Student Loans: When Does it Make Sense to Refinance

Since March 2020, student loan payments have been on pause in order to give borrowers a little breathing room during the pandemic. However, the payment pause is expected to end sometime in 2023, and student loan payments will resume.

With the impending return of payments, many borrowers are considering whether or not to refinance their student loans. When does it make sense to refinance? Here are four instances when refinancing might reduce your debt, get your student loans paid off faster, and save you money.

If Your Credit Is Strong

When you refinance a student loan, you’re actually taking out a new loan to pay off your current debt. That’s why many people choose to refinance when their credit is stronger than it used to be. Having better-than-before credit means you may be able to obtain a more favorable interest rate and terms than what you received when applying for the original loan. So if you’ve recently secured a good job or paid off other debt, it could be a smart time to look into refinancing your student loans. Unsure if your credit is strong or not? Start by checking your credit score, which may be included in your credit card or loan statement, or offered as a service through your credit union or bank. You can also use a debt-to-income ratio calculator (monthly debt payments divided by monthly gross income) to get a sense of whether or not you might qualify for favorable refinancing terms. A debt-to-income ratio of 50% or less is what lenders typically look for.

If Federal Interest Rates Are Low

The terms of a loan are not based on a borrower’s finances alone, but also the economy at large. Credit unions and banks set rates based on the U.S. Federal Reserve. When interest rates set by the Federal Reserve are low, borrowers benefit from lower interest rates. When rates climb, the interest rate for new and existing variable rate loans grows too—making borrowing and repaying more expensive. If you find yourself in an economic environment with low interest rates, it could make sense to refinance your student loans. As of early 2023, interest rates are at their highest level since 2007. However, policymakers will continue to adjust rates depending on inflation and other economic factors, so don’t be discouraged from asking your lender about what refinancing options might be available.

If You’re Overwhelmed by Multiple Payments

Refinancing a number of student loans with a new, single loan can help to consolidate all of your loan payments into one monthly bill—saving you the hassle of managing relationships with multiple lenders and repaying multiple loans. For even more convenience, look for a refinancing option that offers the ability to automate your student loan expenses with regular recurring payments. Some lenders (including HUECU) may even give you an interest rate reduction for setting up automatic payments, so you get added convenience with reduced costs.

If You Don’t Qualify for Federal Benefits

Borrowers with federal student loans, as opposed to private student loans, have a few more considerations to make before they refinance. If you have federal student loans, you may qualify for access to certain government programs, such as student loan forgiveness, including Public Service Loan Forgiveness available to teachers or public service workers, or interest-free payment pauses. If none of these apply to you, or if you are primarily paying back student loans from a private lender, it’s much more likely that you have little to lose from refinancing your loans—assuming the interest rate and terms are better than what you have currently.

Final Takeaways

The good news about refinancing student loans is that it’s easy to learn about your potential interest rate and eligibility before you apply. Doing a little research won’t hurt your credit score, but it will give you some important information about how refinancing could impact your debt and reduce your monthly payments. Click here to find your Education Refinance Loan rate, or reach out to the HUECU Education Lending Team at ed_loans@huecu.org (617-495-4460).