Skip to Main Content

What is student loan refinancing?

Businessman works on laptop at a cafe
Friends Stock/Shutterstock
Bankrate Logo

Why you can trust Bankrate

While we adhere to strict , this post may contain references to products from our partners. Here's an explanation for .

Student loan refinancing is when you apply for a new loan to pay off your current student loans, usually to lower your interest rate or extend your payoff timeline. If you have a federal student loan, you must refinance with a private lender. If you have private student loans, you can refinance with the same lender or choose a new one — which is why it’s so important to shop around first.

What is student loan refinancing?

Student loan refinancing replaces an existing loan with a new one, typically with better terms. Borrowers tend to refinance if interest rates have dropped since they took out the original loan. For example, the coronavirus pandemic has caused interest rates to drop significantly, making it an ideal time for many to refinance their student loans.

Borrowers may also choose to refinance if they’ve improved their creditworthiness. If you’ve personally increased your income or credit score, then you may now qualify for a much lower interest rate when you refinance, which can save you thousands of dollars in total interest.

Refinancing also gives you a new loan repayment term. This can be seen as either a positive or a negative. On the one hand, choosing a longer repayment term could shrink your monthly payments. However, because refinancing essentially resets your repayment period, with most refinancing lenders setting terms at a minimum of five years, it may not be the best choice if you’re nearing the end of your current repayment period.

How does student loan refinancing work?

If you decide to refinance your student loans, you’ll need to choose which of your individual student loans you want to refinance. After that, it’s time to browse lender websites to see what rates and terms are being offered. Refinancing is only available through private lenders, which is an important consideration if you have federal student loans; by refinancing, you’ll lose federal protections like specialized repayment plans and potential loan forgiveness.

Many lenders offer prequalification — where you enter basic information about yourself and your existing loans in exchange for a rate quote. Prequalification, unlike a formal application, does not hurt your credit score, so it’s the best way to compare the rates available to you among lenders.

Once you’re approved for a loan, the loan funds will be used to pay off your existing student loans. From there, you’ll begin making payments on your new refinanced loan. With a lower interest rate or shorter repayment term, you’ll pay less over time on your refinanced loan than you would have with your previous loans.

If you have poor credit or a low income, you may not be approved to refinance your student loans. If you’re denied for a finance, the lender is obligated to give you a reason why. It’s possible that you’ll need to look for a co-signer in order to improve your credit picture.

Student loan refinancing vs. consolidation

Student loan consolidation is a type of refinancing where the main goal is to merge multiple loans into one new loan. Borrowers often consolidate to simplify their debt payoff process, because it’s easier to manage one loan instead of several.

The federal government has an official student loan consolidation program. Borrowers who consolidate their student loans may become eligible for certain income-driven repayment plans and forgiveness programs they may not have qualified for otherwise. Through this program, your interest rate will not change.

Student loan refinancing, on the other hand, is only offered through private lenders, with the main goal being to save money on interest or extend the loan term.

Who should refinance their student loans?

Borrowers with high interest rates on private loans are the best refinance candidates because they have the potential to save the most money.

For example, let’s say you owe $50,000 with a 12 percent interest rate and a 10-year term. If you refinance to a 6 percent interest rate and a 10-year term, you’ll pay $19,470 less in total interest over the life of the loan.

Other people who may want to consider refinancing their student loans include:

  • Borrowers who want to consolidate multiple loans into one.
  • Borrowers with large monthly payments who can qualify for a longer repayment period.
  • Borrowers who want to release their co-signer from an existing loan.
  • Borrowers who have a higher income or better credit score than when they took out their original loan.

Refinancing federal student loans

Because the federal government doesn’t have its own refinancing program, the only option available to borrowers with federal student loans is to refinance them into a private loan.

When you refinance federal loans, you give up all related benefits and protections, including income-driven repayment plans, loan forgiveness programs and extended deferment and forbearance. If you refinance federal student loans, you won’t be able to work toward Public Service Loan Forgiveness (PSLF) or any other loan forgiveness programs.

For instance, when the coronavirus pandemic hit the U.S., the government temporarily suspended federal student loan payments — but this did not apply to those with private student loans.

Borrowers should also keep in mind that the federal government may offer blanket loan forgiveness in the near future. If President-elect Joe Biden decides to forgive federal student loans through executive action, that will likely only apply to federal loans and not private loans. If you have federal loans and refinance them, you’ll lose your eligibility.

Refinancing private student loans

Unlike with refinancing federal loans, there are almost no downsides to refinancing private loans. Because private loans have fewer protections, you’re not giving up much when you refinance from one private lender to another. In fact, some people refinance private student loans multiple times to take advantage of lower interest rates.

How to find the best student loan refinancing lenders

Choosing a student loan refinancing lender should be a well-researched decision. Here’s how to compare the various companies.

Find the best rates

When comparing refinancing lenders, look at the total APR and not just the interest rate. The APR includes the interest rate as well as any fees, making it the best way to accurately compare lenders.

It’s also wise to go through prequalification with lenders instead of relying on the rates advertised on their websites. All lenders will calculate your APR differently based on your credit score, income, employment and more, so you won’t know which rates are available to you until you apply.

Sign up for a Bankrate account to read insights, analysis, and lender reviews from our team of loan experts.

Understand loan terms

After you submit your information to lenders, you’ll receive financing offers, which will include the terms, interest rates and loan amounts available to you.

Most of the time, short terms have lower interest rates than long terms. For example, a five-year refinance term will likely have a lower interest rate than a 15-year term. However, there’s a trade-off; because the loan is condensed into a shorter time frame, the five-year loan will have a much larger monthly payment than the 15-year loan.

Deciding which loan to choose depends on your current budget, other financial goals and your job security. Because private lenders have fewer deferment or forbearance options, make sure to choose a loan payment you’d be comfortable with even if you were to become unemployed. You should also consider how any future goals could impact your budget, like starting a business or having children.

Consider the perks

Some private student loan companies have extra perks for borrowers. For example, Earnest lets borrowers skip one payment a year, and SoFi has a special career counseling service if you lose your job or want to switch industries. Some lenders also offer forbearance programs if you lose your job or experience another economic hardship.

Before picking a lender, read reviews from customers on sites like Trustpilot and the Better Business Bureau as well.

Learn more:

Written by
Zina Kumok
Contributing writer
Zina Kumok has been a full-time personal finance writer since 2015. She’s a three-time nominee for Best Personal Finance Contributor/Freelancer at the Plutus Awards and a two-time speaker at FinCon, the premier financial media conference.
Edited by
Student loans editor