Generally, the sooner you refinance student loans, the better.
When you refinance, a lender pays off your existing loans with a new one at a lower interest rate. That will save you money in the long run — and from the very first payment.
When to refinance student loans depends on whether you’ll find a rate that makes a difference in your life. A $30,000 private student loan with an 8% interest rate will give you a $364 monthly payment over 10 years. Refinancing to a 10-year loan term at 5% interest will save you $5,494 in total and $46 per month. That’s enough to make a dent in an electricity, cable or phone bill.
Before you apply, most lenders will ask that you have:
- An associate’s or bachelor’s degree.
- A credit score at least in the high 600s.
- An income that lets you comfortably afford your expenses and cover your debt payments.
When to refinance student loans
If it’s right for you, refinancing can free up money each month and cut the amount of interest you pay over time.
» CALCULATE: Should you refinance?
Consider refinancing in these circumstances.
You have student loans with high variable interest rates
Interest rates are expected to rise through 2020, which means loans with variable rates will get more expensive to repay. Before they rise again, consider refinancing to a fixed interest rate. That will help you avoid future increases.
You have private student loans
Private student loans generally have higher interest rates and fewer ways to postpone or lower loan payments than federal loans. It’s a safer bet to refinance private loans — you have less to lose.
You’re no longer in school
Many lenders won’t let you refinance student loans while you’re still attending school; Earnest and SunTrust are two exceptions. In general, you’ll need to show that you’re employed and earning enough money to comfortably repay your new loan.
The degree you have might affect whether you can refinance, too. A handful of lenders, including Citizens Bank and Discover, will allow employed borrowers to refinance without a degree. Most lenders will let you refinance with an associate degree; a small number, including First Republic and CommonBond, require a bachelor’s.
The savings will make a difference
As you decide when to refinance student loans, it’s not necessary to wait until you have perfect credit to do it.
Lenders generally look for a credit score in the high 600s or above. With a 670 credit score, for instance, you may not qualify for the very best rate. But you may qualify for a better one than you have now.
It’s not necessary to wait until you have perfect credit to refinance.
You can refinance as often as you’d like. That means you can refinance a private loan now to remove a parent as the co-signer — and perhaps get a small rate reduction — then refinance again once your financial profile will get you an even lower rate.
Your credit has improved
You likely won’t have the same credit score at age 25 that you had at age 22. If refinancing didn’t make sense right when you graduated, consider it once you’re on sturdier financial footing. If you were rejected for refinancing in the past, try again after you’ve paid off credit card debt, for instance, or gotten a raise.
You also have the option to add a co-signer to the application to qualify more easily. You can refinance again later on to remove the co-signer — or choose a lender that offers co-signer release after a certain number of on-time payments.
Many apps and online services, including NerdWallet, let you monitor your credit score for free. That will show you when it’s a good time to refinance.
» MORE: Get your free credit score
When you shouldn’t refinance student loans
Refinancing isn’t for everyone. Avoid it if:
You have federal loans and could see a drop in income
If there’s a chance you’ll make a career change, leave the workforce for a period of time or go freelance, keep federal loans out of your refinancing plans. You may need to take advantage of income-driven repayment, which lowers federal loan payments to a percentage of your income.
Prioritize student loan strategies that will keep you from falling behind on your loans. The consequences of student loan default are serious, for both federal and private loans.
You recently declared bankruptcy
Many lenders make it difficult for those with a bankruptcy in their credit histories to refinance. But a few allow it after a period of time: LendKey requires the bankruptcy to be five years in the past, and Laurel Road requires a four-year waiting period.
You’ll take much longer to pay off loans
Refinancing is worth it only if you’ll save a meaningful amount of money. Going for a low monthly payment could mean a longer loan term and paying more interest.
Take the example of the $30,000 loan above. If you’re five years into a 10-year loan term, and refinance to a new 10-year loan, you’d pay $1,687 more in interest overall. That’s because you’re repaying loans for 15 years total, rather than 10.
Refinancing to a low monthly payment could mean a longer loan term and paying more interest.
Refinancing to a five-year term instead keeps your repayment timeline at 10 years. It saves you just $42 per month but also saves you $2,529 in interest.
Consider your personal goals and how important it is to increase your monthly cash flow. Refinancing to a longer term might make sense in some circumstances, but be aware of the overall amount you’ll pay.