Key takeaways

  • Student loan refinancing can provide a lower interest rate or extend your repayment timeline.
  • Refinancing is only available through private lenders.
  • When refinancing federal student loans you lose federal protections such as loan forgiveness.

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 happens when you refinance a student loan?

Understanding how refinancing student loans works is important before you decide to make such a significant financial decision. If you decide to refinance your student loans, you’ll need to choose which loans you want to refinance.

Refinancing is available only through private lenders, which is an important consideration as you decide which loans to refinance. You’ll lose protections like specialized repayment plans and potential loan forgiveness when refinancing federal student loans.

1. Research lenders

You’ll want to find lenders offering the lowest interest rate and most favorable loan terms for your needs.

Consider each lender’s available payment plans, too. Some offer a single option, while others let you customize your repayment timeline to suit your budget. Keep hardship options in mind should you encounter financial hardship in the future.

Finally, research each lenders’ reputation on sites such as TrustPilot.

2. Get prequalified

Many lenders offer prequalification — where you enter basic information about yourself and your existing loans in exchange for a rate quote. Unlike a formal application, prequalification does not hurt your credit score. It’s the best way to compare the rates available to you among lenders. That said, you’ll need to formally apply after selecting a lender, which does require a hard credit pull.

3. Begin repaying the new loan

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.

Consider finding a co-signer

If you have poor credit or a low income, you may not be approved to refinance your student loans. If you’re denied a refinance, the lender must explain why. You may need to look for a co-signer to improve your credit picture.

What is the difference between student loan refinancing and consolidation?

Both options aim to streamline the repayment process, but there are some key differences to be aware of.

Student loan refinancing

Student loan refinancing is offered only through private lenders, with the main goal being to save money on interest or extend the loan term. You can refinance loans individually or combine multiple loans into a new one. Your interest rate and terms will almost always change.

Refinancing is available for federal and private loans. However, if you refinance federal loans, you will lose access to federal benefits.

While it’s possible to refinance when you’re still in school, this may not be the best move. Many lenders require you to graduate first, so current students have fewer options. Plus, your finances or credit score may be strong enough to qualify for the most competitive interest rates or loan terms.

After you graduate, find employment and improve your credit score, start shopping around for a better interest rate on your student loans.

Student loan consolidation

Student loan consolidation, on the other hand, is a federal program that combines all your federal student loans into a new one through a direct consolidation loan. Borrowers often consolidate to simplify their debt payoff process because managing one loan is easier than several.

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.

Should you refinance your student loans?

There is no one-size-fits-all answer when deciding whether refinancing student loans is a good move. It depends on your financial circumstances and qualifications for a new loan.

Some factors to consider include your credit score, the interest rate on your existing student loans and the current interest rate environment. The type of student loan you have—private versus federal—is another major consideration.

Those with the most competitive applications may qualify for more favorable loan terms or interest rates. But it’s important to assess your financial picture and all of the implications of refinancing before proceeding.

Who benefits from refinancing?

Borrowers with high interest rates on private loans are the best refinance candidates because they have the potential to save the most money. But even without a better rate, refinancing to a shorter term can also help you save. You’ll have a higher monthly payment, however.

For example, let’s say you owe $50,000 with a 12 percent interest rate and a 10-year term. Here’s how your savings would break down if you refinanced to a 6 percent rate or kept the same rate but refinanced to a shorter term.

Original loan Refinanced to lower rate Refinanced to shorter term
Amount $50,000 $50,000 $50,000
Interest rate 12% 6% 12%
Term 10 years 10 years 5 years
Total interest paid over loan term $36,082.57 $16,612.30 $16,733.34

Based on these figures, either option would save you about $20,000 in interest.

You can use a student loan calculator to estimate how much you could save.

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.

Who should avoid refinancing?

Refinancing is not the best option for everyone. Borrowers with federal student loans, in particular, should think carefully about the drawbacks.

Refinancing federal student loans takes away many of their benefits. For instance, you will no longer have the option to pursue loan forgiveness through programs like income-driven repayment plans or Public Service Loan Forgiveness.

You should also think twice about refinancing if:

  • You’re offered a higher interest rate than what you’re currently paying.
  • You’re offered a longer repayment term than your current loan term.
  • You’re near the end of your loan term.

Who is eligible for student loan refinancing?

With the question of ‘What is student loan refinancing?’ addressed, another important factor to consider is eligibility requirements. There’s no minimum standard for refinancing; each institution determines what constitutes an eligible borrower for itself. With that said, there are a few common themes:

  • Your credit is the biggest factor in getting approved for student loan refinancing. The higher your credit score, the more likely you are to get approved and secure the lowest interest rate offered. Most lenders like to see a credit score of at least 650, with a credit history free of late payments.
  • The more debt you have, the riskier you look to lenders. It shows them that you’re less likely to make payments in case an emergency comes up. Before applying for refinancing, try to get your debt-to-income ratio below 50 percent.
  • You’ll need to prove that you have a steady income and can financially afford the payments. Many lenders set a minimum annual income, though the amount varies and may not be publicly shared.
  • Lenders establish a minimum amount you can refinance. If you have less than $5,000 left on your loans, you may have difficulty finding a lender willing to refinance.
  • Some lenders will let you refinance if you don’t graduate, but most lenders require you to complete a program before you can refinance.

When refinancing, the best thing you can do for yourself and your finances is to get quotes from a few different lenders. Lenders weigh their eligibility factors differently. You can often get quotes without a hard credit check. By getting prequalified, you’ll be able to see where you qualify and what rates you qualify for, giving you a better picture of which lender is best for you.

The bottom line

Now that you know what refinancing student loans means, it’s important to remember when it can be a beneficial move.  Student loan refinancing can help some borrowers save money by allowing them to swap out their existing loans with a new private loan with a lower rate.

That said, it’s not the right choice for everyone. If you have federal student loans, consider the fact that refinancing means giving up access to benefits like federal forbearance and student loan forgiveness programs.

If you believe refinancing is right for you, compare rates, terms and fees from as many lenders as possible.

Frequently asked questions

  • The answer depends on your unique situation. For example, refinancing might make sense if you can qualify for a lower rate and save money. But on the flip side, refinancing wouldn’t make sense financially if you can’t qualify for a lower rate than your current rate.
  • Yes, you can refinance federal student loans. Doing so requires you to take out a private student loan to pay off your existing federal student loans. But before you do refinance your federal student loans, understand that you’ll lose access to federal benefits, such as access to income-driven repayment (IDR) plans and student loan forgiveness programs.
  • Provided you qualify, you can refinance as often as you want. There’s no set limit. However, keep in mind that if you refinance too often, it can hurt your credit score. When you apply for a private student loan, a lender usually performs a hard credit check to assess your credit health, which results in a temporary ding to your credit score.
  • The best time to refinance depends on several factors, such as your credit score and income. Refinancing could be a good idea if you have a steady income and your credit has improved since taking out your original loan.