Post-college life

When Should You Refinance Your Student Loans?

If you are one of the 44 million Americans who has outstanding student loans, know it’s a good time to be a borrower. You have the power to take the reins of your student loans, reduce your borrowing costs, and pay them off as quickly as possible. But how?


Enter refinancing.


By refinancing your debt, you can potentially lower the interest rate and overall cost of your student loan(s). A few percentage points off can save you hundreds to thousands of dollars. In fact, people who refinance with CommonBond could save thousands over the life of the loan.


But when is it a good time to refinance?


1.   When you begin your career


To be eligible for refinancing, most student loan lenders, CommonBond included, require you to have graduated from college and started your new career (or received a job offer).


As soon as you are eligible, you should find out where your current rate stands in the market (i.e., whether you qualify for lower or higher rates). You can find out by getting prequalified with online lenders. Applications typically take a few minutes and don’t negatively impact your credit score.


If another lender offers you a better rate, you can take advantage of the savings right away. If not, you can rest assured that you have the best deal available to you at the moment.


2.   After the first year in your new career


Your one-year career anniversary is a reason for celebration. Cheers! It is also a good time to check in on your student loan to see if you can save. Why?


Well, when most people graduate, they have been focusing on school for several years and haven’t been working full-time. As a result, it’s common for them to have little-to-no credit and a modest income.


After focusing on your career for a year, you have likely begun to earn more and utilize credit. Your credit score and financial profile will probably have improved, which can help you get a lower interest rate on your loan.


So when the one-year mark comes up, it’s a good time to shop around to see if you can get a better deal.


3.   When you pay off a debt


Another time to consider refinancing is when you pay of a debt, like a large credit card balance or a car loan.


When you apply to refinance your student loans, lenders will look at your debt-to-income ratio (total monthly payments toward debt divided by monthly income) to determine your ability to repay the amount. The higher the ratio, the more risk you represent.


Whenever your debt decreases, your DTI ratio will decrease. For example, if you earn $5,000 per month and pay $2,000 per month toward your debt, your DTI would be 40 percent. If you reduce your monthly debt payment amount to $1,500, your DTI will decrease to 30 percent. This lower DTI will help you qualify for a lower interest rate.


So when you pay off a debt, wait a few weeks for the credit bureaus to update your scores and then see if you can get a better rate.


4.  When you get a promotion or a raise


Getting a promotion or a raise is another reason to celebrate! It’s a reward for your hard work and best efforts. Plus, when your income increases, it also lowers your DTI. As result, you may be able to get a better deal on your loan. After your income receives a bump, check in to see if you can get a better rate.


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 are paying so much? Or, maybe you are facing a temporary financial difficulty and need to lower your monthly expenses. No matter the case, refinancing can potentially enable you to reduce your monthly payments.


When you qualify for a lower interest rate and keep your loan term length the same, you can save on your monthly and total costs. Plus, if you want to lower your payments further, you can extend your loan term. However, it’s important to note that this can cause the loan to be more expensive overall due to the extra interest you will pay.


6.   When interest rates drop in the market


Lastly, you can save by refinancing when market rates drop.


Most private lenders offer fixed and variable interest rates based on the London Interbank Offered Rate (LIBOR) or the prime rate, which both correlate closely with the federal funds rate. A base rate is often set according to one of the above indexes and percentage points are added on top of it depending on the amount of risk a borrower presents.


As the federal funds fluctuate, the LIBOR or prime rate follows, as do the interest rates offered by private lenders. By keeping an eye on the current rate trends, you can find out when interest rates are down. During those times, apply to see if you can lock in a lower rate and save.


Now you know the six times when it’s a good idea to refinance your student loans. Next, let’s look at when it might not be a good idea.


When you shouldn't refinance your student loans


Before refinancing your student loans, be sure to review and understand what you will be giving up when you pay off your existing lender(s).


Federal loans, in particular, have helpful forgiveness and repayment plans which may be lost when you refinance. It’s worth checking what similarly helpful plans your private lender can offer before relinquishing those benefits.

Plan your student loan repayment strategy


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. Keep these milestones in mind as you progress through your student loan repayment journey.

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