Are you considering refinancing your student loans but have a ton of questions before you initiate the process? Are you wondering is refinancing a good idea at all? If it is a good option for you, when is the ideal time to refinance? What are the pros and cons of refinancing student loans that you need to be aware of? What do you need to refinance student loans?

You’re not alone in asking all these questions. Refinancing is generally a great way to get a better handle on your student loans. But first, it helps to understand how it works.

What Is Refinancing And How Does It Work?

Refinancing is a process in which the lender pays off your existing student loans and issues you a new loan in its place. The new loan will be considered as a completely different loan with no association at all to the original loan. It will have new terms and conditions and a different interest rate based on your current financial credentials.

When you refinance, the lender will first take a look at your credit score, income, debt-to-income ratio and a few other factors. If you’ve been making all debt payments on time, have a good credit score, and are earning a decent, steady income, you’re considered a “˜responsible borrower’. A responsible borrower is someone who manages their finances well and is committed to paying off all debts on time. This is reassuring to lenders as it means they don’t have to worry about the repayments. If you pass their assessment, your refinancing application will be approved.

While a good credit score will get you approved for refinancing, it does not automatically qualify you for a lower interest rate. To score a low interest rate, your credit score must be in the good (740-799) to excellent (800 and higher) range.

So Why Is Refinancing Student Loans a Good Idea?

Refinancing allows you to change the terms of the original loan to terms that are more appropriate for your current financial circumstances. This is one of the biggest benefits of refinancing student loans.

When you applied for your original student loans, you agreed to a certain interest rate, loan term, and monthly repayment amounts. Now that you’ve graduated, your financial situation would have changed considerably.

If you managed your finances well, you would have improved your credit score, which qualifies you for a lower rate of interest.

If you have a steady, high-paying job, you may have spare cash that you can use to pay off your debt earlier.

Or maybe you’re struggling financially and would like to lower your monthly payments and free up much-needed cash.

Unfortunately, regardless of the reason, you cannot change the terms of your original loans. The only way to get more favorable terms on your existing debt is by refinancing your loans.

In general, refinancing you student loan is a good idea if you want to change the terms of your existing loans to suit your current circumstances. However, this may not be the right solution for everyone. Here’s a more detailed look into when refinancing is a good idea.

When Is Refinancing Student Loans a Good Idea?

Refinancing student loans is a good idea when:

• You qualify for a lower rate of interest – A good credit score, consistent income and low debt-to-income ratio will qualify you for a lower rate of interest. Even a marginal rate reduction could potentially save you thousands of dollars in accrued interest over the loan term. You can refinance multiple times, racking up those savings.
• The rate environment is favorable – Interest rates on private loans are pegged to prevailing market rates. When interest rates across the board go down, rates on loans drop too. This is an ideal time to refinance with a fixed interest rate as you’ll be able to lock in the low rates till you’ve cleared the loan. Refinancing when the rate environment is favorable can save you a substantial sum in accrued interest.
• You have spare cash and would like to pay off your debt earlier – Knowing that you have loans to pay off can be a source of constant stress. If you’re earning a high income and have cash to spare every month, it’s a good idea to refinance and increase your monthly repayments. The higher monthly payments will reduce your loan term significantly so you’ll be debt-free much earlier. As an added benefit, you’ll also save more as less interest accrues over the shorter period.
• You’re struggling financially and need to free up cash – If you can’t afford the monthly repayments, you may be at risk of defaulting on your loans. This can have several long-term consequences. You’ll pay a late payment fine as well as interest on the outstanding amount, which will increase your debt, making it even more difficult to pay off. The lender will also report the missed payment to the credit bureaus, which will hurt your credit score. Refinancing to lower your monthly payments will make the payments more affordable. You’ll pay more interest over the longer term but it’s still better than defaulting. You can always refinance again with a shorter term when your finances improve.
• You’re sure you won’t need any federal student loan protections – Federal student loans come with several protections such as income-based repayments, deferment and forbearance options, and forgiveness for qualified borrowers. However, you can only refinance with private lenders. When you do, your federal student loans get converted to private loans and you lose all benefits associated with the original loan. If the lower rate and better terms on the new loan outweigh the benefits of your federal student loans, it’s a good idea to refinance.
• You have private student loans – Private students don’t come with any protections or benefits built in. As long as you qualify for a lower interest rate or for overall favorable terms, you should go ahead and refinance.

Refinancing Student Loans Is NOT A Good Idea If:

• You have bad credit and don’t qualify for a lower rate of interest
• You have federal student loans and are pursuing forgiveness
• Your finances are not stable and you may need the protections associated with your federal student loans – in this case you can still do a partial refinance and only refinance your private student loans

Is Refinancing A Good Idea for You? Your Next Steps

As we said earlier, refinancing may not necessarily be the right solution for everyone. If, after going through the assessment above, you’ve decided that refinancing is a good idea for you, here’s what you should do next.

First Step: Before you initiate any process or make any inquiries, the first thing you want to do is check your credit report to make sure it is accurate. You’re entitled to request one free credit report annually. Get your free report and take time to go through it thoroughly. If you come across any wrong or incomplete entries, file a dispute with the credit bureau. These inaccuracies can pull your score down for no fault of yours. On receiving your dispute, the bureau will investigate, make the necessary corrections, and re-calculate your credit score. It’s important to do this so you get the lowest possible rate on your refinanced loan.

Second Step: Go to Refi.Me and use their handy online tool to get your personalized interest rate from some of the top lenders. This tool cuts down the time spent comparing lenders and their rates and terms. All you need to do input your refinancing goals, the type of student loans you’re refinancing, your credit score and a few other details. In a couple of minutes, the tool will show you the lowest personalized rates that different lenders will offer you based on your financials. You can browse the list and apply to the lender that best suits your needs from the platform itself.

Third Step: Take time to go through your preferred lender’s terms and conditions. Look for hidden fees buried in the fine print. These fees can increase the cost of the loan and wipe out the benefits of refinancing. Refinancing should not cost you anything.

Fourth Step: Once you’re satisfied with the rates and terms, go ahead and submit your application. Don’t forget to keep your documents ready. These are the documents you’ll need for refinancing student loans.

Fifth Step: Keep making the payments on your old loan till the refinancing process is complete and you receive the documents for your new loan. This is important. It can take time for the lender to process your application. Until such time that you receive the new loan documents, the old loan is still in your name and you’re still responsible for the payments. If you stop paying prematurely, it will be considered a missed payment and you will pay a late fee fine and interest.