When To Refinance Student Loans

by Staff on December 2 2020

The main goal of refinancing, for many students, is to save money on interest. This helps lower the overall cost of the loan and also helps you get out of debt faster. If you are dealing with multiple high-interest student loans, refinancing can be a strategic move. But that’s only if you qualify for a lower interest rate.

How Refinance Rates are Calculated

Private lenders do not set a fixed rate for refinancing loans. They will first do a risk assessment based on your credit score, debt-to-income ratio, and other factors. Good credit and low debt-to-income ratio makes you a low-risk borrower. This qualifies you for a quick approval and a lower rate of interest on your refinanced loan. Bad credit and high debt-to-income ratio have the opposite effect.

In general, the sooner you refinance student loans, the more you will save. However, it is equally important to make sure that your financial circumstances qualify you for a lower rate on the refinanced loan. Typically, you should not consider refinancing at a rate higher than your current interest rate–unless you really need a lower monthly rate in the short term.

The Right Time to Refinance Student Loans

Ideally, you should wait to refinance your loans until you’ve met these requirements.

The six-month grace period on your federal loans has passed

Federal student loans have a six-month grace period, starting from the day you graduate from your undergraduate program. You are required to start making loan payments only after this six-month period has passed.

Most students have thousands of dollars in student loan debt by the time they graduate. Finding employment and building financial resources after graduating take time. This grace period is meant to give federal loan borrowers a chance to get a job and make money.

Chances are, immediately after graduation, your credit score won’t be high enough to qualify you for a lower rate. Your debt-to-income ratio is also likely to be high. Refinancing at this time doesn’t make sense as you will pay a high-interest rate. Use this time instead to improve your credit score and your debt-to-income ratio.


Your credit score has improved

Your credit score is the key factor in determining what rate you’ll pay on your refinanced loan. The higher your credit score, the lower the interest rate you can expect to pay. A score of 700 or more is generally good enough to qualify for a lower rate of interest.

It takes time to build strong credit. Making all debt payments on time every time is the single best way to improve your credit score. Remember, a single delayed or missed payment can hurt your score. This in turn will make it more difficult for you to get approved for refinancing or to get any other loans. Even if you do get approved, you will pay much higher interest rates.

Your debt-to-income ratio is low

Your debt-to-income ratio compares your overall monthly debt to your total monthly earnings. The monthly earnings include your income from all sources. The debt includes your student, car, and personal loan payments, mortgage payments, alimony, and child support. It does not take into consideration rent, utilities, groceries, travel, internet, phone, or other expenses.

A high debt-to-income ratio indicates that your income may not be sufficient to cover all your debt plus the other expenses. This makes you a high-risk borrower as you are more likely to miss your monthly payments. Even if a lender does approve your refinance application, they will likely charge you a higher interest rate. 

Ideally, you should wait to refinance student loans when you have a low debt-to-income ratio that qualifies you for a lower interest rate.

Overall interest rates are lower

Interest rates on student loans are tied to market conditions at the time of taking the loan. This rate then stays the same throughout the life of the loan even if interest rates decrease. If you took a loan when markets were strong, you may be paying interest rates that are higher than the prevailing rates. Check the current interest rates. If they have decreased, you’ll pay a much lower rate on your refinanced loan.

You are not pursuing student loan forgiveness

Some federal student loans come with protections such as loan forgiveness. You qualify for loan forgiveness if you meet these conditions:

  • You work in the public sector or you teach in a low-income school
  • You’ve made 120 payments towards your loan

When you refinance your federal student loans, they get converted to private loans. As private loans, they are ineligible for any protections associated with the federal loan.

If you want to pursue the Public Service or Teacher Loan Forgiveness programs, don’t be in a hurry to refinance your federal student loans. You may benefit more from loan forgiveness. Only go ahead if you’re sure you don’t intend to pursue any federal loan forgiveness protections.

Final Thought On When To Refinance Student Loans

You can refinance multiple times so refinancing as soon as you qualify for a lower interest rate is a good idea. The smallest decrease in the rate can make a significant difference. You will start saving from the very first payment. Over the life of the loan, these small savings will add up to a substantial amount. You will also be able to pay off the loan faster. This is especially important is you are dealing with multiple loans with high-interest rates.

When your financial situation improves some more, you can refinance the loan again for even more savings.  

We hoped you enjoyed this article! Remember, you can and potentially lower your monthly student loan payments and save money.