May 6, 2021

Can You Refinance Student Loans?


Like any other loan, student loans (whether federal or private) can be refinanced. For those who may not be familiar with the process of refinancing, simply put, this is taking out a new loan to pay off your existing loan(s). While this sounds counterintuitive, many debtors consider refinancing their loans as this can, ideally, lead to more favorable terms and lower monthly payments.

For student loans in particular, it’s important to note that those who have federal student loans may want to exercise caution when thinking about refinancing. This is because refinancing student loans will be done via a private lender since you can’t refinance with the federal government.

Consequently, this means losing access to government protection for your federal student loans, such as income-driven repayment plans and forgiveness programs.

Who Can Refinance Student Loans?

Typically, those who opt to refinance their student loans consist of professionals who have already graduated. It’s not common for lenders to allow student loan refinancing when the student is still in school, as most lenders require applicants to at least have a bachelor’s degree.

Aside from this, here are some other factors lenders take into consideration when checking who can qualify for student loan refinance:

  • Credit score: As with any loan, your credit score can significantly affect your eligibility for student loan refinancing. A score within the 600 range or above can be considered good, though some lenders much prefer borrowers falling within the 700 range or higher. In some cases, the credit score may even affect the interest rate you will be given.
  • Payment history: Proof of regular and on-time debt payments on your credit report will also work favorably for your student loan refinance application.
  • Income: To qualify for student loan refinancing, lenders will also look at your income versus how much debt you have to see if you’re actually earning enough to repay your loan. For student loans, having a debt-to-income ratio of 50% is generally required by lenders. A lower debt-to-income ratio will, of course, be more preferred by lenders.

How to Refinance Your Student Loans

If you’ve decide to refinance your student loans, the following tips and steps may make it easier for you to prepare and apply for refinancing:

  • First and foremost, review your current agreement thoroughly. Keep in mind that refinancing can only be advantageous when you want to alter your payment plan, which will allow you to choose between making more payments within a shorter time frame or fewer payments but within a longer time frame.
  • Check if your current loan has a prepayment penalty. Compare what you will have to pay: the early termination cost for your old loan versus the savings you can gain from refinancing. Make sure the value of the early termination cost isn’t going to outweigh your plausible savings.
  • Determine the current value of your loan and compare between lenders. Find one that will be favorable to your current financial situation and ability to pay. Check the lender’s requirements to see if you also qualify for their terms.
  • Check if you have alternative options. Some student loan refinancing services may offer packages or terms that can help you cut costs or are more aligned with your financial goals.

Should You Refinance Your Student Loans?

Currently, it’s not advisable for those with federal student loans to refinance. This is because the CARES Act, passed in March 2020, suspended payments and interest for federal student loans, effectively setting the interest rate to zero. This means your balance won’t increase even if you hold off on payments.

On the other hand, those who have private student loans may want to consider refinancing now that lenders have lowered their rates due to COVID-19 restrictions.

Ultimately, it is up to you to decide whether refinancing is the wisest course of action. Your goal, of course, should be to pay off the loan in a way that won’t lead you to financial ruin.

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