Should You Refinance Your Student Loans? (4 Things to Consider)

Every time I log on to Facebook this happens…

In the process of trying to see who else is having a baby and where my old college buddies traveled last week, all of a sudden, out of nowhere this almost always happens:

I stumble upon a photo that I don't recognize of a happy family on the beach or a young millennial joyfully smiling in their apartment. Intrigued, I focus my gaze only to see:

John and Lisa refinanced their student loans and got an amazing rate. Tap to learn how you can do the same.

They got me again. Sponsored social media ads promoting refinancing student loans. Truth be told, I have asked myself “Should I refinance my student loans?” on several occasions.

And while rising student loan interest rates might make the sound of refinancing your student loans tempting, today we will examine when it is best and when it is not recommended to refinance student loan debt.

Should I refinance my student loans:
  • When you should avoid refinancing
  • When refinancing makes sense
  • Other factors to consider

When you should AVOID refinancing your student loans:

Refinancing your student loans is can be as simple as a process as one-click shopping on Amazon, but that doesn't always mean YOU should do it.

However, if you're wondering if you should or should not refinance your student loans, the truthful answer is it depends on your situation. Lets explore some of the sure-fire reasons to avoid refinancing student loans:

1. Your Student Loans are Federally Held

The first two questions you should ask yourself before asking if you should refinance your student loans are:

  1. Are your student loans federally serviced?
  2. Can you defer or be forgiven of your student loan debt?

If the answer to either of those questions is ‘Yes,' then refinancing your student loans might no be the best money move at this point.

When you refinance your student loans you are essentially agreeing to change the provider of who funds your loans, which means you agree to the new terms set by your new lender.

New terms and conditions often come with a better interest rate, hence the incentive to refinance in the first place.

What is important to keep in mind, is not only can refinancing extending the length of your repayment terms, but you can lose your federal perks if you refinance with a private lender.

Federal student loans come with borrower protections/options such as:
  • Deferment,
  • Forbearance
  • Grace periods
  • Income-based repayment options, and
  • Public Service Loan Forgiveness
  • Update for 2020: During the Coronavirus Pandemic, student loan payments were paused for 6-months, but only federal loans.

Refinancing will lose all the above perks such as deferment while back in school, forbearance during tough times and even grace periods. Private lenders operate on their own set of terms.

In particular, IBR and PSLF are two perks borrowers might not want to always let go of.

Are my loans federal? Use this link to see if your loans are serviced by one of the Big 7 Federal Student Loan Servicers.

2. You qualify for Income-Based Repayment or Public Service Loan Forgiveness

If you have a real shot at PSLF or you're currently taking advantage of IBR (income-based repayment) then it is not advisable to refinance at this point.

Public Service Loan Forgiveness or PSLF is a federally funded program designed to give student loan borrowers loan forgiveness after 10-years of service in the public service industry and 120 consecutive minimum payments.

Income-Based Repayment or IBR is a federal student loan option that allows borrowers to pay a percentage of their student loan payment each month that is based on their income.

While there are plenty of horror stories involving both PSLF and IBR (they are fundamentally flawed due to variable interest rates and interest accrual during repayment) if you have a real shot of getting PSLF or you need IBR – do not refinance just yet.

If you refinance your loans through a private company, the income-based payment plan is no longer an option and forgiveness is out the door!

3. Your Credit Stinks

Like many young adults and recent college graduates, sometimes you have a short credit history or perhaps even a low credit score.

Either way, if you fall in the boat of stinky credit score, refinancing your student loans isn't the best idea. For one, you might not even qualify.

Secondly, with a poor credit score you're also bound to get some undesirable interest rates and even variable interest rates (which are no bueno).

4. You Don't Make a Steady Income

Lastly, if you don't make a steady income, i.e. you haven't found your ‘Career' than refinancing might be out the window for now.

For example, my wife asked “should I refinance my student loans from undergrad school” when she was getting her doctorate. The answer was no because she didn't have a steady income – or any income for that matter.

Not only would she have not qualified, she would have no means to make the payments she would have been responsible for by refinancing.

Four reasons you should consider refinancing student loans:

Now that we have covered reasons you should consider avoiding refinancing your student loans, here are is when it makes sense to refinance your student loans

1. Your Loans Were/Are Unsubsidized

Two common words associated with student loans that most people simply don't understand are subsidized and unsubsidized student loans.

Does the loan gather interest at all times (unsubsidized) or after your graduate (subsidized)? Throw in defer and forgive and student loans become very unique case by case.

For example – if your loans are unsubsidized, deferment is not a great option as interest will still accrue.

Deferment is a huge asset when the loans are subsidized. However, it is important to note that private loans do not defer payments, even when you pay ahead.

If your loans were unsubsidized while you were in school, it's not a bad idea to refinance those loans at a lower interest rate to combat all the interest built up while in school.

2. You have high or variable student loan interest rates.

If your federal student loans have high interest rates or variable interest rates, refinancing allows you to lock in a fixed and lower rate.

Depending on your income and credit score, you can get a lower interest rate and save thousands of dollars in interest payments by refinancing. Using the money you saved, you can make extra payments towards your student loans each month.

Lower interest rate = you saving more money overtime.

3. You want to deal with one payment.

How do your student loan accounts break down? Do you have multiple small student loans serviced by one account?

Most student loans are not one loan (like an auto loan would be). Often, student loans are comprised of a bunch of little student loans, you just happen to make one standard allocation payment that gets divided into each individual loan. 

This is a group of loans, serviced by one payment:

when you should refinance your student loans

This is the same loan, only showing each of the individual loans that it consists of:

refinance student loans individually

As you can see in the picture above, there are 6 loans (some subsidized, some unsubsidized) in which you can elect to target specifically. or refinance.

The issue with standard repayment allocations is that your student loan payments are spread among each individual loan. The upside about this is that if you pay extra you can specifically target individual loans to pay them off quicker. 

Why does this matter when it comes to refinancing?

When you refinance your student loans, you consolidate your loans into one loan (not a bunch of small loans) thus, losing your ability to target individual loans.

However, this is sometimes easier to manage for borrowers and you can lock in your loan at one fixed interest rate – instead of numerous variable interest rates serviced by one payment.

4. Refinancing HELPS your cash flow:

Cash flow is vital when it comes to paying down student loans.

For starters, consider seeing where you can free up cash within your budget to throw at your student loans. Cutting the cable, lowering cell phone costs and quickly paying off cars is a great place to start. 

However, sometimes refinancing can lump all loans together and result in a higher monthly payment, tying up your money. Liquidity refers to the cash or assets available.

So if you refinance your student loans and you are now required to throw more towards your payment each month, (That can't go in deferment if you pay ahead) then you have lost liquidity. 

Having the ability to dictate where your money goes each month boils down to the amount of control you prefer when managing your finances.

Learn about the power of cash flow and see how efficient your student loans are by simply googling “Cash Flow Index.”

Is it time to refinance?:

Refinancing your student loans thoroughly depends on your personal situation and financial goals.

Do you plan on knocking out your student loans as fast as possible? Or do you plan on just paying the minimum with some extras here and there on your student loans?

Ultimately, if you have decided that refinancing is the best option for you, checkout the companies we personally used:

  1. LendKey Refinancing
  2. Penfed by Purefy Refinancing.

If you think you're ready to refinance, make sure you have the following:

  • Your credit score handy (and ideally a good score)
  • Your W2 and/or pay stubs
  • Any other pertinent information

Last, it is smart to make sure refinancing will help your debt to income ratio but also you plan on using the saved up money wisely. Refinancing can improve your debt to income ratio which is a huge benefit for prospective home buyers!

Personal Testimony: My wife and I waited to refinance our student loans until we felt comfortable with losing the safety net federal student loans provided. We also wanted to make sure we did not impact our ability to target specific loans, which has been paramount in paying off our student loans.

Q: Should I refinance my student loans or no? Comment below!

should you refinance your student loans