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.

Key takeaway
Student loan refinancing replaces an existing loan with a new one. Most borrowers use this strategy to get a lower interest rate and, in turn, a cheaper loan.

How does student loan refinancing work?

If you decide to refinance your student loans, you’ll need to choose which 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 available only 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 a refinance, the lender is obligated to give you a reason why. You may need to look for a co-signer to improve your credit picture.

Student loan refinancing vs. consolidation

Student loan consolidation is a federal program that combines all of your federal student loans into a new one through a Direct Consolidation Loan. Borrowers often consolidate to simplify their debt payoff process because it’s easier to manage one loan instead of 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.

Student loan refinancing, on the other hand, is offered only through private lenders, with the main goal being to save money on interest or extend the loan term. Unlike student loan consolidation, refinancing is available for both federal and private loans, and your interest rate and terms will almost always change.

Timing can also play a major role in how much money you stand to save on your student loans when you opt for refinancing. While it’s possible to refinance when you’re still in school, this may not be the best move, as your finances or credit score may be strong enough to qualify for the most competitive interest rates or loan terms.

To maximize savings through refinancing and obtaining a lower interest rate, it can be a good idea to refinance sooner rather than waiting years after graduation. Once you graduate, achieve a steady income and solid credit score, it may be a good idea to start shopping around for a better interest rate on your student loans.

Should you refinance your student loans?

There is no one-size-fits-all answer when it comes to deciding whether refinancing student loans is a good move. It depends on your unique financial circumstances and also your 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 individual financial picture and all of the implications of refinancing, before proceeding.

Who refinancing benefits

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. In those 10 years, you’ll pay $36,082.57 in interest. If you refinance to a 6 percent interest rate and a 10-year term, you’ll pay only $16,612.30 in interest over the life of the loan. 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 refinancing does not benefit

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 be able to benefit from administrative forbearance implemented during the pandemic, and 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 higher interest rates than what you’re currently paying or if you’re offered a longer term. In both of these cases, you’ll pay more over the life of your loan — so it’s important to weigh the benefits of new terms with the total cost. This is especially true if you’re near the end of your loan term. If you have only a few years left of repayment, most of your monthly payments will be going toward the principal, so refinancing may not be worth it.

Eligibility requirements for student loan refinancing

There’s no minimum standard for refinancing; each institution has its idea of what constitutes an eligible borrower. With that said, there are a few common themes:

  • Your credit score. 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.
  • Your debt-to-income ratio. 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, keep your debt-to-income ratio below 50 percent.
  • Your job. You’ll need to prove that you have a steady income and can financially afford the payments. Many lenders require a minimum income of $25,000.
  • Your loans. 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.
  • Your graduation status. 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 since all lenders weigh their eligibility factors differently. You can almost always 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.

Bottom line

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 move 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 your student loans 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.