Is It a Good Idea to Refinance Student Loans?

Flexible repayment plans

Many student loan refinance companies offer repayment plans that range from five to 20 years. In contrast, the federal government offers 10, 20, 25 and 30 years.

If you want a little more flexibility between 10 and 20 years, or you have the means to go for a shorter repayment term, refinancing can give you a lot more options. One lender, Earnest, lets you pick your repayment plan down to the month, depending on what you want to pay every month.

If you can afford a shorter repayment plan, it could ultimately save you time and money. For example, let’s take the same $25,000 balance with a 6.7% interest rate and refinance it with a seven-year term and a 3.5% interest rate — lenders typically offer lower rates on shorter repayment terms.

With the new loan, your monthly payment would go up by $50 to $336. But you’d be debt-free three years sooner, and you’d save a whopping $6,147 in interest.

In contrast, a longer repayment period could give you some relief if you’re struggling to keep up with your payments. Let’s take the same loan but extend it to a 15-year repayment term and a 4.25% interest rate. In this scenario, your monthly payment would drop by $98 to $188, and you’d still save money on interest because of the lower rate ($518 total).

Whatever you decide, refinancing your student loans can give you the freedom to control your own repayment plan.

Simpler repayment

If you have multiple monthly payments from more than one lender or loan servicer, refinancing your student loans can combine all of those payments into one.

This may not seem like a huge benefit, but over time, it can get harder to keep track of multiple loan payments, especially as you add new loans and other financial accounts to the mix. If you can refinance and enjoy some of the other perks that come with the process, a simpler repayment plan can be a nice bonus.

Transfer debt to a child

As previously mentioned, some student loan refinance companies allow a parent to transfer debt they incurred on behalf of a child to refinance that debt in their child’s name, effectively transferring the responsibility for paying it back.

Of course, both the parent and child need to be on board, and the child will need to be able to qualify for the new loan on their own — or possibly with the parent as a cosigner.

But if you’re a parent who borrowed student loans to help your child to get through school, but you’re not struggling to manage retirement savings and other important financial goals, refinancing can be the key to getting back on the right track.

Drawbacks of refinancing student loans

While there are a lot of strong reasons to consider refinancing your student loans, it’s also important to consider the potential downsides before you move forward.

Not everyone qualifies

Student loan refinancing has relatively modest eligibility criteria, but if you just graduated and haven’t had the chance to build your credit history yet, you may have a tough time getting approved.

And while asking a parent to cosign your loan can help improve your approval odds, that arrangement can come with its own potential pitfalls.

This is because, by cosigning, your parent agrees to make the loan payments if you can’t or don’t. It also means that the loans show up on their credit reports as if they owe the debt. The credit report tradeline counts against them when they apply for credit in the future and can increase their debt-to-income ratio — the percentage of your gross monthly income that goes toward debt payments — even if they’re not actually making payments on your loans. 

So if you’re thinking about asking a parent to cosign to help you get approved, talk about what the arrangement entails, so you’re both on the same page. Then make it a priority to pay your monthly bills on time and in full to avoid damaging both of your credit scores.

Qualifying may not be enough

Just because you get approved for student loan refinancing doesn’t mean you’ll get favorable enough terms to make it worth it. The average credit score and salary for people who refinance are 774 and $98,156, respectively, according to Purefy data.

That’s not to say you need to be at those levels to get approved. It just means that you may need to be at or close to those levels to qualify for the best interest rates and terms to make refinancing worth it.

Depending on your current loan situation, though, you may not need to get the best rates for refinancing to make sense. But carefully consider whether you can take some time to improve your credit and income before you apply.

No more federal loan benefits

If you’re refinancing federal student loans, you’ll lose access to any benefits you get with those loans from the Department of Education. That includes:

• Income-driven repayment plans: These federal student loan repayment plans reduce your monthly payments to a fraction of your discretionary income, which can come in handy if your income is less than what you want it to be or you’ve lost your job. While you have to recertify your income every year — so payments can go up over time — if you still have a balance after your 20- or 25-year repayment term ends, the remainder will be forgiven.
• Loan forgiveness programs: The federal government offers two student loan forgiveness programs: Public Service Loan Forgiveness and Teacher Loan Forgiveness. If you qualify for either of those programs, it may make a lot more sense to keep your loans where they are, or at least some of the balance if you’re applying for Teacher Loan Forgiveness because that benefit is capped at $5,000 or $17,500, depending on your area of teaching.
• Loan repayment assistance programs: Several government agencies offer loan repayment assistance programs to help eligible borrowers to pay back what they owe. If you’re a member of the military, a health professional, or a public defender, or you work in another eligible field, you could get tens of thousands of dollars in repayment assistance. Research your options before you pull the trigger on refinancing.
• Generous options if you can’t pay: Deferment and forbearance options can vary among private student loan companies, but in many cases, they don’t compare to what the federal government offers. Also, if you default on federal student loans, you can rehabilitate or consolidate them and bring them out of default status. That’s generally not an option if you default on private student loans.

Of course, if you have private student loans, you don’t need to worry about losing any of these perks. But federal student loan borrowers should think carefully about what they’re giving up before they refinance.

Student loan refinance eligibility: Who can refinance?

If you’re wondering, who can refinance student loans? The answer is that it depends on the lender. Unlike the federal government, which has standardized eligibility requirements for all college students, private lenders each have their own eligibility criteria.

For example, while some set minimum requirements for credit scores and income, others don’t. And while certain lenders stick to more traditional credit underwriting, others may also look at your bank accounts and retirement accounts to determine how you manage your money. The latter option can be helpful if your credit history is still relatively new, but you have a history of spending and saving wisely.

In addition to those requirements, you’ll also typically need to be a U.S. citizen or permanent resident, though some lenders may allow non-permanent residents to apply if they have a cosigner who meets one of those requirements.

You’ll also typically need to be at least the age of majority in your state, which shouldn’t be a problem for most college graduates, and have student loans from a Title IV school.

Before you refinance, make sure you review the eligibility requirements from each lender you’re considering to determine whether you qualify.

Also, make sure you get prequalified with each lender, so you can get an idea of your approval odds and even what your terms would look like before you submit an official application.