Since the goal of refinancing is to save money on interest, you’ll likely want to choose the lender that offers you the lowest rate you qualify for. Variable rates tend to be lower than fixed rates, but they could go up in the future; only opt for a variable rate if you plan to pay off your loan quickly.
Similar to private student loans for those attending school, refinance loans aren’t required to offer the same consumer protections that federal loans do, such as income-driven repayment plans or forgiveness. But some refinance lenders provide more than the standard 12 months of forbearance throughout the loan term, and/or additional loan modification options for borrowers having difficulty making payments.
Refinancing is typically best for those with strong incomes and job stability. But life is unpredictable. If you think you might need to take a pause from payments or to lower your monthly bill, consider choosing a lender with a more generous forbearance policy.
Also, if you choose to refinance with the help of a co-signer, go with a lender that offers a co-signer release policy so you can take on the full repayment obligation when possible. That will protect your co-signer’s credit from the negative marks that could occur if you fall behind on payments.
Frequently Asked Questions
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.
How many times can you refinance student loans?
There is technically no limit to how many times you can refinance student loans, though after completing the process a few times, it likely won’t be useful anymore. The main reason to refinance debt is to secure a lower interest rate, and at a certain point, you may find you already have the lowest rates possible.
What is the credit score needed to refinance student loans?
The minimum credit score needed to refinance student loans varies by lender, but as a general rule of thumb, you’ll likely need a score of about 650 to qualify. However, to get the best interest rates available, a credit score of roughly 720 or higher is a common benchmark.
If your credit is lower, consider waiting to refinance until you can increase your credit score.
Can I refinance student loans with bad credit?
Some lenders may refinance student loans if you have bad credit, but it’s often not worthwhile. With poor credit or a spotty financial history, you’ll likely only qualify for the highest interest rates. Since most people refinance to get a lower rate, it probably doesn’t make sense to refinance if you have subpar credit.
However, you may be able to add a co-signer to your application. If they have excellent credit and a stable income, you could qualify for better rates—even if your own credit score is low. But adding a co-signer comes with it’s own set of risks and rewards, so make sure you understand the pros and cons before using this strategy.
Is refinancing student loans better than consolidation?
Student loan refinancing and consolidation are two similar, but distinctly different, processes. With refinancing, you combine all your old loans into a new debt. The interest rate on the refinanced loan is determined by your creditworthiness, and if you have excellent credit, you could reap significant savings by getting a lower rate. Only private lenders offer refinancing, so your refinanced debt will be a private student loan.
Student loan consolidation, however, typically refers to a direct consolidation loan. This is a federal program that allows borrowers to combine multiple federal student loans into one consolidation loan. It remains federal debt, so you keep all the same protections. However, the new interest rate on your consolidated loan is simply a weighted average of your old rates. That means you won’t save money with consolidation.
Refinancing and consolidation both have their pros and cons, and the right option for you depends on your financial situation and goals.