Borrowers who decide to refinance their student loans do so with one main goal in mind: getting a lower interest rate. And the earlier they move forward with refinancing, the better off they'll be.
Refinancing your student loans means spending less money on interest over time and, thus, putting more money back into your pocket. For this reason, the best time to refinance your student loans to maximize your savings is as soon you graduate.
Of course, it's not quite that simple. Yes, the earlier you refinance the better. But other factors, such as your income level, your credit score and the current interest rate environment, also play a big part in determining when you should refinance.
When you can achieve the magic mix of a steady income, a good credit score and low rates, it's definitely the perfect time to refinance your student loans. Here's what you need to know.
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A steady income
Private lenders who offer student loan refinancing like to see that you have a dependable and consistent source of income that you can rely on to repay your new refinanced loan well into the future.
Lenders also look at something called your debt-to-income (DTI) ratio to see if you can afford your new monthly payments. The lower your DTI, the better. A low DTI indicates that you make more than you owe and thus have the money to cover your debt.
To calculate your DTI ratio, divide your total monthly payments (credit card bills, rent or mortgage, car loan) by your gross monthly earnings (what you make each month before taxes and any other deductions). If your DTI is over 40% — the threshold at which lenders begin to worry you'll be a risk — work on paying off any other debt, like high-interest credit card balances, and/or try increasing your income by adding a side hustle or asking for a raise.
Fair credit
Most private lenders require borrowers to have good or excellent credit in order to qualify for refinancing.
Private student loan lender Earnest, for example, says on its website that potential borrowers need to have a minimum credit score of 650.
Actual rate and available repayment terms will vary based on your financial profile. Our lowest rates are only available for the most credit qualified existing cosigned loan borrowers who receive the 0.25% Loyalty discount and requires selection of our shortest term offered, full principal and interest payment while in school, and enrollment in our 0.25% Auto Pay discount. Enrolling in Auto Pay is not required as a condition for approval. Interest rates are subject to change.
Residents of Hawaii must request a loan of at least $1,501.
You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment from a checking or savings account. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. It is important to note that the 0.25% Auto Pay discount is not available when loan payments are deferred during the interim period as a result of selecting the deferred repayment option.
To be eligible for the Loyalty Discount, applicants must have previously obtained an Earnest Private Student Loan and apply using the same email address associated with that loan. Only one Loyalty Discount may be applied per eligible Earnest Private Student Loan. Not all applicants may qualify. This offer cannot be combined with Earnest's Rate Match program. Earnest may modify or discontinue this offer at any time and without notice, however, once a Loyalty Discount is earned, it will not be taken away.
Nine-month grace period is not available for borrowers who choose our Principal and Interest Repayment plan while in school.
Earnest clients may skip a payment through a single, one-month forbearance during a 12 month period. Your first request to skip a pay can be made once you've made at least 6 months of consecutive on-time full principal and interest payments, and your loan is in good standing. The interest accrued during the skipped month will result in an increase in your remaining minimum payment. The final payoff date on your loan will be extended by the length of the skipped payment periods. Any unpaid accrued interest may capitalize (added to the principal balance) at the end of the forbearance period by adding unpaid accrued interest to the outstanding principal as permitted by law and the terms of the loan agreement. Please note that skipping a payment is not guaranteed and is at Earnest's discretion. Your monthly payment and total loan cost may increase as a result of postponing your payment and extending your term.
At the end of the day, the higher your score, the better chance you have at getting a lower interest rate, so it's good to take steps to improve it. Financial experts suggest aiming for a 760 credit score to likely qualify for the the top credit cards, best loan terms and lowest interest rates.
Low rates
It's important to understand what the current interest rate environment looks like before refinancing your student loans. When the Federal Reserve makes changes to rates in response to the economic climate (either cutting or raising them), it's likely that private lenders will follow suit. So, if market interest rates are low, presumably so are refinancing rates.
Right now, rates are relatively low, so private student loan borrowers may want to refinance and choose a lender that offers fixed APRs so they can lock in the low rate and enjoy the security of knowing it won't ever change even if rates go up in the future.
To see just how much you can benefit from a low rate, use a student loan refinancing calculator like this one from ELFI. First, you enter your current loan information, including the loan amount, monthly payment and interest rate or the months remaining in your loan term. You can then test different loan terms (5, 7, 10, 15, 20 years) to see your savings when paying a refinanced interest rate over a shorter or longer repayment term.
With federal student loan payments and interest on pause through December 2022 federal borrowers should wait until the freeze ends before they consider refinancing. If you do ever refinance with a private lender, you will lose any built-in protections you had through your federal loans, such as income-driven repayment plans, loan forgiveness and deferment/forbearance options.
On the other hand, private student loan borrowers may want to consider refinancing today given the current low interest rates. Read more about who should and shouldn’t refinance during the pandemic.
How to choose the best lender to refinance with
Once you think you're ready to refinance your student loans, use loan marketplaces like Credible to compare lenders' rates and loan terms. You'll also want to consider their fees and any special payment protections they offer.
Select analyzed and compared private student loan funding from national banks, credit unions and online lenders to rank the best options for borrowers. We rated our top student loan refinance companies and all offer low refinancing rates, flexible loan terms, no upfront origination fee for refinancing or early payoff penalties, financial hardship protection — plus co-signer options if the direct borrower does not meet the income and/or credit requirements to refinance on their own.
- Best overall: SoFi® Private Student Loan Refinancing
- Best for fair credit score: Earnest Student Loan Refinancing
- Best for having a co-signer: Citizens™ Student Loan Refinancing
- Best for parent loan refinancing: ELFI Student Loan Refinancing
- Best for medical school loan refinancing: KeyBank Student Loan Refinancing
Bottom line
The earlier you refinance, the less you'll spend on interest over the long run. But the perfect time to refinance is really up to your personal financial situation.
You'll want to have a secure income and strong credit, as well as know you can score a lower rate. Remember that you can refinance as often as you want, so consider it each time your financial situation improves or rates go even lower.
