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When Should I Refinance My Student Loans?

Proper timing when refinancing student loans is a great way to save money and eliminate risk.

Written By: Michael P. Lux, Esq.

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Refinancing student loans has grown in popularity because it presents many borrowers with an opportunity to save money on interest. However, refinancing can be a mistake when done with the wrong loan or at the wrong time.

How does a borrower know when to refinance their student loans?

The simple answer is that refinancing should be done whenever lower interest rates are available.

Unfortunately, the simple and easy answer is not always the best answer. When it comes to refinancing student loans, there are some circumstances where waiting patiently is the best course of action.

The One Time You Definitely Should Not Refinance

Before jumping into the timing and the strategy of refinancing, it is important to point out how refinancing can be a huge mistake.

Federal student loans have important protections like income-driven repayment plans and student loan forgiveness. Unfortunately, Congress sets federal loan interest rates. As a result, these rates tend to be higher than many private lender options.

The borrowers who might utilize the federal protections, which include perks beyond loan forgiveness and income-driven repayment plans, should not refinance their federal loans.

Federal student loans should only be refinanced by borrowers who are certain they won’t require any help paying the debt off in full.

Tracking Down Federal Loans: Sometimes, it can be difficult to tell whether or not a student loan is a federal student loan. Borrowers can access the Department of Education’s records on the Federal Student Aid website. Finding complete records on the page can be a little tricky, so we have prepared step by step instructions to track down the student loan information.

Private Student Loan Refinancing

Federal loans present many complications when refinancing. However, private loan decision-making is simple.

Borrowers that can get better terms on a refinance should refinance their private loans.

For some, this can mean getting a significantly lower interest rate. For others, it might be the same interest rate, but lower monthly payments due to a longer repayment length.

The key is to identify the times a borrower might be able to get a better deal by refinancing…

The Times When Refinancing Makes the Most Sense

Knowing when the time is right to refinance will depend upon many different circumstances.

Market Rates – Broader economic conditions can be a driving factor in whether or not the timing is right to refinance. Borrowers tracking the student loan refinance marketplace may want to bookmark our monthly update.

Before Buying a House – Refinancing can be a huge asset when buying a house. By refinancing, borrowers can improve their debt-to-income ratio, which helps qualify for a mortgage. Borrowers going with this approach should carefully coordinate the timing of their student loan refinance and mortgage applications.

When You Get a New Job – Getting a new job can make a huge difference in student loan refinance rates. Borrowers earning more money are less risky to lenders. Best of all, most lenders will accept an offer letter or paystub as proof of income, so those with new jobs don’t need to be in their position very long.

When Negative Items Fall Off Your Credit Report – Borrowers with poor credit scores may struggle to get approved for refinancing. As time passes, many negative items no longer appear on credit reports. The removal of negative reporting can turn a rejection into an approval.

When a Cosigner Released is Needed – Some student loan lenders have cosigner release programs, but the best way to release a cosigner from a loan is usually to refinance the debt. Going this route can get the borrower a lower interest rate and remove student loans from the cosigner’s credit report.

During Your Student Loan Grace Period – Most lenders give borrowers a six month “grace period” after completing school. Some borrowers mistakenly believe that they have to wait until the grace period is over to refinance. Waiting for the grace period to end allows the loan to generate additional interest each month. Those who refinance as soon as they find a job will be able to start saving on interest immediately.

The Times When You Should Wait to Refinance

Just as there are times when refinancing should be done immediately. There are also times where waiting is the most prudent approach.

During School – Many students realize that some of their student loans have unreasonably high interest rates and look to refinance. Those without a job or a degree will find it very hard to qualify for refinancing and usually have to wait. However, there are steps borrowers can take to improve their student loan situation while still in school.

Your Application is About to Improve – If you are only a couple of months away from negative reporting falling off your credit report or from starting a new job, it makes sense to wait. While there is no harm in refinancing multiple times, trying to refinance twice within a couple of months will likely cause headaches for a minimal benefit.

What is a good refinance rate?

In most cases, a good refinance rate is one that is better than your current interest rate. A slight interest rate improvement can still result in significant savings over the life of a loan.

Unlike mortgage rates, which can change daily, student loan refinance rates typically move about once a month.

The lowest rates currently available are from the following lenders:

RankLenderLowest RateSherpa Review
T-1ELFI5.28%ELFI Review
T-1Splash Financial5.28%*Splash Financial Review
3Laurel Road5.49%Laurel Road Review

Unfortunately, these ultra-low rates are only available for borrowers looking for a 5-year variable-rate loan. In many cases, the lenders offering the best rates on the longer loans will not be the same as the lenders in the 5-year loans.

Readers looking for a longer loan can find the current best rates on the market here.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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