Should You Refinance Only Some of Your Student Loans?

iQuanti: With the rising cost of higher education, many student loan borrowers hold multiple student loans, often with different loan servicers, interest rates, and repayment periods. When making decisions about student loan refinancing, you might not only be trying to figure out whether to refinance, but which of your loans you should refinance. Here are some reasons why borrowers with multiple student loans might want to refinance only some of their student loans.

Lowering interest rates

If some of your loans carry higher interest rates than others, it might make sense to refinance only those loans. Borrowers who can obtain lower interest rates—for example, those with good credit or high income—may be able to lower the amount they pay over the lifetime of the loan.

Unlike refinancing a home loan, student loan refinancing is free, so you don't have to factor the cost of refinancing into your decision to refinance. This means that even if the difference between your current interest rate and your refinanced interest rate is small, it might still be worth it to refinance.

Lowering monthly payments

If you're looking to free up money for other obligations or put more into savings, you might decide to refinance to a longer term. While refinancing with a lower monthly payment means that your overall loan payment period may be longer (and the amount you pay overall will be higher, since the loan will accumulate more interest), it may be a good decision if the lower payment improves your overall financial health.

Lower monthly payments may be especially attractive if you're looking to qualify for a home loan, car loan, or personal loan. Getting approved for these loans largely depends on your debt-to-income ratio (DTI)—your total monthly debt payments divided by your gross monthly income. Lenders look for a low DTI because it means a healthy balance between your debt and your income. Lowering your monthly student loan payment lowers your DTI, which means you may qualify for a higher loan amount after you refinance.

Consolidating loans

Loan consolidation is a type of refinancing that allows you to combine multiple loans into one. After consolidation, instead of making multiple payments, you only need to make one monthly payment to one loan servicer.

When consolidating your loans, you can opt to extend the repayment period and thus lower your total monthly payment. But even if you don't extend your term, consolidation might save you money in the long run if making a single payment means you'll be less likely to forget a payment and incur late fees.

However, you don't have to consolidate all your loans if you don't want to. Depending on your financial priorities, you might decide to refinance only some of your loans. If you're interested in lowering your interest rates, for example, you may decide to consolidate only the loans with higher interest rates. Or if you'd like to lower your monthly payment, consolidating loans with higher payments might make sense.

Consolidating only some your loans may be a good idea when you have a mix of federal and private loans. Federal loans can be consolidated with either the federal government or a private loan servicer, while private loans must be consolidated with private servicers.

If you decide to consolidate with the federal government, you don't have the option of shopping around for a new interest rate. Instead, your new rate after federal loan consolidation will be the weighted average of all your loans' interest rates. With private consolidation, you can request quotes from multiple private loan servicers to get the best rate possible.

Based on the ever-changing loan environment related to federal student loans, one suggested approach would be to hold back up to $50,000 in federal loans to see what happens with potential federal loan forgiveness.

Keep in mind that if you decide to consolidate your federal loans with a private loan servicer, you'll give up access to federal protections, such as income-driven repayment, deferment, and forbearance. If you want to consolidate while keeping these protections, it may make sense to consolidate your federal loans with the federal government and your private loans with a private servicer.

Change loan servicers

One final reason student loan borrowers often decide to refinance one or more student loans is that they're unhappy with their loan servicer. If you've had good experiences with one of your loan servicers, while another servicer has poor customer service or a web site that's difficult to navigate, refinancing that loan with a servicer you trust may mean spending less time stressing about your loans overall.

Source: iQuanti, Inc.