Tori Dunlap
Written by Tori Dunlap
Last updated: Feb.23,2022

There is no yes or no answer to the question of whether or not you should refinance your loans. It depends on your personal situation. American students have been taking out student loans for decades. However, the current situation with the pandemic and the impact it had on the global economy has made it more difficult to repay student loan debt. 

The option to refinance loans allows students to save some money by lowering their interest rates. However, there’s a downside to this as refinancing leads to losing access to federal repayment plans and protections that you might need later down the road. With that said, here is a simple guide on refinancing student loans and whether or not you should do it!

What Does It Mean To Refinance a Student Loan

Most simply put, refinancing a student loan means replacing your current loan with a new loan that typically has a lower interest rate. That means you would save some money on your college debt by transitioning over to a payment plan with lower interest. 

We’re talking about tens of thousands of dollars you could be saving over the course of your loan repayment years. Not only would refinancing help you save all that money but it would also make it easier to qualify for a mortgage later down the road. 

The good thing about refinancing student loans is that it doesn’t cost any money—there are no origination or prepayment fees (although you should always check the fine print of your contract to see if any future expenses could occur). 

Types of Student Loans You Can Refinance

Any private loan can be refinanced in case your financial situation makes you eligible for a loan with lower interest and a faster repayment plan. It is important to address that federal student loans cannot be refinanced through the government. 

In other words, you cannot replace your federal student loan with another federal loan with lower interest. However, what you can do is refinance a private or a federal student loan into a new private loan. You can refinance both the federal and the private student loan at once.

What you need to keep in mind is that as soon as you refinance a federal loan, you will lose the ability to apply for government assistance programs. That might not matter to you now but you also might need these programs in the future. That’s why you need to think twice before deciding to refinance your loan. 

When Should You Refinance Your Student Loan

This brings us to the next question - when should you refinance your student loan? The answer depends on your situation. You should only refinance your student loan if you know that your financial situation is strong enough so that you won’t need the benefits of federal loan repayment programs. 

If that’s not the case, then you might not want to go there. Sure, refinancing a loan would save you money but only if you are able to make the monthly payments on your refinance consistently. In case you fail to make those payments, you’ll find yourself in even more trouble with no access to federal forgiveness plans to help you out. 

Besides, your credit score needs to be at least in the high 600s for you to qualify for a refinance. On top of that, you need to have a stable income that’s high enough to cover your monthly fees without missing a single payment. 

When You Should Not Refinance Your Student Loan

It might be more important to discuss when you should not refinance your student loan. For instance, if you don’t have a stable income and if you’re not sure whether your job is secure enough, then it might be best to stay away from any refinancing deals. 

The thing about private lenders who refinance federal loans is that they don’t offer you many options in case you lose your job and end up unemployed. There are no forgiveness plans with private lenders so, if you’re worried that you might lose your job, don’t try to refinance your loans.

Next up, if you have a bad credit score or you’re just beneath the low bar (650), then you won’t qualify for a refinance anyway. If you don’t have a co-signer ready to join you, then it’s not worth trying to qualify for refinance loans. 

Most importantly, you should not refinance your student loan if you think that the federal repayment plans may come in handy someday. We’ve mentioned this several times throughout this article because it’s important – refinancing a federal student loan means you’ll lose the ability to leverage loan forgiveness and other federal repayment plans designed to help people who cannot make their monthly payments in due time.

Losing this eligibility is definitely the biggest reason why you should think twice before refinancing federal loans. Keep in mind that most private lenders don’t offer any similar protection plans so you might find yourself in a bad situation if for any reason you’re unable to make the monthly payments. 

If you’re already working toward federal loan forgiveness, then it definitely doesn’t make sense to refinance your loan. The Public Service Loan Forgiveness or the Teacher Loan Forgiveness are programs that cancel your remaining debt after a certain amount of years in service (whether as a public service worker or a teacher). If you’re counting on any of these programs, then there is no point looking at refinance options.

Last but not least, you should not refinance your loan if your average weighted interest rate is low to begin with. The whole point of refinancing a loan is to lower the amount of money you have to pay in interest over time. If the interest rates on your loan are already low, maybe no private lender would be able to offer you rates that are lower than that. In that case, it wouldn’t be worth it to go through the refinance procedure.

Think Twice Before Refinancing Your Loan

We’ve covered the basics of what student loan refinancing is, as well as whether or not you should do it. While we did give you a few reasons as to why you should and why you shouldn’t go for it, at the end of the day, it depends on your personal situation. If you’re almost done repaying your loans, then a loan refinancing plan might not mean much to you.

Same goes if your interest rates are already as low as they can get based on your credit score. However, if you’re in a situation where you don’t see any future benefit from the federal repayment programs and you’d like to cut down your interest rates even further, then looking at private lenders for refinancing deals could be worth a shot. 

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