What to Consider Before Refinancing Student Loans

What to consider before refinancing student loans
Fiona Staff5/7/2020

For young adults entering the real world, there are many benefits to refinancing one or multiple student loans. Whether the goal is to consolidate numerous debts for convenience, or simply to qualify for a lower rate, there are several great options available for student loan refinancing.

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Here are five key points to contemplate regarding student loan refinancing. 

Locking in a Lower Interest Rate

Ultimately, the main reason to refinance student loans is to save money. Borrowers can achieve this through refinancing by locking in a new, lower fixed interest rate, which will reduce monthly payments and allow them to avoid the uncertainty of variable rates. See how you can save on monthly interest.

Buying Time

Borrowers may also want to refinance student loans to buy time. If their current monthly payment amount is too high for the borrower’s budget, refinancing can alleviate the matter by stretching out the loan term (i.e., the amount of time the borrower has in months to repay the loan). In this case, with a lower monthly payment, a borrower will have more available cash to cover regular expenses. 

Understanding Different Interest Rates

There are two types of interest rates: fixed and variable. Fixed rates are guaranteed for the duration of the repayment period, whereas variable rates can go up and down over the entire life of the loan. For this reason, fixed rates can be a little higher, whereas variable rates are usually lower initially, but can increase beyond the fixed rate amount over time. Deciding on which rate to choose may depend on how quickly one can pay back the entire loan.

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It should come as no surprise that a good credit score is typically required to qualify for student loan refinancing, usually 650 or above. If a lender has more assurance a debt will be paid on time and in full, they will be more likely to take it on in the first place. If a borrower’s credit rating is not quite up to scratch, however, many lenders will allow for a co-signer to be added to the loan, to cover the risk.

Debt-to-Income Ratio

One of the main factors that determines the interest rate offered by a lender is the borrower’s debt-to-income ratio. It’s determined by the amount of money a borrower owes for all outstanding debts, divided by the amount they earn. Knowing this, a lender is better able to estimate how likely a borrower will be able to pay them back. A lower ratio, in the vicinity of 50% or below, is preferred by most lenders.

Bottom Line

When it comes to the best student loan refinancing plan, the best thing to do is shop around. Get a sense of the interest rates available, as well as the lengths of the repayment periods. Ultimately, refinancing is about saving money or buying time. In some cases, it can even do both!

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