When making any financial decision, timing is everything, and refinancing student loans is no different. There are several factors to this – some a student can control and others they cannot – that affect when they should refinance student loans. This includes the timing of graduation, interest rates, employment, and credit score.
Taking each of these factors into account, you can make a good decision about the timing of refinancing student loans by asking yourself a few simple questions.
How soon after graduation should I think about refinancing student loans?
The answer to this question is: it depends. Some lenders want to see positive repayment history before they will consider refinancing your student loans, while others simply want to see steady employment and that you have the potential income to repay them.
Perhaps a better answer is: as soon as possible. If you are fortunate enough to get a job right out of school, refinancing can save you money even before you make your first payment once the grace period is up.
Another potential factor is whether you had a cosigner for your original student loans. Will your new loan require a cosigner, or will you be able to refinance without one? If you do need a cosigner, is there a cosigner release once you have met certain requirements?
You may also want to look at the term of the new loan. Will it be shorter, longer, or the same as your current loans? Lowering payments, but adding a much longer term, may not save you money in the long run.
You should consider refinancing right away, because not only will your payments usually be lower, but you will significantly reduce the interest you pay over the term of the loan. However, there are several other factors to consider to make sure you get the best deal possible.
How do interest rates affect when I should refinance?
Student loans, as many other loans, come in two different types: those with variable or fixed interest rates. Any hikes or lowering of the federal interest rate will have a direct effect on variable rate loans.1
It also has an effect on the rates offered on fixed rate loans, which are usually tied to the prime interest rate. The lower interest rates are, the better. While it is hard to predict what the Fed will do for sure with interest rates, there are usually economic factors that indicate which way they are going.
If interest rates are falling, it may be a good idea to wait to refinance loans, although there is some risk to this strategy. If they appear to be rising, refinancing as soon as possible is, generally speaking, the wisest choice.
Variable interest rates can be a good idea if interest rates are low and it appears they will stay that way; but if interest rates do go up, so can your payments and the overall amount of interest you will pay over the term of the loan.
Fixed rates are usually slightly higher than variable rates, but will remain constant over the length of the loan, so payments will not vary either. Whether you are offered a variable or fixed rate loan may determine whether you should refinance right away or wait.
Should I refinance before or after I get a job in my field?
Some lenders simply want to see that you have enough income to repay your loans regardless of whether you have a job in your field or not. Some want to see positive repayment history, meaning up to 12 on time, in full payments.
Certainly, a part of waiting to refinance until after you have a job in your field depends on your comfort level, how secure you feel in your current financial position, and how likely it is that your income will increase once you are hired in your degree field.
The advantage of refinancing before you get a job in your field is that you reduce your monthly payments and the interest over the term of the loan right away. However, once you get a job in your field, lenders may look more favorably on your application and offer you a lower interest rate than they might otherwise.
Also, if you want to apply for a mortgage, you may want to reduce your monthly payments as soon as possible, reducing the effect of your student loans on your income.2 This may help you when applying for a mortgage and can affect how much you qualify for and the interest rate you are offered on your home loan.
Both options may offer advantages, and it is up to you to decide what works best for your particular situation.
Does my credit score affect when I should refinance?
The simplest answer to this question is yes. The better your credit score, the better interest rate you will get, but it can also impact if you are even eligible for refinancing.
The first factor is that you will probably need at least good credit to qualify for refinancing your student loans. The first step to take is to check your credit score and make sure your credit report does not have any errors. If it does, take the necessary steps to fix them.3
You can then contact a lender, who can tell you about your eligibility, estimate your interest rate and payments, and guide you through the application process.
The best thing you can do to improve your credit score is to make your payments on time and in full. Don’t ignore creditors or debts, but work with them to make payment arrangements and resolve them.