If you’re struggling to make your monthly student loan payments, refinancing may be one way to lower them.
Refinancing involves taking out a new loan that pays off your existing debt. The new loan will typically have different terms than your original. When you refinance, you could potentially secure a lower interest rate, extend your repayment term, or both.
One budget strategy to address temporary financial strain is to refinance your student loans into a longer term now, then refinance again later when your situation improves.
Extending your term spreads your balance into smaller payments over more months. While this means you have a longer loan term — which could result in paying more in total interest over the life of the loan (even with a lower interest rate) — it provides immediate relief.
Consider these scenarios before making the refinance decision.
When a Lower Payment Might Be Worth the Trade-Off
Life happens. Unexpected medical expenses, family emergencies, or a cost of living that outpaces your salary can all strain your budget, and a lower student loan payment can provide breathing room.
Refinancing your student loans can free up cash flow now, but it will likely mean you pay more on your loan overall.
Situations where that trade-off might make sense include:
- How Refinancing Student Loans Can Help When Buying a Home
Lowering your monthly student loan payment can also improve your chances when applying for a mortgage. Kate Wood, a lending expert at NerdWallet, explained that a lower monthly student loan payment can result in a lower debt-to-income (DTI) ratio — and mortgage lenders prefer a lower DTI ratio. DTI is one of many factors that will determine if you qualify and what mortgage rate you could receive.
“How much of a difference it’ll make depends on how much refinancing actually reduces your monthly payment, and how much other debt you have,” Wood said. “But it certainly doesn’t hurt to lower your monthly student loan payment.”
Lenders typically focus on your monthly payments rather than your overall student loan debt. Refinancing to reduce your monthly payment shows as less monthly debt overall and can help lower your DTI.
However, you’ll want to refinance your student loans well before you apply for that mortgage.
“Anything you need done with your finances, any change you need to make, you ideally want to have it finished and make sure the dust has settled on your credit reports before you start getting into homebuying,” Wood said. This includes any temporary lowering of your credit score from the hard credit checks that come with refinancing loans.
“Mortgage lenders are looking for stability,” Wood said. “You definitely don’t want anything about your finances changing after you’ve submitted a mortgage application and before you’ve closed on the home, but honestly, you don’t want to have just made a bunch of changes right before you apply either.”
There are downsides to refinancing, such as paying more in interest over a longer term or losing federal student loan protections.
When you refinance for a lower monthly payment, you may end up paying more in total interest due to a longer term. You also might be extending your student loan debt into life stages you hadn’t planned for: a 10-year term and a 25-year term end at very different points in your life.
If you currently have federal student loans and want a lower payment, you could ask your loan servicer about available income-driven repayment plans. Federal plans, such as the new Repayment Assistance Plan, can potentially get you a lower monthly payment without permanently giving up federal forgiveness programs or other protections. Once you refinance federal loans into private ones, you cannot switch back.
Qualifying for a lower payment usually takes solid credit and steady income, which is why it’s better to refinance before a financial crisis than during one — even though hardship is rarely something you can see coming.
Alternative options to refinancing include entering into forbearance, selecting an income-driven repayment plan if you’re a federal student loan borrower, or asking your servicer if interest-only payments or skipping a payment is possible.
If you’re finding that you can no longer afford your loan payment, you may want to reconsider your budget. Look for expenses you can cut, such as dining out or subscriptions you don’t use; consider a side hustle for extra income; or make the case for a raise at work.
When It Makes Sense to Refinance Again
If your finances improve and you can afford to pay more each month, refinancing again may get you a better rate or term. The best time is usually when your income or credit score has increased and your employment is stable. If you refinanced before purchasing a home, wait a couple of months so you get used to your new monthly expenses. The last thing you want is to end up with another student loan payment you can’t afford.
With refinancing, look for a low interest rate, a monthly payment you can afford, and a term you can live with.
About the author
Elin Johnson covers student loans for NerdWallet. She has written about higher education news and policy since 2019 for BestColleges, WorkShift, New America, Inside Higher Ed, and The Chronicle of Higher Education. She is the former editor of The Cordova Times, and former content advisor to the Learn & Work Ecosystem Library. Her work has won awards from the Alaska Press Club and Student Press Law Center. She graduated from Linfield University with a bachelor’s degree in Journalism and Media Studies and International Relations.
