Should I Refinance My Student Loans A Second Time?

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Student loan refinancing is a great way to turn a good credit score and income into lower student loan interest rates.  Once borrowers experience the savings from a refinance or a consolidation, the temptation is to do it again and again.  Going through the process for a second, third, or fourth time has potential to improve interest rates, but it does come with risks.

Multiple Refinance Rules

Borrowers considering a second refinance should know that there is no rule or limitation against refinancing student loans multiple times.  Some lenders will even let current customers apply to refinance their existing loans, but this isn’t the case with every company.

The Downside/Risk of Multiple Student Loan Refinance

The biggest concern with refinancing student loans multiple times is the hit to the credit score.

When a borrower shops around, the credit agencies treat multiple inquiries from multiple lenders as a single inquiry.  This minimizes the dent to a credit score and it normally recovers quickly.  Starting the refinancing process again means yet another credit inquiry.  New accounts and new inquiries can gradually erode an otherwise strong credit score.

The other danger of refinancing many times is the temptation to assume that it can be done again and again at a lower rate.  Borrowers may opt for a variable-rate loan with the assumption that they can just lock in a fixed-rate loan at a later time if it looks like interest rates are headed up.  This attitude is dangerous as it can result in missing the opportunity to lock in desirable terms.

Taking Advantage of a Second or Third Student Loan Refinance

The student loan refinance marketplace has gotten incredibly competitive.  The fact that this marketplace is so competitive is a huge asset for borrowers.  It means lower rates and it means lenders will be less picky with the borrowers they accept.

Another perk of going through the process is the new customer bonus that many lenders use to entice consumers.  These bonuses currently range from $150 to $350 and are offered by numerous lenders.  The cash up front isn’t enough to make up for a difference in interest rate, but it can be a nice perk for going through the process.

When is the best time for a second refinance?

There are several different circumstances that can make wading back into the refinance market a good idea.

Interest Rates Drop – If you read headlines about the fed slashing interest rates or hear economic news about interest rates falling, there is a good chance that student loan refinance rates will also be dropping.  Student loan interest rates tend to move a bit more slowly than mortgage interest rates, so it is a good idea to keep an eye on the lowest student loan refinance interest rates available to see when they move.  Checking these numbers once or twice a month is normally sufficient to track rates.

Credit Score Improvements – If your credit score has jumped significantly since the last time you refinanced, it might be time to see if that jump is enough to save money on your student loans.  Small movements like 5 or 10 points probably are not enough to tip the scale, but if negative reporting fell of your report, you could be very appealing to the refinance companies.

New Job or a Raise – Earning more money improves your debt-to-income ratio (DTI).  Along with credit score, DTI is one of the two key factors in credit decisions.  If you have pay stubs to show that you are earning more money, it means you are less of a credit risk and more deserving of lower interest rates.

Debt is Eliminated – Similar to getting a raise, eliminating debt also improves your DTI.  Paying off a car loan or a credit card can make your monthly balance sheet look much more appealing to a lender.  Make sure not to apply too soon after paying off other debts as it takes some time before it will appear on your credit report.

Fixing Mistakes from the Last Refinance – If you made a mistake on a previous refinance, there is nothing wrong with going through the process a second time to get it right.  Borrowers who only checked with a couple lenders may find that they can get a better rate by casting a wider net.  Similarly, borrowers who are having second thoughts about their repayment length or the variable or fixed-rate loan that they selected can opt for better loan terms the second time around.

Happy with your Current Lender?

If you don’t want to leave your current lender, going through the steps of a refinance might be enough to get them to drop your interest rate.

Lenders won’t respond to advertised rates or even “approved” rates from other lenders.  However, if you provide a Truth In Lending Statement from a new lender, your current lender will take note.  This document is the final document that gets signed once everything has been approved and the terms are set in stone.  Lenders matching other lenders at this stage of the process is becoming increasingly common.

One Final Tip

Shop rates with as many different lenders as possible.  Each lender evaluates applications slightly differently than others, so the only way to know who is offering the best actual rate is to apply.

There are a number of student loan sites and lender aggregators that will only list the 5 or 6 companies that are paid advertisers.  It is common for some of the smaller lenders who don’t have the best advertised rates to end up offering a better deal than the larger companies.  We are currently tracking 17 different national lenders that specialize in student loan refinancing.  Applying to all 17 certainly isn’t necessary, but only checking a few different lenders is insufficient.

The refinance process is relatively simple, so spend a couple hours on it and get the job done right.  It can be an excellent investment of time.