Refinancing Student Loans for a Lower Payment: What to Know

If you're struggling to make your monthly student loan payments, refinancing may be one way to lower them.Refinancing is when you take out a new loan that pays off your old loan. The new loan will likely have different terms from the original. When you refinance, you could walk away with a lower interest rate, longer repayment term or both.One possible budget strategy to address a current financial strain is to refinance your student loans into a longer term now, then refinancing again later when your situation improves.Extending your term breaks your balance into smaller payments spread over more months. This means you have a longer loan term — which could mean you pay more in interest over the life of the loan (even if you have a lower interest rate).Let’s take a look at your options before you make the decision to refinance.When a lower payment might be worth the trade-offLife happens. Unexpected medical bills, family emergencies or a cost of living that outpaces your salary can all squeeze your budget, and a lower student loan payment can give you some breathing room.Refinancing your student loans can mean freeing up some cash now, but it will likely mean you pay more on your loan overall.Situations where that trade-off might make sense include:New baby or child care costs.A pay cut or a commission-based income.A move to a higher-cost city.A medical event.Caring for a parent or an older relative. Going through a divorce.Changes in your spouse’s income. It’s a good idea to try to refinance your student loans before money gets too tight. That leaves you time to compare lenders and understand your options — and to lock in a lower payment while you still qualify for one.You can use our refinance calculator to learn how much you can save on your monthly payment by extending the length of the loan with refinancing.How refinancing student loans can help when buying a homeLowering your monthly student loan payment can also help you when it comes to applying for a mortgage to fund a new home. 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 really like a lower DTI ratio. DTI is one of the many factors that will determine if you qualify and what mortgage rate you could be offered.“How much of a difference it'll make depends on how much refinancing actually shaves off 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 tend to be more interested in your monthly payments rather than your overall student loan debt. Refinancing to bring down your monthly payment will show as less monthly debt overall and can help bring down your DTI.But 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 as a result of the hard credit checks that tend to 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.”Downsides to refinancingThere 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 deeper 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 the 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 can't 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, picking 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 a possibility.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 againIf your finances improve and you can afford to pay more each month, refinance again may get you a better rate or term. The best time is usually when your income or credit score has gone up 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.