More than 4 in 10 college graduates carry student loan debt, according to the Federal Reserve. The median debt ranges between $20,000 and $24,999. But even a smaller amount can make it challenging to save for other long-term goals, like retirement, especially if your loans have high interest rates.
Refinancing can help you reduce how much you owe under the right circumstances. But it's not a good move for everyone. Here are three signs it could be a smart decision for you right now.
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1. You have private student loans
Refinancing federal student loans usually doesn't make sense because you'd have to give up key benefits, like the option to choose an income-based repayment plan. Plus, the government paused payments on these loans during the pandemic, and that pause remains in effect. This will likely end this summer, but for now, you don't have to make payments on these loans if you're unable to do so.
It's also possible the Supreme Court could rule in favor of President Biden's proposal to forgive federal student loan debt for millions of Americans in the coming weeks. This may not happen, but while it remains a possibility, refinancing federal student loans isn't wise. If you did so, you wouldn't be eligible for this loan forgiveness.
Private student loans typically have more restrictive terms, so there's less to lose by refinancing these. You probably won't have access to things like income-based repayment plans anyway, so you can base your decision solely on the rates available to you.
2. You've improved your credit score
Private student loan lenders take your credit into account when setting your interest rate. A high credit score translates to a lower rate. Those with poor credit typically pay more because there's a greater risk they could default on their debt.
Things like making on-time student loan payments and limiting how often you apply for new credit can raise your score or keep it high. But time also plays a factor. If you've made mistakes with your credit before, it can take some time for them to fall off your credit reports. Until they do, they'll affect your score and your student loan interest rates.
Refinancing your student loans can be advantageous if you have worked hard to improve your credit since you first took out the loan. Even though interest rates on all types of loans are high right now, you may be eligible for a more competitive rate now than you were in the past. And the lower your interest rate, the less you have to give your lender each month and overall.
3. You'll save money
This might seem obvious, but it really is the most important factor to focus on when deciding whether to refinance your student loans. There's no sense in going through all the hassle of refinancing if it's not going to make a difference to your monthly payments.
Many student loan lenders have refinancing calculators to help you figure out what your payments will look like after refinancing. This is a good place to start if you're trying to decide whether this is the right move for you. And if you have any questions, you can always reach out to the lender directly.
Make sure to inquire about whether you'll have to pay an origination fee and what kind of repayment options you'll have. Compare these to what your current lender offers before deciding whether to make the switch.
It doesn't hurt to check if you can find a better deal on your student loans right now, but with high rates on all types of loans, it may not be the most favorable time to refinance. In that case, wait until interest rates begin to drop and then reach out to lenders to see if you can score a better rate.
