By: Kelly McNerney
The answer is an enthusiastic “Yes!” Or a cautionary “No.” It all depends on whether your refinance will put you in a better overall financial position. And finding a lower interest rate is far from your only consideration.
In Part 1 and Part 2 of our “Student Loans Done Right” series, we answered your FAQs about the mechanics of loan types and repayment plans. Now we tackle important factors that can help you decide whether refinancing your loan(s) is in your best financial interest.
More Money in Your Pocket is the Goal
When you refinance, you replace one or more of your current student loans with a new loan. Refinancing a student loan does not come with origination, application, or prepayment fees like a mortgage would.
When you refinance, aim for one or more of the following goals:
- Lower your interest rate.
- Consolidate multiple loans into one lower monthly payment.
- Save money, possibly tens of thousands of dollars over time.
- Pay off your loan sooner and free up cash to pursue other goals.
- Lower your debt-to-income ratio, so you qualify for a better mortgage or car loan.
The question is, will refinancing your loan really improve your financial standing? Answer these three questions to decide:
Do you currently hold a federal student loan?
Federal loans frequently have lower interest rates than private loans. But it is the generous protections and repayment options that are often the crucial factor in sticking with a federal loan. These benefits include:
- Income-driven repayment plans. Monthly payments can be as little as 10% of discretionary income.
- Plans than offer loan forgiveness after 20-25 years of on-time payments.
- Deferment and forbearance options that allow you to temporarily stop making payments when you face financial hardship.
- Public service loan forgiveness if you work in eligible jobs.
Private lenders do not offer loan forgiveness. Only some have deferment and forbearance options, and they are not as generous as federal plans. These protections may be a lifesaver if your finances or job outlook are not yet as stable as you would like.
Speaking of financial circumstances…
Are you a strong candidate for refinancing?
The better your financial outlook, the more loans you will have to choose from. Here are some characteristics that creditors look for:
- A minimum FICO credit score in the mid-600s, with 700+ the best bet for loan approval.
- A steady job with enough income to cover your expenses. Many lenders require a debt-to-income ratio (what you owe compared with what you make) of at least 50%. Twenty percent or less will get you the best loan terms.
- Graduation from an eligible school. Lenders generally require that you have a degree and that you graduated from a school that is qualified to receive federal aid.
You can enlist a co-signor to qualify for a loan but working to increase your credit score and income and reduce your debt will put you on a stronger financial footing in the long run.
Will you really save enough money to make refinancing worth the effort?
Once you determine that you might benefit from refinancing, run the numbers to find out for sure. There are plenty of student loan refinancing calculators online (here is our choice) As you crunch data, consider:
- Which lenders have the lowest interest rates?
- Are the terms fixed (the rate will stay the same throughout the loan) or variable (the rate will rise in the future)?
- What is the repayment term? The shorter the time span, the less you will pay in interest. Also, factor in how much time is left to pay off your current loan. If you only have five years to go, for example, it may be cheaper to stick with your existing loan than take on a new 10-year loan, even at a lower interest rate.
- What are the options if you experience financial hardship?
- If you have multiple loans with different interest rates, will you benefit from refinancing those with the highest rates?
Student loan debt can have a significant impact on your life goals. If you need help balancing all the considerations, feel free to reach out to the financial experts at FJY. We can help you create a holistic strategy personalized to your priorities.