Is refinancing student loans worth it? There’s no one answer that’s right for everyone. The benefits of refinancing depend on someone’s goals and financial situation. In general, however, it is worth refinancing student loans. Especially if you qualify for a lower rate and your finances are in good shape. However, there are a few downsides to refinancing federal student loans that you should know about.

Refinancing Student Loans Is Worth It If:

First, we’ll start off with the signs that refinancing your student loans is worth it.

You Qualify For A Lower Interest Rate

Borrowers choose to refinance for several different reasons, but one of the main goals is to save money on the loan. Depending on your loan amount, paying a lower rate can save you hundreds or even thousands of dollars in interest. You’ll qualify for a lower interest rate if you have good credit, consistent income, and low credit utilization.

You don’t have to wait till your financials are strong enough to qualify for a huge drop in your interest rate. Even a marginal drop in the rate can save you hundreds of dollars over the life of the loan. Refinancing student loans is worth it if you qualify for any rate that’s lower than your current rate.

The Rate Environment Is Favorable

Interest rates on loans are based on several different economic factors. These rates fluctuate through the year, increasing or decreasing depending on the Federal Reserve cutting or hiking rates. When market rates are down, borrowers benefit by paying lower interest rates on their new loans. You can take advantage of the lower rates by refinancing. You can refinance multiple times and there are no fees associated with the process. It’s absolutely worth it to refinance when the rate environment is favorable.

You Have Private Student Loans

Unlike federal student loans, private loans don’t come with protections such as forgiveness or income-based repayment. Whatever your reason for refinancing, you pretty much have nothing to lose with private student loan refinance. As long as you qualify for a lower interest rate or find a more agreeable monthly payment option, it’s worth refinancing your private student loans.

You’re Sure You Won’t Need Any Federal Student Loan Protections

Federal student loan protections don’t really benefit all borrowers. If you have a steady job and don’t see a drop in income anytime soon, you don’t need income-based repayment plans. Keep in mind, if your career field doesn’t qualify you for forgiveness, that program is of no use to you. If you don’t see yourself making use of the federal loan benefits, it’s worth refinancing. You’ll benefit more from the lower interest and better terms on the new loan.

Refinancing Student Loans Is NOT Worth It If:

Now onto the signs that refinancing may not be worth it.

Your Credit Score Is Unsatisfactory

Your credit score is the first thing lenders will look at to determine your eligibility to refinance. Most lenders require a minimum credit score of 650 just to qualify for refinancing student loans. But a score of 650 doesn’t necessarily guarantee a lower interest rate. Your credit score will need to be higher than that to qualify for a lower interest rate and other perks. If your goal is to save money in the long run, it may not be worth it to refinance student loans when your credit score is low. In this case, it’s better to work on building your credit score and consider refinancing at a later time.

However, if you plan to refinance your loans in order to manage your monthly payments, you may be able to refinance with a cosigner. Lenders look at a cosigner’s credit in order to determine if they can help you qualify for the refinanced loan. Of course, it does mean the cosigner is on the hook if the borrower doesn’t repay on time.

You Have Federal Student Loans And Your Income Is Unstable

Federal student loans offer unmatched protections for borrowers who are struggling financially. If you haven’t found steady employment or you have a low-income job, you may find the monthly repayments unaffordable. With federal loans, you can choose one of the income-based repayment plans. These plans set your monthly payment amounts to a percentage of your discretionary income so your payments affordable at all times. Switching to an income-based repayment plan protects you from delinquency or default, which have far-reaching consequences.

Refinancing converts your federal student loans to private loans that have none of the benefits associated with the original loans. If you are unsure about your employment or you see a drop in income, it’s worth it to hang on to your federal student loans. Only consider refinancing your private student loans till your employment and income improve.

You Have Federal Student Loans And Are Pursuing Student Loan Forgiveness

Student loan forgiveness programs are only applicable to federal student loans. There are multiple federal loan forgiveness programs. Each one has its own qualifying criteria. Under the Public Service Loan Forgiveness Program, you may qualify for loan forgiveness if you’re employed by a government or non-profit organization. Under Teacher Loan Forgiveness, you may qualify for forgiveness if you teach full-time for five complete and consecutive years in a low-income school. If you think you may qualify for any of the forgiveness programs, it’s worth keeping your federal loans federal. In this case, too, you should consider refinancing only your private student loans to get the lower rate benefits.

Your Next Steps

If you’ve decided that refinance student loans is worth it for you, here’s what you need to do next.

Use a student loan refinance calculator to determine your estimated monthly repayments and interest rate.

Check lenders’ requirements for refinancing and shortlist lenders whose requirements you meet. Narrow down your list further based on interest rates, fees, and refinancing terms. Refinancing should not cost you anything. Eliminate any lender that charges you exorbitant fees to refinance. Make sure to read the fine print too to ensure that the lender doesn’t have any hidden fees buried in there.

Request your free credit report and go through it thoroughly. If you spot any inaccurate or incomplete entries that are pulling down your score, file a dispute with the credit bureau. The bureau will investigate and depending on their findings, they will correct your report and re-calculate your credit score.

Only submit a formal refinancing application when your credit score is reflecting correcting. This will help you get the best rate possible on your refinanced loan.