When it’s a good idea to refinance your student loans (and when it’s not)

Student loan debt is still a big financial problem for millions of Americans.


According to statistics released by the Institute for College Access and Success in October 2020, more than six in ten Americans (62%) who graduated from college in 2019 have student loan debt, with an average debt of $ 28,950. .

The good news is: Federal student loan interest rates have been cut to 3%, and some private student loan rates are even lower. As a result, many people may find student loan refinancing an attractive option.

However, this is not as easy as it sounds.

Borrowers with good credit history and high income are eligible for the lowest interest rates. Refinancing your student loans can be a terrible idea depending on the type of loans you have.

All payments, interest and collections on federal student loans held by the government are currently stopped. The forbearance of student loans and the freeze on interest held by the federal government are expected to expire on December 31, 2020. There is therefore no reason to consider refinancing these types of loans until then. “You will never beat a 0% interest rate, so there is no incentive to [refinance federally held student loans] for now, ”says Adam S. Minsky Esq., lawyer specializing in student loans.

When Refinancing Student Loans Is Not a Good Idea

Federal student loans may be eligible for a variety of benefits and guarantees, including discharge on death or disability, default settlement, and deferral or forbearance alternatives. If you make qualifying monthly payments while working full-time for a qualifying job, you may be eligible for repayment plans based on your income and debt forgiveness.

That’s a lot to give up, and you should only do it if you can significantly lower your interest rate or pay off your debts quickly. Despite this, Minsky advises maintaining a fully established emergency fund as well as sufficient life and disability insurance to mitigate some of the risks.

You can use the federal student debt consolidation program instead of refinancing your federal student loans. Federal loan consolidation retains all the benefits, but the interest rate is a weighted average of past loans. It won’t lower your interest rate, but it does offer other benefits, according to Mark Kantrowitz, vice president of research at Savingforcollege.com.

When you combine your bills, all of your payments come together into one easy-to-manage payment. Consolidating your debts can also allow you to extend your repayment period while reducing your monthly payment. Remember, just like extending a private loan, increasing your loan will increase the amount of interest you pay on time.

When to refinance your student loans?

If you have a private student loan and can save money on interest or lower your monthly payments over time, refinancing makes sense. Reducing your interest rate by one percentage point on a $ 37,000 loan could save you $ 18 per month and $ 2,200 in interest over the life of the loan. You can save even more money if you refinance higher-interest debt, such as graduate student loans.

Pro tip

Refinancing a student loan, unlike other types of loans, rarely includes an upfront origination fee. However, keep in mind that extending the term of a loan will make you pay more interest over the life of the loan. Adding five years to the loan term would cost almost $ 5,500 in interest in the above case.

Student loan refinancing: what you need to know

Refinancing a student loan offers a significant advantage over other forms of debt, such as mortgages, because the initial loan origination costs are rare. Comparing offers is straightforward because most lenders do not charge a fee for refinancing student loans. It’s about determining the best loan term or the lowest interest rate. Applying for refinancing is simple to complete, but you will need to provide supporting documents to prove your income and identification. You’ll also need a good credit score (typically 650+) and a debt-to-income ratio (DTI) of 50% or less to qualify for refinancing, although these numbers may vary by lender.

A lower DTI and a higher credit score can help you get cheaper loan rates when your financial situation improves. “Your credit score isn’t the only factor that determines whether you’ll be approved for a private loan. They will also review information that is not on your credit report, such as your employment history. “Kantrowitz continues. Lenders will want to know how much you earn and how long you’ve been in your current job.


Refinancing student debt can be a catch-22 situation. If you have a high income and a high credit score, you’re more likely to get a lower rate. However, those most in need of the financial help that a student loan refinance could provide are the least likely to qualify for a fair deal. However, since student loans can be refinanced without incurring an upfront cost, even minor financial benefits can make refinancing beneficial. Just make sure that you aren’t willingly sacrificing the crucial collateral that comes with government loans.

About Judith J. George

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