What to Consider Before Refinancing Your Student Debt

Grace Lemire
Grace Lemire

Grace Lemire is a freelance writer and editor with over five years of experience in the personal finance industry. She has been featured on a variety of publications, including NPR, CNN, FinanceBuzz, Dollar Geek, Pangea, and True Finance. Her work focuses on the intersection of personal finance and technology. In 2023, Grace was nominated for the Best Personal Finance Advice award in Debt.com’s FinTok Awards.

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Daniel Kahn
Daniel Kahn
Daniel is the co-founder and COO at Sparrow. Daniel is responsible for the day-to-day operations of a company, working closely with other members of the executive team to develop and implement strategies to support the growth and success of the company.
Daniel was a 2023 Forbes 30 Under 30 lister in the Education category.  Daniel was born and raised in Raleigh, North Carolina and graduated from Duke University in 2020.
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Camden Ford
Camden Ford

Camden leads Sparrow’s business operations – everything from product management to business analytics. After graduating Cum Laude from Duke University where he studied Civil Engineering, Camden worked as a Consultant for A.T. Kearney where he worked in their Strategic Operations practice. With a strong background in analytics, Camden strives to deliver data-driven conclusions and insights.

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November 13, 2023

Looking at your student loan balance is like biting into a chocolate chip cookie only to realize it’s actually oatmeal raisin. Can be really shocking when it isn’t what you expect.

With the way interest compounds on student loans, the total debt can increase pretty rapidly before your eyes. Refinancing your student loans could be a viable option to lower your interest rates, monthly payment, and overall money spent. That said, there are several things to consider before making the jump to refinance your student debt.

What Does it Mean to Refinance Your Student Debt?

Put very simply, refinancing your student debt means replacing your current student loans with a new loan with a lower interest rate.

Refinancing could look like this [note: this is a very basic example]:

Loan 1: $10,000 at 7.5% interest rate

~insert magical refinancing here~

New Loan: $10,000 at 5.25% interest rate

Notice that the new loan is for the same amount of total debt, however, the interest rate is lower. This would save you money in the long run as less interest would accrue.

Is Refinancing a Good Idea?

Based on our example, refinancing may seem like a perfect route for you. Still, you should consider the following circumstances about when you should and should not refinance.

When You Should Refinance Your Student Debt

  1. If the savings will be significant. If you can qualify for a better interest rate, it’s a good idea to refinance. A lower interest rate can save you money in the long run as less interest will accrue over time. Note: Contrary to popular belief, you don’t need to have a perfect credit history to qualify for a lower interest rate. 
  2. If you have student loans with high variable interest rates. Variable interest rates are just as it sounds – they vary. It is challenging to predict what payments will be with a variable interest rate because it’s always changing. Whether your variable interest rate is currently high or low, it may be a good idea to refinance if you can secure a lower fixed rate.
  3. If the economy supports low interest rates. Interest rates are impacted by economic factors. If the rate environment is good, rates may be lower, and it may be a good idea to take advantage of that.
  4. If your finances have improved. If your financial situation has improved since you first took out your loans, you may qualify for a better interest rate on a new loan. This could be in the form of a higher paying job or improved credit score — both of which will help you secure a lower interest rate.

When You Should Not Refinance Your Student Debt

Believe it or not, there are situations where it isn’t a good idea to refinance your student loan debt.

  1. If you’re planning to pursue student loan forgiveness. If you are pursuing a program such as Public Service Loan Forgiveness, you should not refinance your student debt as it would make you ineligible for the program.
  2. If you have Federal Loans and may experience a drop in income. When you refinance federal student loans, you lose the option to participate in federal repayment programs such as income-driven repayment and federal loan relief options. These may be important to you if you have volatile income or are planning to be unemployed.
  3. If you’ve declared bankruptcy recently. It is significantly more difficult to refinance your student debt if you have declared bankruptcy. While not impossible to refinance under these conditions, many lenders will require around 4-10 years to have passed since the bankruptcy filing before lending.
  4. If you’ve had to default on student debt. Defaulting on a student loan is a red flag to private lenders as it tells them that you may not be able to make consistent loan payments. This may make it more challenging to find a lender to refinance with.

Questions to Ask Yourself Before Refinancing

With that in mind, you should ask yourself the following questions before deciding to refinance your student debt.

1. What is my current interest rate, and what could I qualify for?

Take a good look at the interest rates assigned to the loans you currently have, and compare them to the interest rates you’re likely to qualify for. Is there a big difference?

While there’s a chance that the interest rate might be the same, or maybe even worse, recent data has shown that refinance rates for well-qualified borrowers are hitting all-time lows. In the beginning of May 2021, borrowers with credit scores of 720 or higher were seeing interest rates of 3.6% on a 10-year fixed rate refinance loan1 [hint: this is a good rate!].

Borrowers refinancing at such low rates are likely saving thousands of dollars over time. If you think you’d qualify for a lower interest rate, refinancing may be a good decision!

2. Is my income stable?

Financial stability is important for a few reasons:

  1. Credit evaluation
  2. Available repayment options/Ability to make payments

Credit Evaluation

If you’re looking to refinance your student debt, you will be seeking a new loan entirely. Part of the process of securing that new loan is being evaluated by the lender to determine your interest rate and loan terms. Your credit score and financial history will factor into those elements of your loan. If this area isn’t up to par, you might not be able to receive a better loan than what you already have.

Available repayment options/Ability to make payments

If part of your plan to refinance your student debt involves federal loans, you will want to make sure that you’re able to make payments without the federal repayment options. Plans like income-driven repayment aren’t available with private student loans. If that is a necessity to you and your financial health, you may want to reconsider refinancing federal loans.

3. What is my reason for refinancing?

Knowing your goals and intentions with refinancing is important so that you can ensure your new loan aligns with these goals. Most often, people refinance to reduce the overall amount paid over time. Others are more focused on securing a lower monthly payment and don’t mind a longer repayment period.

Either way, it’s important to make sure that you’re clear on your goals for refinancing so your new loan can help support those goals.

4. What does my credit history look like?

When you go to get a new loan, lenders will review your credit score, income, and any other outstanding debt to develop an idea of your likelihood to pay back the loan. The stronger you look to the lender, the more likely you are to get a competitive interest rate and loan terms. If you don’t look so hot (financially, of course) to the lender, you may not be able to refinance with the terms you were hoping for or without a cosigner – neither of which are ideal.

Final Thoughts

Refinancing certainly has its pros and cons, and ultimately, isn’t for everyone. Before refinancing, make sure you are clear on why you’re doing it. When you’re ready to go ahead and refinance, check out Sparrow’s application to simplify the process.

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