score. So if you can’t afford your current loan, your credit score will reflect that, and lenders will hesitate to give you a new one.
Related: Best Student Loan Refinance Lenders
Refinancing Alternatives to Consider
If you don’t qualify for student loan refinancing, or you’re looking for another route, there are a few alternatives that might help. Keep in mind that even if you’re not eligible to refinance right now, you can take steps to qualify in the future.
Get Up-to-date on Your Loans
If you’re behind on your loans, your first course of action should be to bring them current again. This not only increases your chances of getting approved for refinancing, but it also boosts your credit score and could help you secure a lower interest rate down the line.
Make Extra Loan Payments
If you have the means, start to pay your loans more frequently, such as every two weeks rather than once a month. You can also increase your minimum monthly payment to put more money toward your balance. By paying off your debt more quickly, you reduce the amount of interest you pay over time without officially refinancing loans.
Apply for an Income-driven Repayment Plan
If you have federal student loans, look into IDR plans. Since these plans are based on your discretionary income and the size of your household, you won’t pay more than what you can afford. This is a good idea if you’re struggling to make the minimum payments on time every month and you’re looking into refinancing as an affordability strategy.
Consider Student Loan Consolidation
While private student loan refinancing and student loan consolidation are similar, they’re not quite the same.
Refinancing means you take out a new loan that replaces your old debt, and in the process, you turn any federal loans into private student loans. Consolidation is a strategy that combines multiple federal loans into one, giving you an interest rate that’s the weighted average of your previous rates. Your federal loans remain federal, so you still get all the useful repayment benefits the government offers.
Consolidation is only available for federal student loans and there’s no credit check required. It’s a solid choice if you have multiple federal loans and you want to simplify things by having just one monthly payment—but it won’t reduce your interest rate.
Use a Debt Payoff Plan
If you have many different student loans, consider paying them off through the debt avalanche or debt snowball methods. List out your loans including your lender, how much you owe, your monthly payments and your current interest rates for each.
Using the debt avalanche method, you’ll tackle the loan with the highest interest rate first. Make minimum payments on all your other debts, but put any extra cash on hand toward the loan with the highest interest rate. When that’s paid off, put all your cash toward the loan with the next-highest interest rate. You’ll do that until all your loans are paid in full.
The debt snowball method is similar but tackles loans from the lowest amount owed to the highest. Pay off the smallest debt first, then use that cash to pay off the next-lowest debt, until all your debt is paid off.
Ask for Alternative Payment Plans
Since some private lenders don’t have deferment or forbearance programs, you’ll need to talk to your lender about what it can do for your individual situation. If you’ve recently lost your job or you’re otherwise not able to afford making payments, ask about hardship assistance. Some lenders have payment-reduction options to lower monthly payments, the interest rate or both.
Are You Ready to Refinance Student Loans?
If you think you’re paying too much in interest or you have high monthly payments, refinancing your student loans might be a good idea. If you have the means to pay off your loan fast, refinance lenders might offer terms that work within your desired timeline.
But refinancing isn’t the right move for everyone. Review all your options before applying, and make sure refinancing is in line with your needs and goals.
Related: Compare Student Loan Refinancing Rates For 2024
Frequently Asked Questions (FAQs)
Where can I refinance student loans?
If you’re not sure where to refinance student loans, you can check out private online lenders, traditional banks or credit unions. Each lender has its own formula to determine your eligibility and interest rates, so some may offer you a better deal than others. It’s a good idea to shop around and get estimated rates from a few sources before making a final decision.
Can I refinance student loans without a degree?
It’s possible to refinance your student loans if you didn’t graduate, but it may be more difficult. Some lenders won’t work with borrowers who don’t have a degree, so you should read the eligibility requirements before submitting a formal application. However, several lenders do accept applicants without a degree, including Citizens Bank, EdvestinU and Rhode Island Student Loan Authority, which is open to applicants in any state.
Can you refinance student loans without a job?
It’s not impossible to refinance student loans without a job, but it will be harder. Lenders want to be sure you have a healthy, stable income so you’re less likely to miss payments in the future. You can find lenders that have no minimum income requirements, but to boost your odds of success, include any alternative income sources on your application. You may also want to add a co-signer with great credit to your application.
However, you’re likely to get much better rates if you can wait to apply until after you’ve secured a job. Some lenders will even accept a job offer letter as proof. In those cases, you don’t need to wait until your first paycheck to start the refinancing process.
How do I refinance student loans?
If you’re not sure how to refinance student loans, the process is pretty straightforward. First, check your credit score and take any necessary steps to improve it before you apply. Then, do some comparison shopping and get offers from multiple lenders. You can compare the interest rates, loan terms and repayment options offered by each.
Once you’ve chosen your top lender, submit a formal application and wait for approval. Your new lender should pay off your old loan directly, and then you’ll start making regular payments to your new lender.
Can student loans be forgiven after refinance?
Loan forgiveness programs are offered by the federal government only to federal student loans. That means that after you refinance your debt into private loans, you won’t be eligible for any federal forgiveness options.
However, other programs may help pay down private student loans, even after they’ve been refinanced. Many states offer student loan repayment assistance programs, which are typically offered to workers in certain careers. Doctors, nurses, dentists, lawyers and teachers are all common careers that offer repayment assistance in exchange for a few years of service.
Some states even offer loan repayment as a moving incentive. For example, Kansas will pay up to $15,000 towards your student loans if you move to a rural area. Maryland will pay up to $30,000 towards your student debt if you buy a home through the state’s mortgage program.
It’s becoming more common for employers to help workers pay off their loans, too. Private loans are usually eligible, so you could get a few thousand dollars each year to help you pay off your student debt.
What happens if you don't pay student loans?
If you don’t pay your student loans on time, what happens next depends on whether you have federal or private student loans.
For federal debt, you’ll become delinquent as soon as you miss a payment. After 90 days, it will be reported to the credit bureaus, and after 270 days your loans will enter default, which has serious consequences.
For private student loans, including those who have been refinanced, your missed payment will generally be reported to the credit bureaus immediately. After 90 days, you will usually enter default. However, each private lender is different so the exact timeline may vary.
