With rising college costs, student loans are placing a strain on more and more people’s lives. Student loan refinancing can help with that. This is what you need to know about when to refinance your student loan:
What is Refinancing?
Refinancing is when a lender agrees to pay off your current loan(s) in their entirety. You’ll then take out a new loan to pay this lender back. A big reason why refinancing is popular is that you can change the terms of this new loan. For example, you can secure a lower interest rate or change the repayment plan.
How Does Student Loan Refinancing Work?
When you refinance your student loans, you combine one, some, or all of your current loans into single a new loan. You can do this with both federal and private loans. By doing this, you can choose new terms for the loan such as:
- Changing the length of the loan
- Getting a new interest rate
- Switching from variable to fixed rates
How to Find the Best Student Loan Refinance Option
Finding the right refinancing option should be a simple. Use Sparrow to find the best student loan refinance option for you. Sparrow shows you the most important information and simplifies the entire process.
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How Do I Qualify for Student Loan Refinancing?
There are certain aspects that lenders look at to see if you’re qualified for refinancing. The main things you want to keep in mind are having a steady income, a good credit score, and a good payment history.
Steady Income
Lenders look at your income to ensure you’ve got enough money coming in each month to pay off your monthly payments. You want enough to be able to support your current lifestyle in addition to making payments on your loan. A good way to determine this is by looking at your debt-to-income ratio. Take your monthly debt and divide it by your monthly income. The lower the number, the better condition you are in.
Good Credit
Your credit score is another important factor that lenders use to access whether or not you qualify for student loan refinancing. You want to have a credit score at least in the high 600s. The higher, the better. A high credit score helps lenders know that they can trust to make timely payments on the loan. On top of that, a good credit score will allow you to access lower interest rates.
>> MORE: What credit score is needed for a student loan?
Payment History
Lenders want to make sure that they can trust you to make payments on time. Because of that, you’ll want to make sure that you maintain a strong payment history on all debts, particularly your student debt. For example, if your record shows that you’ve always made payments on time, you’re more likely to qualify. On the other hand, a record of missed payments might make lenders think twice about letting you borrow money.
How Much Will I Save?
The amount of money you’ll save depends largely on your personal situation and the terms of your new loan. However, people can save anywhere between hundreds to tens of thousands of dollars over the life of the loan.
Borrowers who used Sparrow to refinance reduced their interest rate by 2.29 percentage points on average, saving them around $17k over the life of their new loan.
When should I refinance my loans?
There are certain factors to look at to see if now is the right time to refinance your loans. Here are some of them:
Good Financial Situation
Has your financial situation improved since you got your loans? Do you have a better income or credit score? Are you currently in a good financial position? If so, now would be a good time to refinance your student loans.
You Have Private Student Loans
Refinancing when you have private student loans has little to no downsides, as long as you can secure better terms. If you have private student loans, it might be a good move to refinance.
>> MORE: Compare private student loan lenders
Interest Rates are Low
Student loan interest rates can change based on the Federal Reserve’s actions. When the Federal Reserve cuts interest rates, it might be a good time to refinance your student debt while rates are low. Similarly, if you’ve been waiting to refinance and it looks like the Federal Reserve will be hiking interest rates in the near future, you may want to take advantage of the current situation by refinancing. Assuming you can get a lower rate and better terms, refinancing is typically a smart move since you are almost guaranteed to save money over the lifetime of your loan.
>> MORE: What is the average student loan interest rate?
Your Current Interest Rate is High or Variable
If your current interest rate is high or variable, refinancing is a good option. You may be able to switch over to a lower fixed rate, which can help make handling your monthly payments a lot easier.
Can I Refinance My Student Loans More Than Once?
Yes. There is no limit to how many times you can refinance your loans. Additionally, there are typically no fees for refinancing your student loans. So, if your credit score or income has recently improved, you can consider refinancing as many times as you want until you’ve got the best student loan for your financial situation.
Why Shouldn’t I Refinance My Student Loans?
Just like there are many reasons why you should refinance, there are just as many for why you shouldn’t. Here are some of them:
You plan to use federal loan benefits
If you refinance your federal loans, you’re turning them into private loans. This means giving up the option to participate in programs that come with having a federal loan such as federal student loan relief or income-based repayment plans. If you would still like to take advantage of those benefits, then don’t refinance.
You are Pursuing Loan Forgiveness
People who refinance their loans don’t qualify for federal loan forgiveness programs such as the Public Service Loan Forgiveness Program. If this is something you’re hoping to do, then don’t refinance your loans.
You Recently Declared Bankruptcy
It’s not impossible to refinance after declaring bankruptcy, but it can be harder. Most lenders won’t consider lending to you until 4-10 years have passed since you went bankrupt.
You Don’t Have a Good Financial Situation
If you don’t have a steady income or good credit, then it’s not a good idea to refinance your student loans now.
>> MORE: Should I refinance my student loan?
Final Thoughts from the Nest
There’s a lot to think about when deciding to refinance your student loans. At the end of the day, though, if you’re in a good position to make this move, then do it. Refinancing could save you a lot of time and money over the lifetime of the loan.
Sparrow is a great place to get started. Sparrow is the fastest way to compare real, personalized student loan rates. Complete the Sparrow application to get prequalified offers from 15+ lenders through one application.