Get Your Finances Ready to Refi Student Loans

You probably shouldn’t refinance most student loans until after Dec. 31. But you can get ready right now.

Ryan LaneAugust 10, 2020

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Student loan refinancing rates are near record lows, but you may be waiting to take the plunge.

It makes sense to stick with current student loan relief options that pause your federal student loan payments. That's free money, more or less, and can help you get your finances in shape. You've now got additional time — until Dec. 31 — during which you are not required to make payments and interest does not accrue.

But if you have higher-rate private student loans as well,  you may want to use the pause on federal payments to improve your financial picture, then consider refinancing your private debt.

Refinancing rewards great credit and healthy personal finances. Here's how to make sure the best deal is waiting for you.

Improve your credit

Refinance lenders consider many factors to decide your interest rate. You may not be able to immediately move the needle on some of them, like your income.

But you can improve others.

For example, a better credit score typically means a better rate. Refinance lenders may approve you with a FICO score above 650, but offers will likely be better for scores in the mid-700s and above.

Look for opportunities to improve your credit score. One major factor in FICO and VantageScore credit scores is utilization: the percentage of available credit you’re using. If you're utilizing more than 30% of your credit, either on any one card or across all your revolving accounts, paying down balances strategically could help your scores.

You can also make biweekly payments to keep balances low or ask for higher credit limits.

A history of paying bills on time is the key to a great credit score, but lowering credit utilization is among the levers available to build credit fast.

Pay down debt

You may have some extra money thanks to paused student loan payments. Unless you need it for an emergency fund, consider using that cash to pay off one or more debts.

When deciding your offer, refinance lenders usually consider your debt-to-income ratio, or DTI. DTI is your monthly financial obligations divided by your monthly income.

For example, let’s say you earned $4,000 a month and paid $2,000 toward rent, your existing student loans, etc. Your DTI would be 50%, which is about as high as any refi lender would like.

Of course, a lower DTI is better and could increase the number of offers available to you. So, use a debt tracker and look for monthly payments you can reduce or knock out altogether.

Can you pay off credit cards or consolidate them into a lower payment? (Don't close the accounts, which could hurt your credit scores.) Or could you refinance other debts with higher interest rates first, like car loans?

Watch the rates

If current refi interest rates are moving higher than you’d like — and you’re positive that you want to refi eventually — apply sooner rather than later.

Consider this: A $30,000 loan at 6% typically accrues $144 in interest each month. That interest isn’t accruing now, but it isn’t forgiven. Once the payment suspension ends, interest will start again.

If you refinanced at 4% a month before the end of forbearance, you’d come out ahead in a little less than five months by saving roughly $30 on each monthly bill.

If you have private loans, check your rates now. Private loans don’t have federal benefits — like the current interest waiver — so there’s little downside to refinancing if you can get a better rate.

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