Is Student Loan Refinancing Right For You?

Photo Credit: Rachael Gorjestani

Read this if you’re considering refinancing your student loans. Estimated read time ~5 minutes.

If you have student loan debt you may have heard whispers about refinancing for a lower interest rate. But you might be wondering if that’s legit, it definitely sounds like a scam. Essentially you give all your income and debt information to a company in the form of a loan application and they approve you and offer you a reduced interest rate. What’s in it for them? Interest on a $1.4 trillion market.

So how do you decide if refinancing your student loans is a smart financial move for you? Read on for straightforward questions and answers to help you decide.

How Predictable is Your Income?

Federal student loans have by far, the most flexible monthly payments. They’re designed to meet the needs of young borrowers inexperienced with debt and landing entry-level positions that may not pay incredibly well. While some refinancing companies offer monthly payment flexibility and the possibility for deferment, many refinancing companies don’t. Borrowers with predictable income are better suited to refinancing.

How Good is Your Credit?

Many student loan companies require minimum credit scores of 660-680. The better your credit score, the better your interest rate. Even if you use a company like Earnest who doesn’t have a minimum required score, a low score may not actually snag you a better interest rate than you currently have. Refinancing is best suite to borrowers with good to excellent credit scores but is worth looking into even if your score is lacking.

Do You Have Federal and Private Loans?

Student loan refinancing allows you to pick and choose the loans you refinance and consolidate them all into one loan. It’s important to note that if you have some loans at a better interest rate than your refinanced rate you can keep those with your current servicer and refinance only the higher interest rate loans. If you’re looking to simplify many loans with different interest rates into one loan with one interest rate, refinancing is a good fit.

How Quickly Do You Want to Repay?

Student loan refinancing shouldn’t be used to extend the term of your loan repayment. Many companies offer terms from 5-15 years. The goal of refinancing is to pay less interest. If you extend your loan term you could wind up paying more. The speed with which you intend to repay your loans can help you decide if a fixed or variable interest rate is right for you. Fixed rates tend to appeal more to those who plan to take awhile to repay and lower starting variable rates appeal to those who want to repay quickly.

What are Your Other Financial Goals?

Less interest = more bang for your buck. You’ll be out of student loan debt faster making the same monthly payment. Do you want to buy a home, max out your 401K contributions, max out your IRA, make additional investments, start a side hustle, drop down to part time at work, change careers, travel? Refinancing will help you get out of student loan debt faster so you can go all in on these goals guilt-free. However, some borrowers don’t want to delay these financial goals and may want more of their money right now. If that’s you, you may not be the right candidate for refinancing.

Will refinancing get you to your debt free dream? Is there a category that you struggle with? Let me know in the comments below or on the Repayable Facebook Page. You can always send me an email jeni@repayable.org with any questions you have about whether refinancing is right for you or not.