When is the Best Time to Refinance a Student Loan?

Congratulations! You’re a newly-minted graduate. Diploma in hand, you’re ready to take on the world. Pretty soon, you’ll find yourself collecting a paycheck and attending (virtual) happy hours with co-workers, instead of pulling all-nighters with assists provided by Red Bull.

Transitioning from student to working life is certainly an adjustment, and nowhere is this more strongly felt than when you come face to face with the reality repaying student loans.

Yes, you remember swallowing that bitter pill before you first signed your life away to pay for your education. An education that you filled with your grandest hopes and dreams, and that has hopefully positioned you to be on the right track for the type of professional and personal success that you envision. Every time a new loan deposit was dolloped into your bank account, you felt an odd combination of disbelief, and dread. Disbelief that your bank account could see so much money inflows while you’re unemployed, and dread knowing that as easily that money is flowing in, it’ll be 10 times harder to pay back.

But now you’re here, a recent graduate, and if you took out federal loans, are lucky to enjoy a period of forbearance through September 2020. That’s obviously a huge relief, but what are you going to do after?

Note, this article is written for students and graduates who have taken out federal loans. This means that your student loan was issued by the U.S. government through the Department of Education.

To understand why this is important, you need to first understand how the government thinks about lending.

Thanks to advances in technology, a new breed of private lenders have evolved. Companies like SoFi, Earnest, and Laurel Road have capitalized on advancements in data analytics to create algorithms that they believe are better able to predict an individual’s propensity to default on a loan.

As a result, these lenders are able to establish strict criteria around the profiles of people that they are willing to lend to. Consequently, by being selective about lending criteria, these lenders are able to offer lower interest rates, since the overall risk profile of their “portfolio” of loans is ostensibly decreased with stricter screening.

Here’s where things get interesting, and where refinancing comes into play. If you have a strong credit history and have been otherwise fiscally responsible as an adult, you can reap the benefits by qualifying for a loan from one of these “new age” lenders.

These new lenders have made “shopping” for student loan refinancing much easier. Tools like NerdWallet even lay out the top 8 most popular lenders.
My advice? Go through each lender, and get interest rate quotes. The process is quick (~3 minutes) and has no bearing on your credit score.
Now that you have some context, these 4 factors will you help you determine the best time to refinance your student loans.

Interest rate

Obviously this is the most important factor, and the reason why you are refinancing in the first rate. All else being equal, choose to refinance with the lender that offers you the lowest interest rate. If you’re being really eagle-eyed, keep an eye out for announcements from Fed – typically, a decrease in the federal funds rate will trigger a decrease in subsequent consumer rates, such as those on student loans.

Loan Forgiveness

This is probably the second biggest factor to determine whether you want to refinance with a private lender or not. If you face financially hardship while out of school, federal loans offer various programs to delay payment. Private lenders operate very differently, and it is up to you to carefully read the terms and conditions.

When I was going through my refinance process, I called each of the 4 lenders I had narrowed down my search to, and asked what their policy around financial hardship was. The vast majority offered some sort of reprieve, however there was a hard cap set on how much time you have. My advice: don’t let this piece deter you from capitalizing on the huge savings that a lower interest from a private lender can provide.

Payment Options

Once you go private, options like forbearance are no longer on the table. Furthermore, most private lenders set up an auto-pay schedule to withdraw a predetermined amount at a specified time. If you expect your income to be in flux or vary significantly throughout a given time period, this is something to keep in mind.

Payment Terms

How many years do you plan on repaying your student loans? It can be daunting to evaluate options – you’ll quickly notice that the more time you take to pay off your loan, the lower the monthly payments are. You have to strike the right balance between paying off quickly and making sure that you’re taking care of other aspects of your personal finances. There’s no one number or formula that fits all.

As you can see, there are many factors to consider when the best time to refinance a student loan might be. In my experience, the biggest hurdle was psychological – I kept wondering whether there was something in the fine print that I hadn’t read, and that in a few years, my new private lender would creep in the middle of the night and harvest my organs because of some footnote I overlooked.

In reality, as long as you find the right balance between a low interest rate and good payment terms, you can pat yourself on the back. You’ve taken one small step on your loan, one giant leap for your personal finances!

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