Does Refinancing Make Sense for You?

If you’ve got student loan debt (and let’s face it, who doesn’t?) you’re likely paying a good amount in interest each month. Unless you lucked out and snagged super low interest rates, that amount can really add up quickly!

You may have heard that refinancing your student loan can help. In other words, you take out a new loan at a lower interest rate to pay off the loan with the higher rate. If you have multiple loans, you can take out one new loan—at a lower interest rate—and pay them ALL off. There are some cases where, depending on the lender, this includes Federal Parent PLUS Loans. Now you have one loan with one manageable interest rate, and that could save you big money.

Sounds like a plan, right? But before you press the GO button on refinancing, ask yourself these three questions:

  1. Do you have federal student loans? These loans may include flexible repayment options and even loan forgiveness plans. If you have a lower income or lose your job (it could happen), you may be eligible for plans that cap what you have to pay each month. In some cases, your repayment could be slashed to zero. Yes, zip. So although you hope you’ll find that dream job and watch your income steadily increase…stuff happens. Federal loans may provide relief, but if you refi, those options go away.
  2. Are you eligible for loan forgiveness? While we’re on the subject, certain professions and people on select federal reapayment plans may be eligible for loan forgiveness as well. Really! Those who work for qualified non-profit or government agencies, for example, could have the remainder of their loans forgiven after 10 years of consistent loan repayment and service. Other professionals, like doctors, nurses and lawyers could have options as well. If this is you, definitely think carefully before refinancing your loan.
  3. Are you creditworthy? In order to refinance, a lender will want to know that you’re a safe bet—someone who will repay the loan on time. Here are three things they’ll want to see.
  • You have a proven track record of handling money—aka a good credit score. While you should never use credit cards if you don’t have to, if you do use them, keep balances low and pay them off each month. And always make all of your other payments on time—whether to your credit company, your utility company, your dentist or anyone else who bills you.
  • Shoot for a score of at least 660. The higher the better. And make it a habit from here on out to protect and monitor your score.
  • You’re steadily employed— with enough income to support the loan repayment as well as your lifestyle. This is called your “debt to income ratio," and it’s a good thing to keep in mind.

If your credit score is under 660, you can add a cosigner to the loan and use his or her credit score for loan consideration.

To refi or not to refi, now you know the questions.

Need help? We will be happy to discuss your options with you. Learn more here.