Is it Safe to Refinance Student Loans on a Fluctuating Income?

should I refinance student loans

There are many times when student loan refinancing is a good idea. But, like all financial strategies, there are gray areas and risks. One of the biggest risks can occur when your income fluctuates.

Say you work on commission, are a freelancer, or starting a business. You most likely have an unreliable cash flow; some months that are better than others. You might find yourself asking, “Should I refinance my student loans right now – or is that not an option for someone like me?”

Let’s find out.

Are your student loans private or federal?

Before you can even consider refinancing, it’s important to know what type of student loans you have: private or federal.

Federal loans

Funded by the federal government, these loans have a great deal of repayment flexibility. They offer access to federal consolidation, various repayment plans, forgiveness options, and help for those facing financial hardship.

For example, someone experiencing financial hardship due to a fluctuating income can apply for forbearance, deferment, or income-driven repayment plans.

The idea of losing these benefits is one of the main reasons someone might not want to refinance federal loans. If you refinance federal loans, you will lose those benefits – you’ll be replacing your federal loans with a new, private loan.

Private loans

Funded by private lenders, these loans don’t have the same hardship or forgiveness benefits as federal loans. Some lenders offer similar benefits, but they vary and aren’t guaranteed.

However, if you already have private student loans, you don’t have access to those benefits anyway. In that case, replacing one private student loan with another is a fairly low-risk proposition.

Refinancing student loans on a fluctuating income

Let’s say you know you want to refinance your student loans but you’re worried about approval. After all, income is an important factor in this process.

So, can you refinance student loans on a fluctuating income?

The answer is maybe. While income heavily dictates whether or not you’ll be approved, it’s not all that matters. Let’s look at some of the major factors that play into whether or not you’ll be approved for student loan refinancing:

1. Your annual income

While a fluctuating income can prove to be a challenge in getting approved for refinancing (or any other loan), it doesn’t have to be the end of the world. What you want to focus on isn’t the highs and lows of your month-to-month, but what that averages out to at the end of the year.

In figuring out that number, you might even realize that you earn more than you thought.

When you apply for refinancing, figure out the amount you can prove that you earn on an annual basis. If you’re worried that number isn’t high enough, consider taking on a side gig or two to give it a boost.

2. Your credit score

Another factor that will come into play is your credit score. Check your score for free to see where you stand. Here’s a snapshot of ranges to help you see where your score falls:

Image credit: Experian

The higher your credit score range, the better your chances are for approval. And if you need to work on your score, pay down revolving debt like credit cards and always make on-time payments to give your score a boost.

3. Whether or not you have a cosigner

Finally, if your credit score and annual income aren’t enough to get approved, you can try refinancing with a cosigner.

This isn’t at all uncommon. In fact, the last time The Consumer Finance Protection Bureau (CFPB) reported on this, the number of private student loans with cosigners had risen to 90 percent.

If you know someone willing to do this for you and they have good income and credit, then that could greatly improve your chances of being approved for refinancing.

Questions to ask yourself before you refinance

The question of can you refinance student loans on a fluctuating income isn’t as important as asking yourself, “Should I refinance student loans on a fluctuating income?”

Again, this will depend on whether or not your loans are federal or private, as federal loan borrowers have more to lose if they refinance and then end up needing benefits that are no longer available to them.

Even if you can refinance your student loans, that doesn’t mean it’s the best idea for you. The answer will depend on how much risk you can reasonably absorb. Here are a few questions to ask yourself:

  • Do you have a solid emergency fund?
  • Do you have dependents relying on your income?
  • Are the highs of your fluctuating income high enough to cover the low months?
  • Are you comfortable forfeiting benefits such as federal income-driven repayment plans?
  • Can you predict the trajectory of your income over the next few years?
  • What’s your debt to income ratio?
  • What percentage of income in your lowest-earning months is taken up by bills?

These questions are meant to frame your current financial situation. What you’re looking for when you think, “Should I refinance student loans?” is a picture of the health of your finances before you even consider refinancing.

For example, if you have a high debt-to-income ratio and a good portion of your income is going to bills, then refinancing federal student loans could present a great risk. If you hit a period in which you can’t afford to pay all your bills, you won’t have income-driven repayment plans to fall back on.

Ways to keep student loan refinancing low-risk

If your income fluctuates, it’s important to keep your refinance as low risk as possible. Here’s how:

  • Choose a fixed interest rate, rather than a variable rate.
  • Choose a longer repayment term so you can lower your monthly payments.
  • Use your higher income months to build up your savings for lower income months.

These steps can ensure that you give your budget as much room as possible to account for months when your income dips. Remember, you will no longer have income-driven repayment plans to help if you hit a financial snag.

Whether your loans are federal or private, a lower interest rate is a huge advantage for you. It means more of your money can be used to pay off the debt – and can even help decrease your payments if you choose a longer repayment term.

You might notice when you apply that the offered variable rate is lower than the fixed rate. It could be tempting to jump on that but there’s no way to know if or when that rate will increase. There’s also no way to know how much that could increase your monthly payment.

With a fluctuating income, that might be too much of a risk to bear.

Finally, if you’re not sure you’re comfortable with refinancing due to your fluctuating income, just say no for now. You can always try again later if your income stabilizes or you save enough money to give yourself more of a buffer.

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