If your career, finances, or priorities have changed since you first took out your student loans, there’s probably a better payment plan out there for you. That’s where refinancing comes in. When you refinance, your current loans are paid off and replaced with a single loan with a new interest rate, term, and monthly payment. Refinancing can help you get a better interest rate, potentially saving you thousands. So, when does it make sense to refinance?
1. When you begin your career
To be eligible for refinancing, most student loan lenders, including CommonBond, require you to have graduated from college and started your new career (or received a job offer). Once you’ve gotten your first few paychecks, you can check to see what rates you qualify for.
2. After the first year in your new career
A better credit score and higher income are both factors that can help you get better rates on your loans. Now that you’ve been earning, making regular student loan payments, and have settled into a new monthly budget, it’s a good time see if you can get a better deal or potentially put more toward your loans.
3. When you pay off a debt
Another time to consider refinancing is when you pay off a debt, like a large credit card balance or a car loan. First, there’s a good chance your credit score will get a boost. Second, your debt-to-income ratio or “DTI,” which looks at your monthly bills vs your monthly income, will also have improved. Both factors can help you get better rates (just wait a few weeks after paying off your debt to ensure credit bureaus have updated your score).
4. When you get a raise or new job
When your income increases, your DTI improves with it. That means you could qualify for a better rate. It also means you may have more room in your budget to put towards your loans. If you can manage a more aggressive payment, you may want to refinance into a shorter-term loan (such as a 5-year loan).
5. If your payments are too high
Did a friend or colleague tell you about their low student loan payments and leave you wondering why you’re paying so much? If you’re focused on other financial goals, refinancing can lower your monthly bill by helping you qualify for a lower interest rate, extend the length of your loan (such as from a 10-year to a 20-year loan), or both. Keep in mind that extending the length of your loan could increase the overall amount of interest you’ll pay.
Tip: If you’re saving up for a house down payment, lowering your student loan bill can help you decrease your debt-to-income ratio (DTI), which is an important factor if you plan on applying for a mortgage.
6. If you can manage higher payments
If you’re in a position to put more towards your loans each month and are eager to get debt-free as soon as possible, refinancing can help you get to the finish line sooner. A shorter-term loan (such as a 5-year loan) will likely come with a higher monthly bill but a lower interest rate, faster timeline, and less interest overall.
Tip: Not ready to commit to a higher bill? You may want to choose a lower monthly plan, then set up autopay to pay more than the minimum. You’ll still save overall, but have the option to pay less if you ever need more wiggle room.
7. When interest rates drop in the market
If you haven’t refinanced your loans since taking them out, there’s a chance that current market rates (basically determined by how the economy is doing) are lower than what you’re paying. Even a .50% decrease in your rate could save you thousands.
Note: If you have federal loans, you may be eligible for an income-based repayment plan (IBR), public service loan forgiveness (PSLF), or other type of repayment plan. If you’re interested in taking advantage of that, we recommend checking to make sure you’re eligible (99% of people who have applied for PSLF have been denied) and taking the appropriate steps. You should also run the numbers to make sure taking advantage of these actually saves you money in the long run. You can learn more at studentloans.gov.
Refinancing is a great tool that empowers you to ensure you are getting the best deal on your student loans. You don’t have to stay with your original lender simply because it was the one you initially chose. You have options and can regularly comparison shop to find out if you are getting the best deal. As you advance in your career, build your credit, and increase your income, refinancing can help you continuously reduce your cost of borrowing.