Believe it or not, when we were first married, our combined monthly student loan bills were actually higher than our mortgage. -- Michelle Obama
Student loan debt has weighed down many borrowers for many years. Today, outstanding student loan debt tops $1.7 trillion -- some 93% of which is from federal student loans. There are more than 43 million borrowers, with an average balance of $37,338 -- and many people owe much more than that, especially if they've attended a particularly expensive school or have attained one or more advanced degrees.
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If you're one of the 43 million saddled with significant student loan debt, you might be wondering if and when it would be smart to refinance your debt. Here are signs that can help you decide.
1. Interest rates have fallen
People typically refinance their mortgages when rates are significantly lower, and it's the same with student loans. Refinancing means having a lender pay off one or more of your debts, leaving you with a new loan and, most likely, different terms and/or a different interest rate. We've been in a period of rising rates recently, though, making refinancing less attractive for many.
2. Your current loans feature high interest rates
If you have any student loan debts with relatively steep interest rates, those are candidates for refinancing. Many student loans these days carry fairly low rates, though. Recently, federal student loans sported interest rates between about 5% to 7.5%, while some private loan rates were near 15%. If your rates are meaningfully higher than rates you could refinance at, it may be worth doing.
3. Your debts feature variable interest rates
Some loans feature variable interest rates, which are adjusted up or down regularly in accordance with prevailing interest rates. That's great when rates are low or falling but it can cause trouble when rates are high or rising. If you have a variable-rate loan, it may make sense to refinance, especially if you expect rates to keep rising for some years.
4. You have a good credit score
When a lender agrees to refinance your debt, they will take your credit score into account when determining what interest rate to offer you. Those with great credit records and strong credit scores will be offered the lowest rates.
5. You have reliable income and a debt-to-income ratio that's not too high
Lenders also want to see that you'll be able to repay the loan they'll give you, so it's important to demonstrate reliable income that's sufficient to cover your monthly repayments. They also don't want to find that you already have a lot of other debt because adding more to it might increase your odds of defaulting.
6. You're making more money
If you're making more money now than you did before, you might want to refinance into a new loan with more appealing terms. You might choose a shorter-term loan, for example, to pay off your debt faster and pay less interest in the process.
7. You have lots of student loans
If you've accumulated a bunch of different loans over your educational journey, it can get complicated staying on top of them all and making lots of payments. By refinancing, you can roll all that debt into a single new loan. You might also consider just consolidating your loans -- which is a bit different from refinancing because it can't change the terms of your loans.
8. You want to take control of your debts, releasing a cosigner
If you took out your student loans with someone, such as a parent, cosigning the debts, you might refinance in order to have the new loan in only your name, releasing your cosigner.
9. You'll save money by refinancing
The biggest, and arguably the only, reason to refinance student loan debt is simply this: if it will save you money. Think through your situation carefully and crunch some numbers before taking action because sometimes it's not worth refinancing. Remember that it costs money to refinance -- so your savings should more than make up for the cost.
When not to refinance student loan debt
The signs above show when it might make sense to refinance, and they also conversely show when it might not -- if interest rates have risen, for example, that's more of red light than a green one. Here are some more times when it might be a bad idea to refinance your student loan debt:
- If you might qualify for student loan relief or forgiveness programs: There are relief programs available for those struggling to pay student debt. Refinancing may disqualify you from them, so look into that before proceeding.
- If you've defaulted on a loan or have declared bankruptcy: People in this boat likely won't qualify for refinancing.
- If you expect to have much of your debt wiped out by President Biden's relief program. The Supreme Court is due to rule on it soon -- and it might have done so by the time you read this article. So look up the latest news on this.
Those with significant student loan debt would do well to read up on student loans. The more you know, the savvier moves you can make, saving yourself money -- and headaches.
