How do I know if student loan refinancing is right for me?
The three items to consider when deciding whether to refinance are financial history, interest rates and repayment goals.
First identify whether you qualify; of the lenders that disclosed their minimum credit scores to Forbes Advisor, all had a minimum credit score of 650 or higher. You’ll also generally need to show stable income, a low debt-to-income ratio and a history of on-time debt payments.
Eligible to refinance? Now look at your current loans’ interest rates. If they’re meaningfully higher than the rate you’ll likely get when you refinance—which you can check using lenders’ prequalification tools on their websites—refinancing might make sense for you. But if you don’t stand to save much, or you are relying on federal programs like Public Service Loan Forgiveness that you’d lose by refinancing, it’s not worth it.
Which student loans should I refinance?
Your safest bet is to refinance high-interest private loans. That’s because you won’t lose potentially useful federal repayment options, including up to three years of deferment or forbearance, since private loans usually come with less generous repayment terms.
Under the CARES Act, which was passed in response to the coronavirus (Covid-19) pandemic, and President Donald Trump’s Aug. 8 executive order, federal student loan borrowers have an additional forbearance option: They do not have to make payments from March 13 through Dec. 31, 2021, and federal student loan interest rates are set at 0% during that time.
You do not have to refinance all of your loans, so consider keeping federal loans federal and leaving them out of your refinance package.
If you do not plan to make use of any federal loan benefits—or you want to refinance so that you can pay off loans very quickly—it’s possible to refinance federal loans. Consider doing so, though, after the Covid-19 monthly payment pause has ended.
When is the best time to refinance student loans?
Many lenders require a degree in order to refinance, so it’s best to wait until you’ve graduated. Some lenders have more relaxed degree requirements, but they may want to see a history of on-time student loan payments for a period of time first (say, 12 months). You also typically must be out of school before refinancing, with some exceptions.
If you don’t yet meet the credit and income requirements but you want to refinance anyway, it’s possible to use a co-signer. Due to the risk to their credit score the co-signer takes on, though, it’s ideal to wait to refinance until you have the financial profile to be eligible as the sole borrower. You can take the time to improve your credit score and refinance later on.
What is ‘co-signer release?’
Some refinance lenders offer to release the co-signer from a loan after the borrower makes a certain number of payments. That can protect the co-signer from a credit hit as a result of the primary borrower’s negative payment history. If you plan to use co-signer release, check your loan documents to see when it will be possible (in 36 months, for instance) and what additional requirements you might need to meet.