Is it worth it to refinance student loans? That’s a million dollar question with no one answer that’s right for all borrowers. The best answer to this question is ‘it depends’. In general, refinancing student loans is a good idea. However, it may not be the best option for everyone. Whether or not refinancing is worth it for you will depend on your financial circumstances and your financial goals.

But first, why consider refinancing at all? When you take a student loan, you are bound by the terms set at the time of taking the loan. If your financial situation changes and you want to change those terms, the only way to do it is by refinancing.

Here’s when you should consider refinancing and when you shouldn’t.

When It’s Worth It To Refinance Student Loans

If one or more of these apply to you, it’s worth looking into refinancing your student loans.

You qualify for a lower interest rate

A high credit score, steady income, and low debt-to-income ratio will qualify you for a lower interest rate. You’ve worked hard to build your finances now it’s time to reap the rewards by refinancing at better terms.

Market interest rates are low

Fixed interest rates are largely determined by market conditions at the time of taking the loan. If market rates have dropped but you’re still paying higher rates fixed at the time of taking the loan, refinancing is a good idea. Sometimes rates fall so low you can get a lower rate even if your finances haven’t improved.

You want to increase your monthly payments

If your finances have improved considerably, it makes sense to increase your monthly payments. This will help reduce the loan term so you pay off your loan sooner. As an added bonus, you’ll also pay much less by way of interest.

You want to lower your monthly payments

If finances are tight and you can’t afford the monthly payments, you can extend the loan term by refinancing. This will lower the payments and make them more affordable. Over the long term you pay more in interest when you extend the term. However, in the short term it will help you avoid defaulting on your loan. You can always refinance again with a shorter loan term after your finances improve.

You want to change your servicer or lender

If you’re unhappy with your current lender, it’s worth refinancing to change lenders. Dealing with a helpful lender can make a huge difference when you need help with managing your loans.

When Not To Refinance Student Loans

If any of these circumstances apply to you, refinancing may not be the best option for you.

You have federal student loans

Federal student loans come with several benefits and protections including income-driven payment plans, deferment and forbearance. When you refinance, you lose all benefits associated with the original loan. If you think you may want to avail of the flexible payment plans or other protections, you shouldn’t refinance. This is especially important if you don’t have a steady job and your finances are not yet on solid footing.

You are pursuing federal loan forgiveness

If your employment qualifies you for Public Service Loan Forgiveness or Teacher Loan Forgiveness, refinancing is not a good idea. These protections are only associated with federal student loans. If you refinance, you’ll no longer be eligible for forgiveness.

You don’t qualify for lower interest rates

You must have good credit and a steady income to qualify for a lower interest rate. If your credit is poor and you don’t have a steady job, it may not be worth it to refinance.

Interest rates are higher than what you’re currently paying

Sometimes market interest rates are so high, even your good credit doesn’t help lower the rate you’re being offered. Under these circumstance, it’s better to wait till rates drop a bit.

Your loan is almost paid off

Most lenders are reluctant to process a small loan size. If you’re close to repaying your loan, it may not be worth it to spend the time it’ll take to find a lender willing to refinance your small loan.

Is It Worth It For You To Refinance Your Student Loans?

Refinancing your student loans is worth it only if it helps you save money or pay off your debt faster.

If you have private loans, the decision is easy. You have nothing to lose and everything to gain by refinancing at better terms. Even a marginally lower interest rate or higher monthly income can save you thousands over the life of the loan.

With federal student loans however, you shouldn’t rush into refinancing for small gains. You must put a great deal of thought and weigh the pros and cons before refinancing federal student loans. It’s only worth choosing this option if your finances are stable and if the savings are substantial. It’s not worth giving up the federal protections if your income is unstable abd refinancing won’t improve your financial situation significantly.

3 Things To Do Before Refinancing Your Student Loans

You’ve assessed your financial situation and decided it’s worth it to refinance your student loans. Before you go ahead and sign any loan agreement, here are a couple of things you should do:

#1. Months before applying for refinancing, work on improving your financial health. Make all loan and credit card payments on time. Look for ways to boost your income while working on cutting down your expenses. Refrain from applying for new lines of credit. New credit applications trigger a hard credit inquiry, which will lower your score by a few points. This will prevent you from getting the lowest interest rate possible on your loan.

#2. When you’re ready to apply for refinancing, check your credit report and make sure all entries are correct. If you find any errors, file a dispute and get it corrected. Inaccurate entries can bring your credit score down and hurt your chances of getting a lower interest rate for no fault of yours.

#3. Last but not least, compare the rates and terms offered by multiple lenders. This will help you find the lender that’s best for you so you get the maximum benefits of refinancing.