Three times it just makes sense to refinance your student loans

It’s 2016. Do you know how much you pay in student loan bills every month?

The start of a new year is a natural time to take a good look at how you spend your money. If you qualify, student loan refinancing is one way to cut down your student loan payments or shrink the number of years they weigh on you.

Refinancing replaces your current loans with a new, private student loan at a lower interest rate. The catch: You must meet specific criteria to be eligible. Plus, if it’s federal loans that you’re refinancing, you’ll lose access to certain student loan repayment plans and forgiveness programs. That means it makes sense to look into refinancing only when you’ve hit certain milestones.

Here’s how to know you’re ready to consider student loan refinancing as part of your new-year, new-you financial plan.

1. You or your co-signer have great credit

Lenders are most likely to offer you a refinanced loan when you’ve shown you’re a trustworthy borrower, meaning you pay your bills on time. Your credit history is one way they determine that. Borrowers in the 690 to 850 FICO credit score range will have the best shot at refinancing.

When you’re 20-something, of course, that can be difficult to pull off.

“It’s hard to have an established, high credit score when you’re first out of school,” says Jack Zoeller, founder of student loan refinancing lender CordiaGrad.

If your credit isn’t where you want it to be, you can use a co-signer — a parent or another trusted adult with strong credit who can take responsibility for the loan if you can’t pay it.

Some lenders, including SoFi and Earnest, have been backing away from credit scores as a basis for evaluating potential customers. Your monthly cash flow, education and employment history are more telling, they say.

2. You have solid income relative to your debt

Most lenders also look at how much you earn compared to your debt load. They’ll consider not only student debt but also car loans and credit card balances in the calculation.

“The primary reason that many get turned down by one or more lenders when they try the first time — beyond FICO, beyond having a below-average credit score — is too much debt,” Zoeller says.

Say you’re a few years out of school and earning $70,000 a year, but you have $150,000 worth of total debt.  That’s more than double your income — more than what most lenders will take a chance on, says Vince Passione, CEO and founder of LendKey, a refinancing lender that works with community banks and credit unions.

“Some lenders might still require you to get a co-signer on that loan because you just don’t have enough capacity to pay off the loan over time,” he says.

Lower your debt by throwing extra funds at your credit card balance, student loans and car loans. Credit card debt in particular can be a red flag for lenders, Passione says. But once it’s gone, you’ll likely have a better chance at a favorable interest rate when you refinance.

“If you pay down that credit card over a couple of months you might be able to reapply six months later,” he says.

3. Your current loans’ interest rates are 6.5% or higher

The biggest draw of refinancing is how much you’ll save in interest over time with a lower rate. Qualifying borrowers are likely to save money if their private or federal student loans carry interest rates of 6.5% or higher. Parents who took out loans to pay for their children’s education can often get a good deal when they refinance parent PLUS loans, for instance.

You’ll save the most over time — but potentially pay more per month — if you choose a shorter repayment term along with a lower interest rate than you’re currently paying, says Zoeller of CordiaGrad. Many customers currently on a 10-year schedule refinance to five- or eight-year loan terms, he says.

“Twenty-five [percent] to 30% of our borrowers, almost a third, actually increase their monthly payments when they refi,” he says.

Next steps

Fill out the form below to see how much you could save by refinancing through NerdWallet’s partner Credible, a marketplace that lets you compare refinancing offers from up to eight lenders. Click “Get personalized offers” on the next screen to complete a full application on Credible’s website. You can also check out lenders like SoFi and Earnest, which aren’t on Credible’s platform, to see what interest rates you get.

You’ll want to apply and complete the refinancing process within a 30-day period so your credit isn’t adversely affected. If refinancing makes sense for you, you’ll be able to free up cash for the things you want to do, in the short or long term — and that’s a solid way to start 2016.

This article first appeared at NerdWallet.