When should you refinance your student loans?


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Taking out student loans for college tuition and room and board is commonplace these days. If you recently graduated from college or decided to take a break from classes, be prepared to start paying back those loans 6 months from the time you leave school. While many students don’t pay close attention as those loans accumulate year after year, the lender does, and once you hit that 6-month threshold, expect those payment notices to start rolling in!

Depending on the types of loans that you took out, federal and/or private, refinancing your loans may be a smart idea. However, there are a few factors to consider before starting the paperwork. First, you should decide why you want to refinance your loans: lower interest rate, lower payment, remove a cosigner or even pay down debt sooner.

Private Student Loans

If you have private student loans, meaning not backed by the government, it’s usually a good idea to look into your refinance options to make sure you have the best repayment plan. They typically have higher interest rates and less flexibility when it comes to payment versus federal loans. Some other reasons to refinance include:

  • If your loan has a variable interest rate, it may be time to lock in at a fixed rate as interest rates are expected to rise through 2020. When you lock in at a fixed rate, you can avoid any surprised late when interest rates increase.
  • If you have a parent or co-signor on the account, and you want to remove them, you will have to refinance the loans into just your name. Your co-signor may request this if they need to remove the debt from their credit report.
  • If you’ve made significant improvements to your credit, you may be eligible for an even better interest rate. That interest adds up over time, and the saving may well be worth the extra paperwork.
  • Your financial situation has significantly changed. If you’ve started a great job that allows you to pay down your loans quicker, refinancing may be a great option. A shorter repayment period normally means a better interest rate. Even though your monthly payment will increase, you’ll be spending less money total on interest for the life of the loan – but make sure you can handle the increased monthly amount.

Federal Student Loans

Federal student loans come with a different set of rules than private loans. They have different levels of repayment, and you could have your loans forgiven if you qualify under certain circumstances. Before you decide to refinance your federal loans, make sure you understand what they provide:

  • Federal loans have flexible repayment options that make them more manageable. Repayment options include Income Based Repayment, Income Contingent Repayment, Pay As You Earn, and Revised Pay As You Earn. Each program has specific qualifications that need to be met to determine the best option for your situation.
  • You could qualify for loan forgiveness! If you work as a federal employee or in the non-profit sector for a minimum of 10 years, you could be eligible to have the balance of your federal loans forgiven if you’ve been making consistent payments over time. If you refinance your loans, you lose this option.
  • If you have a high debt load or unstable employment, staying with a federal loan may provide you with more repayment options down the road should you find yourself struggling to keep up with monthly payments.
  • You may pay more in interest over the life of a federal loan compared to a private loan if you chose an income driven plan. You may also have to pay taxes on any loan amount that’s forgiven (consult a tax professional if you have questions). But if you lose your job or experience a hardship having the option to reduce your monthly payment may be a lifesaver!

Making the decision to refinance your student loans should come with a lot of thought, especially if you have a mix of private and federal. Make sure you evaluate the interest, monthly payments, and repayment flexibility. You need to also plan long term and not just based on your current financial situation. If you have questions on whether refinancing makes sense for you, give us a call, we are happy to help!

Laura Berendsohn
Washington Branch Manager, Assistant Vice President