Key takeaways

  • Student loan refinancing involves taking out a new loan to pay off one or more of your current student loans and streamline the repayment process.
  • It can provide a lower interest rate, extend your repayment timeline to help minimize borrowing costs or make your monthly payment more affordable.
  • Refinancing is only available through private lenders, and you lose key benefits when you refinance federal student loans.

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. Refinancing student loans can be daunting, but it can also offer significant benefits for borrowers. With the potential to lower interest rates and save money in the long run, refinancing can be an attractive option for many student loan borrowers.

However, it’s important to understand the process and potential risks before making a decision. For example, if you have a federal student loan, you must refinance with a private lender, which means you’re giving up some of the unique protections offered by federal student loans. 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.

How does a student refinancing loan work?

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 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.

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 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 you’re less likely to make payments in case an emergency arises. Before applying for refinancing, try to get 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 set a minimum annual income, though the amount varies and may not be publicly shared.

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. 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.

When is student loan refinancing a good idea?

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. However, you’ll have a higher monthly payment.

For example, let’s say you owe $50,000 with a 12 percent interest rate and a 10-year term. The table shows 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.

When is student loan refinancing a bad idea?

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.

How student loan refinancing can help your credit score

If you manage your money right, refinancing could improve your credit. This is particularly true if refinancing helps you make your monthly payments.

Consistent payment history

Paying your loans by the due date proves that you are a responsible borrower, and those timely payments will translate to a higher credit score. Set up reminders on your phone or calendar to make your payment. To simplify the process, you can also automate your student loan payments. Some lenders even provide a discount for setting up autopay.

More affordable payments

If you were struggling to make payments before, refinancing could be a good way to lower your monthly bill, making the expense more manageable. A more affordable bill, in turn, can make it easier to stay on top of your monthly payments moving forward, allowing you to establish a solid track record of consistent, on-time repayment.

How student loan refinancing can hurt your credit score

There are a few circumstances where refinancing could be detrimental to your credit score. In most cases, however, the impact is temporary and relatively small.

Refinancing requires a hard credit check

Refinance of any loan will require a hard credit check. Lenders want to see whether you have a history of responsibly using credit and repaying debt.  Hard credit checks can knock a few points off your credit score.

Multiple loan applications

If you apply with several lenders to secure the best loan terms and rates possible, you could also end up with multiple inquiries impacting your score. To avoid this type of ramification, completing all applications within a few weeks or a month is often best. Credit scoring models typically consider all loan inquiries within about 45 days as one inquiry, which reduces the impact on your score.

Replacing an old account with a new one

The age or length of your accounts is one of the factors credit bureaus use to calculate your overall credit score. Credit history accounts for 15 percent of your FICO score.

When you refinance, you replace an old credit account with a new one. This reduces the average age of your accounts, which can have a small negative effect.

Missed payments

The biggest impact on your credit score is your payment history. If you’re overambitious with your monthly payment when you refinance and miss a payment, your credit score could drop significantly. Your payment history makes up 35 percent of your FICO score.

Will refinancing student loans save you money?

In many situations, refinancing student loans can cut costs and help you save money in interest fees. Yet figuring out whether a refinance is in your best financial interest depends on several factors, including your credit score, current interest rates and new terms you’re considering. In general, refinancing student loans could save you money if:

  • You’ve improved your credit score since taking out your original loan.
  • You can get a lower interest rate on your loans.
  • You can afford to switch to a shorter repayment term.

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 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 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 refinance your federal student loans, understand that you’ll lose access to federal benefits, such as 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.
  • Refinancing your student loans could initially cause a slight dip in your credit score.
    This is because lenders conduct a hard credit inquiry to determine your eligibility for refinancing.
    While a hard inquiry could reduce your credit score by a few points, the impact is typically minimal and short-lived.
    If you are considering multiple lenders, aim to do all your rate shopping within a short time frame.

    Credit scoring models often regard all inquiries made within 14 to 45 days as a single inquiry, which helps to minimize any negative effects on your credit score.
    Further, lenders will replace your old loan with a new one when refinancing, which could reduce the average age of your credit accounts and cause a slight dip in your credit score.
    However, if refinancing results in lower monthly payments and you make these on time, it could improve your credit score over the long run.