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Student loan debt is one of the biggest forms of debt to carry, especially for people who have advanced degrees or who took longer than average to get their degrees.
Refinancing your student loan debt may seem appealing, but it’s not for everyone.
Here’s what you need to know about student loans and student loan refinancing before you decide whether refinancing is right for you.
Is It A Good Idea To Refinance Your Student Loans?
Like any other loan, refinancing student loans usually means extending the term of your loan in exchange for lowering the interest on those loans, or lowering the monthly payment. Often refinancing lets you do both, which frees up more of your income for other uses.
However, when it comes to student loans refinancing isn’t always the best option. For one thing, many student loans come at lower interest rates than competing loan types. Also, loans held by the Federal government usually have more favorable terms than private loans, even refinancing offers.
Here’s what you need to know about qualifying for student loan refinancing and how to refinance your loans so you can decide if refinancing is right for you.
How To Qualify For Student Loan Refinancing
The single most important part of qualifying for student loan refinancing is having a good credit score and a positive credit history. That’s because the better your credit score is the more favorable offers you’re likely to receive.
You can improve your credit score by paying all your bills on time, maintaining low or no credit card debt, but making small purchases on credit to provide a longer credit history.
You’ll also have to meet certain income requirements to refinance. That means that people on income-driven repayment plans and low-income payment options may not qualify for refinancing.
Many lenders require that you have graduated from school and have a degree to refinance. That means that you may need to go back to school to finish your degree if you need to refinance student loans.
Who Should Consider Refinancing Student Loans?
Refinancing might be a good option if you have privately held loans and think you might qualify for a better interest rate now than when you got the loans.
Refinancing can also be a good decision if you have multiple different student loans and want to consolidate those loans with a single loan servicing company.
It’s also typically a good idea to refinance loans with a high variable interest rate, especially if it’s hard to predict and budget for your student loan payments.
Lastly, it may be a good idea to refinance if your financial situation has changed. Say you recently got a new job, a promotion, or paid off a long-standing debt. In these situations, refinancing might be in your best interests since your finances may qualify you for a better loan.
When You Shouldn’t Refinance Your Student Loans
Of course, there are as many times when you should refinance your loans as there are times when it’s a good idea. Refinancing your loans can sometimes mess with other benefits to your student loans, putting you in a worse financial situation.
For instance, if your credit score is lower than when you took out your student loans, now probably isn’t the time to refinance.
But there are two incredibly common situations where it’s not very likely that refinancing will help.
Your Loans Are 100% Federally Held Loans
Many students take out a combination of federal and private student loans to pay for school. However, if you were able to take out only federal student loans then it’s probably best not to refinance them.
Federal loans tend to have lower interest rates and more flexible payment programs than private loans. So, instead of refinancing consider working with your loan servicing company to find a better payment plan.
You Are In A Public Service Student Loan Forgiveness Program
Certain kinds of public careers, like teaching, also qualify for the public service student loan forgiveness program. Unfortunately, it’s usually not possible to refinance your loans while you’re still participating in this program, so it’s best to continue payments as normal.
Fortunately, if you have federally held loans you can still apply for income-driven repayment and other payment options that reduce the burden of your student loan payments.
That way you’ll still be on track for student loan forgiveness, and will have lower payments without having to refinance.