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Updated on Tuesday, April 9, 2019
Deciding when to refinance student loans is important — you want to make sure the timing is right.
When you refinance, a private lender pays off your existing federal and/or private student loans, issuing you a new loan in their place. You can choose new terms, and might even get a lower interest rate than you currently have.
But it’s not worth going through the refinancing process only to find out you should have waited. If you’re wondering when to refinance student loans, here are five scenarios when it could be the right move.
1. You have strong credit and income
Refinancing lenders look for a solid credit score and healthy income to ensure that you have a history of on-time repayment and the means to pay back your debt.
If you have strong credit — or can apply with a cosigner who does — you could qualify for the lowest rates. Having a stable source of income is also important to make sure you can keep up with the monthly payments.
Unlike the federal government, private lenders typically don’t offer a lot of flexibility if you can’t make payments. They don’t generally have income-driven repayment plans or forgiveness programs, for example, and only some lenders allow for temporary forbearance if you lose your job or go back to school.
So before refinancing your student loans, make sure you have enough money coming in to keep up with payments. If you’re feeling confident about your credit and income, now could be a good time to make the move.
2. You have rising variable rates
If you borrowed private student loans to pay for college, you might have chosen a variable interest rate, which can go up over time. If your rate is rising, it might be a good time to explore refinancing options.
When you refinance, you could qualify for a lower rate than what you have now. Also, you typically have the option to choose between a variable and fixed rate on your new loan.
Unless you expect to pay off your debt quickly, locking in a fixed rate might be the way to go. You’ll be protected against rising rates in the future and can have peace of mind knowing your loan costs won’t go up over time.
3. Your student loans are already private
Refinancing federal loans with a private lender means you lose access to federal protections, such as income-driven repayment and Public Service Loan Forgiveness. For some borrowers, this sacrifice might not be worth the potential savings that come with refinancing.
But if you already have private student loans, you don’t have to worry about losing federal benefits. Plus, you’re already familiar with the process of borrowing from a private lender, such as a bank or credit union.
In effect, refinancing your private loan might simply mean a change in lender, as well as the chance to change your terms and possibly snag a lower interest rate. But since each private lender sets its own policies, do your research on your new lender to ensure it will meet your needs.
4. Restructuring your repayment terms would be helpful
Some borrowers refinance student loans while hoping to pay the debt off quickly. But for others, refinancing could be a strategy for lowering monthly payments, even if it takes longer to retire their loans.
When you refinance, you can choose new terms, often between five and 20 years. A five-year term might result in a faster repayment, but you’ll need to cough up more money each month than you would on a typical 10-year plan.
On the flip side, a longer term of 20 years could reduce your bills and free up more cash flow from month to month. You’ll be in debt longer — and probably pay more interest over the years — but it could take the strain off your budget in the present.
Plus, you could always choose to make extra payments if your financial situation changes. If you’re aiming to speed up repayment or lower your monthly bills, refinancing sooner rather than later could help you achieve your goals.
5. You’d save money on your debt
Perhaps this last point goes without saying, but if you’ve crunched the numbers and determined that refinancing would save you money on your student loans, now could be the time to act.
Saving money is one of the biggest benefits of refinancing. You initially borrowed your student loans under certain terms and conditions, but refinancing lets you choose new ones.
Fortunately, you can find out if refinancing would save you money without dinging your credit. Lots of online lenders will check your rates with a “soft” credit check (meaning it won’t impact your credit score), so you can instantly see what offers you could get.
While these prequalification offers aren’t final, they’ll give you a good sense of whether you’d save money through refinancing your student loans.
When to refinance student loans more than once
If refinancing offers the chance to lower your interest rates and restructure your debt in a way that better serves your needs, it stands to reason that refinancing your student loans more than once would only enhance these benefits.
Let’s say for example, you refinanced your student loans and chose a variable rate. And then later, you discover that your rate is rising, and you decide you’d feel more comfortable switching to a fixed rate. In this case, refinancing a second time could help you make the switch.
This move could also make sense if interest rates have dropped significantly since you last refinanced, or if you need to readjust your monthly payments. Whatever your goals, refinancing multiple times could be useful, depending on your situation.
That said, you want to be careful that you don’t accidentally add time to your debt payoff schedule. If you’re already one year into a 10-year term, for example, refinancing for another 10-year term would effectively put you back at square one.
You also want to watch out for any fees that could come with refinancing. Most lenders don’t charge an origination fee for disbursing a new loan, but some do. So if you’re thinking about refinancing for a second time, make sure this move won’t cost you extra money.
Don’t hesitate if the savings are there
In many cases, the sooner you can refinance your student loans, the better. If you have the credit and income to qualify, it makes sense to lock in a low rate on your student loans, especially if rates are predicted to increase in the months to come.
But make sure you’ve crunched the numbers on your new offer and that you understand both the short- and long-term costs of your refinanced loan. And if you’re thinking about when to refinance the student loans you got from the federal government, make sure you’re comfortable giving up federal repayment plans and forgiveness programs.
As long as you’ve thought through the pros and cons of student loan refinancing — and have shopped around for the best offer — you can feel confident about your decision to refinance your student loans.