4 Times Student Loan Refinancing Can Save You Big

There's nothing cheap about going to college. According to the College Board, the average cost of tuition and fees for the 2014–2015 school year was $31,231 at private colleges, $9,139 for state residents at public colleges, and $22,958 for out-of-state residents attending public schools. It's thus no surprise that many students — like yours truly — pay their way through college with student loans.

Once you graduate and start paying back your student loan, however, you might begin to receive refinancing offers. But receiving an offer to refinance your student loan doesn't mean you have to jump at the opportunity. Here are four signs that you should refinance your student loan.

1. You Need a Better Interest Rate

One of the main reasons graduates refinance their student loans is to get a lower interest rate, which translates into a lower monthly payment.

Student loan rates vary depending on whether you have a federal or private loan. If you have a federal student loan, which are easier to get with no credit history and low income (these comprise most of the loans I have), you'll pay a fixed-rate for the duration of the loan term. But there are different types of federal student loans. Direct Subsidized and Unsubsidized Loans offered by the federal government have a fixed interest rate of 4.29%, and federal Perkins Loans have a fixed rate of 5%. Your rates may be higher, depending on when you took out the loan.

These rates might seem reasonable, but if you do some research you'll find that many private lenders offer better rates on their student loans. For example, SoFi and Earnest have student loan rates starting at 1.90% for variable rates and 3.50% for fixed rate.

Refinancing and getting a cheaper rate and monthly payment frees up your cash, giving you more disposable income to pay off other debts or build a savings account.

2. You Have a Higher Credit Score

Of course, refinancing a federal or private student loan doesn't guarantee the lowest rate. To qualify for an interest rate lower than what you're currently paying, you need a high credit score.

Unfortunately, federal student loans offer the same rate regardless of a borrower's credit history. So a student with an Unsubsidized Direct Loan and no credit history pays the same rate as a student with the same loan and a 700 credit score.

If you have a credit score in the high 700s or 800 range — thus able to qualify for the best loan rates — a federal lender isn't going to drop your rate. A private lender, on the other hand, weighs your credit score, debt, and income when determining your rate. Refinancing with a private lender makes sense if you've built a strong credit history and are looking to save money.

3. You Need to Simplify

If you have both federal and private student loans (I'm with you here, too), juggling multiple lenders and payments can be overwhelming and confusing. Refinancing and combining your federal and private loans into a single debt can simplify your finances.

4. You Have a Stable Job

Although refinancing your federal and private loans into a single loan can simplify your bills, you need to evaluate your job situation and then decide whether now's the best time to give up your federal benefits.

If you have multiple federal loans, you can apply for a Direct Consolidation Loan and combine them into a single one. But unfortunately, you can't consolidate private loans into a federal loan. Therefore, if you have a mix of federal and private debt, and you're looking to consolidate, the only option is refinancing with a private lender.

A private lender might offer a better rate, but they don't always offer the protection or benefits of a federal loan, such as flexible repayment options. If you have a federal student loan and experience economic hardship after losing a job, you can apply for deferment or forbearance and temporarily stop making your payments. Or you can negotiate a lower monthly payment. Depending on your occupation, you might even qualify for public service loan forgiveness or teacher loan forgiveness. Unfortunately, these benefits aren't necessarily offered with all private loans. Check with each prospective lender to understand their precise offerings.

Before refinancing a federal loan into a private one, seriously consider the stability of your job and income. If you're a high-income earner working in a field with a low unemployment rate, by all means, switch from a federal loan to a private loan if you can save money. But if you have other debts, a low-paying position, or you're still living paycheck-to-paycheck, it might be better to stick with a federal loan, just in case you need to take advantage of guaranteed hardship provisions.

Are there other signs that you should refinance your student loans that you'd like to add? Let me know in the comments below.

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Phil Danley

Thanks for the info on student loans. Mine were from 1981-1986 and just involved going to the bank. One option and one interest rate...9%. Times have changed!