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When to Refinance Student Loans: Is a Refi Right for You?

An important step in student loan refinancing is knowing the right time to refi.

Justin Cupler

Contributing Writer at Tally

March 22, 2022

Student loan debt is complex and can easily become confusing, but it’s necessary for many people who are pursuing higher education. 

After leaving school, there can be several benefits to refinancing loans, including lower student loan payments, lower interest rates and more. The key is understanding when to refinance student loans. 

If you pick the wrong time or refinancing option, you could end up with a financial problem

Below, we'll outline when to refinance student loans, and when it might make sense not to. 

When to refinance student loans

If you’re trying to figure out when to refinance student loans, it all depends on your unique personal finances.

Here are a few beneficial times to consider refinancing student loans. 

You have private student loans 

First thing’s first: consider the types of student loans you have. 

If you have a federal student loan, not only do you have a relatively low interest rate, but these loans also have no origination fee and come with loads of benefits like deferment and forbearance options, student loan forgiveness programs and income-based repayment plans. 

This isn’t to say you can't refinance a federal student loan, but it’s typically not a particularly favorable option. That’s because you'll have to refinance the federal loan into a private loan that lacks the same protections and programs as the federal loan.

If you have a private student loan, you don't have to consider these benefits unless your lender offers them. So, there's really nothing to lose from refinancing your private student loans if the numbers make sense.

Your credit score has improved

If your credit score has improved since you took out your original student loans, this is a great time to consider refinancing. You could get a better interest rate on a refi than you originally received. 

Check your private student loan documents to find the annual percentage rate (APR), and use it as the benchmark when shopping for a new student loan.

If you’re applying for student loan refinancing, compare the new refinancing rate to the old one. If the new rate is lower, that’s a good sign that refinancing may be right for you. You may even find out your good credit score can get you lower monthly payments on your refinanced loan. 

You'll save money over the life of the loan

While a lower interest rate is great, the true goal is to pay as little as possible over the life of the loan. Review your original loan documents to see how many payments remain and how much you’ll pay in total for the remaining loan term.

Compare that number to the total loan cost for the refinanced loan you're considering. If the refinanced loan has a lower loan cost than your current loan, this is likely a good option. 

Just ensure the total cost of the new loan includes all the fees, like the loan origination fee and any administration fees. 

You have a variable-rate student loan

Some borrowers take out variable-interest-rate loans because they have lower rates in their early years. However, these loans' interest rates can eventually meet or exceed a fixed-rate loan's interest rate after several rate increases. 

If you have a variable-rate loan with an interest rate that crept upward and is now higher than many fixed-rate loans, it’s likely a good idea to refinance. 

Yes, you’ll lose the potential of the future interest rate reductions a variable APR loan may offer, but the fixed-interest-rate loan locks you in at a lower interest rate with no risk of increasing in the future. 

You need to remove a cosigner 

Sometimes a cosigner requests to be removed from a student loan or the courts order the removal. 

Certain private loan servicers will allow you to remove the cosigner after a set number of on-time payments via a cosigner release, but many don't offer this option. This can also be a difficult option to qualify for. 

The other option is to refinance the student loan without the cosigner on the new loan. It’s still smart to follow the best practices above regarding interest rates and the overall cost of the loan, if possible, so you don't end up in a worse financial position. 

When not to refinance student loans

There are times when it makes sense to skip refinancing your loans altogether. Here are some of them. 

You're in a student loan forgiveness program

The federal government offers two student loan forgiveness programs: Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness (TLF). 

  • PSLF is for anyone employed by the federal, state or local government or a nonprofit organization. After you've made 120 satisfactory payments on your student loans, the PSLF forgives any remaining loan amount. 

  • TLF forgives up to $17,500 of your Direct Loan or FFEL Program loans if you teach full-time for five consecutive academic years at an elementary school, secondary school or educational service agency in a low-income area. 

Refinancing will make you immediately ineligible for either of these programs, as the refinance will be with a private lender. 

You want or are already in an income-based repayment plan

The federal government also offers a range of income-driven repayment plans that can reduce your monthly loan payment to as little as $0. 

Private lenders offering student loan refinancing generally don't have these income-based repayment programs, so it's smart to stick with your federal student loan.

You already have a great interest rate

If your existing loan already has a lower interest rate than you can get from a refinance, there's no need to refi. This even applies to variable-rate loans.  

Your credit score dropped

If your credit score has decreased since taking out your student loans, there's very little chance you'll get low rates with a refinance. It's wise to continue making your payments on time to help build your credit score, then refinance later. 


The right refinance option for federal student loans

Generally speaking, it's not a great idea to refinance federal student loans. However, you may have multiple loans from different servicers after college, making paying your loans each month tedious. 

The federal government offers a Direct Consolidation Loan that rolls all your federal loans into one loan. The interest rate on a Direct Consolidation Loan is a "weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of 1%."

Student loan consolidation not only makes paying your loans easier, it can also lower your monthly payment, since repayment terms can last up to 30 years. Plus, you can convert any variable-rate student loans to a fixed rate when consolidating. 

Refinancing student loans can save you money and time

Refinancing student loans can lower your interest rate, get you a fixed interest rate and even remove a cosigner. But you need to explore your options carefully and choose the right loan option(s) for you. 

Keep in mind that refinancing your federal student loans is not typically a good idea, as your new loan will be a private loan, without the benefits and protections of a federal student loan. You can consolidate your federal student loans instead. 

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