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What is student loan refinancing?

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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.

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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 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 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 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 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.

Should you refinance your 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. In that 10-year period, 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.

However, 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 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 own idea of what constitutes an eligible borrower. With that said, there are a few common themes:

  • Your credit score. Your credit is the biggest determining 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, try to keep your debt-to-income ratio below 50 percent.
  • Your job. You’ll need to prove that you have 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 a hard time 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.

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
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