When to refinance your student loans

Refinancing student loans can save money but it’s important to get the timing right. (iStock)

Refinancing student loans means taking out a new loan (preferably at a lower annual percentage rate) to pay off existing private student loans. This is different from federal student loan consolidation, in which multiple federal loans are combined into one.

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There are different reasons for wanting to refinance but it's important to consider whether it's the right move before diving in.

Is refinancing your student loans a good idea?

There are certain scenarios that make refinancing student debt an attractive option.

For example, it can be the right choice when your credit score would allow you to refinance to a lower interest rate or if interest rates have dropped, said Logan Allec, a CPA and owner of personal finance blog Money Done Right.

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In either case, refinancing student loans to a more favorable rate could translate to saving money. The same may be true if the annual percentage rate on a variable rate loan is set to adjust. Switching to a fixed interest loan could help you lock in a lower rate.

You may also lean toward refinancing if you took out multiple loans at varying interest rates and you have a larger overall loan balance. Combining several loans into one can simplify your monthly payment obligations. Refinancing student loans may also be the only option for removing a cosigner if your current private lender doesn't offer cosigner release.

In terms of timing, refinancing earlier in your loan repayment term typically makes more sense than waiting until later. Like other loans, private student loans are structured in a way that you're paying more in interest in the early part of the loan term, with more money going toward the principal as time goes on.

When you should avoid refinancing student loans

Refinancing can help with saving money on private student loan rates but it may not be the best choice if you also have federal student loans. That's because there are more things to think about than just interest rates when refinancing federal loans.

"The only true refinancing you can do is to transfer your federal loan into a private loan," said Allec. "But by doing so, you miss out on some benefits and protections on federal loans."

Those include the ability to qualify for deferment and forbearance periods if you need to temporarily pause your monthly payments. You also lose the option to enroll in an income-driven repayment plan when you refinance federal loans into private loans. And depending on your career choices, refinancing federal loans into private ones means you'd no longer be eligible for public service loan forgiveness. Also, remember that this only goes one way — you can't refinance private student loans into federal loans.

The more common option with federal loans is consolidation, which allows you to combine all of your loans into a single loan. The interest rate you pay would be based on the weighted average of the rates for each individual loan you consolidated. You wouldn't necessarily be saving money but it could make managing your monthly payments easier.

How to refinance student loans

If you're considering refinancing student debt, the first step involves researching private student loan lenders.

When comparing lenders, consider:

• Minimum amounts required to refinance.
• Maximum borrowing limits.
• APR range and whether rates are fixed or variable.
• Whether you’ll pay any fees, such as an origination fee or prepayment penalty.
• Any special perks or benefits, such as deferment periods or interest rate discounts.

Also, remember to check your credit score and finances against the lender's minimum requirements. It may be necessary to enlist the help of a cosigner to qualify for refinancing at the best interest rates.

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