When You Should & Shouldn’t Refinance Your Student Loans

By Travis Hornsby   Updated 05/05/2021 at 2:08 pm

Did you know there’s currently $1.44 trillion in student loan debt in America? That’s an astronomical amount of money. So if you have student loan debt, you aren’t alone.

Student loans were meant to help students, and they have, but they’ve also created a huge source of heartache and stress for millions of people.

For most borrowers, student loan debt lingers for years. It starts to affect future plans like buying a home and even starting a family.

What can you do about it?

Of course, you can add them to your debt snowball or debt avalanche.

But one way that borrowers have tackled their student loan debt is through student loan refinancing. We’re going to going into detail on that here.

If you’re up to your elbows in debt and want some relief, refinancing your student loans might save you money. But it’s not for everyone.

Here’s what you should know about student loan refinancing, reasons people choose to do it, and whether it might be right for you.

What is student loan refinancing?

Student loan refinancing is simply getting a new private student loan at a new interest rate that will replace the old one. Your old student loans are paid off with the new one that is created.

You can refinance federal and private student loans through online lenders, banks, and credit unions. Your new student loan will have different repayment terms and a new interest rate based on several factors, including your credit.

Refinancing your student loans is different than loan consolidation. Student loan consolidation combines all of your federal student loans into one loan. Private loans aren’t eligible for consolidation through any federal programs.

Refinancing can combine multiple loans into one as well. The difference is that refinancing generally has an interest savings you don’t see with consolidation.

When is student loan refinancing your best option?

Refinancing your student loans could cut thousands if not tens of thousands of dollars off your student loan debt. You may be surprised how much you can save if you can secure a good interest rate.

With that said, there are times when you should and you shouldn’t turn to refinancing.

So when could it be a good idea to refinance your student loans?

1. When your student loan interest rate is above 5%

If your student loan interest rate is above 5%, explore what’s available through refinancing. Depending on your credit, it’s very possible you could get an interest rate of 3% right now.

Look at your student loan debt. Then use a student loan refinance calculator and see what kind of difference a 2% swing in your interest rate would make.

2. When you work in the private sector

Why does where you work matter? Because of Public Service Loan Forgiveness (PSLF). A requirement of PSLF is working for a qualifying employer in the public sector, like a government agency positions or non-profit. Not-for-profit 501(c)(3) organizations all qualify for PSLF.

But if you work in the private sector and have no desire to work elsewhere, then you won’t be missing out on the huge payoff available with PSLF.

3. When you already have private student loans

If you already have private loans, why not refinance them? You can get a lower rate and you won’t be losing out on any federal protections because you don’t have any to lose. You can refinance your student loans more than once which can improve your credit, and then refinance again and score even better terms and a potentially a lower rate.

If one or more of these scenarios applies to you, consider looking into refinancing options to see if it’s the right choice.

And when shouldn’t you refinance your student loans?

As many reasons as there are to refinance your student loans, there are also times when it’s not a good option. If these reasons apply to you, it’s better to look at other repayment strategies that make more sense.

1. When you don’t have three months worth of expenses saved

Most financial experts agree that people should have somewhere between 3 and 6 months worth of expenses saved as an emergency fund.

Why does this affect refinancing? When you refinance, your federal student loans become private loans and you lose access to federal protections, like deferment and forbearance. Should you run into financial trouble, programs like these come in handy. You need to be sure you can cover all your expenses before choosing to refinance.

2. When you have credit card debt

Credit cards usually have extremely high interest rates, and the debt can grow quickly if you are only making minimum payments. It also affects your credit rating, which is one of the main factors in landing a good refinancing interest rate.

Having credit card debt can keep you from taking full advantage of a good interest rate. That’s the main draw of student loan refinancing. Without a lower interest rate, it’s usually not worth it.

The one caveat to this rule is if your student loan payment is preventing you from paying down your credit card debt.

3. When you want to be eligible for income-driven repayment plans

Only federal student loans are eligible for income-driven repayment (IDR) plans. IDR plans base your student loan payment on your income. This is especially helpful if you’re in a career field with lower salaries or are in an entry-level job.

4. When there’s even a chance you might qualify for PSLF

If you have a shot at PSLF or may down the road, you shouldn’t refinance your student loans. At a minimum, you should explore your PSLF options first. PSLF can be such a great program for borrowers, especially if you have over $50k in student loan debt.

PSLF does have many requirements and you need to keep a paper trail to ensure you qualify. If you can qualify for PSLF, though, it will all be worth it.

5. When you’re paying off your loans soon

If you are close to paying off your loans, it doesn’t make sense to refinance. You might save some money through an interest rate deduction. But it could also add time to your repayment terms. Unless there’s a significant drop in your rate, just continue your current repayment plan and get rid of your debt.

Is refinancing your student loans the right choice for you?

Student loan refinancing is a great way to slash your student loan debt and pay it off quicker, but it isn’t the best choice for everyone. You could be giving up a lot of perks offered with federal loans. Sometimes the best thing to do is to spend your time and energy cutting expenses so you can crush your loan debt as quickly as possible.

Travis Hornsby founded Student Loan Planner after helping his physician wife navigate ridiculously complex student loan repayment decisions. To date, he’s consulted on over $400 million in student debt personally, more than anyone else in the country. He is a Chartered Financial Analyst and brings his background as a former bond trader trading billions of dollars.

He brings that same intensity to analyzing the best repayment paths for graduate degree professionals with six figures of student debt. He’s helped over 1,700 clients save over $80 million dollars on their student loans, and he’s been featured in U.S. News, Business Insider, Forbes, Huffington Post, Rolling Stone, ChooseFi, Bigger Pockets Money, and more.

When you should and shouldn't refinance your student loans

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