Key takeaways

  • Refinancing a student loan can save you money in interest if you can get a shorter repayment term or a lower interest rate than what you had with your original loan.
  • Whether you’ll save money through refinancing heavily hinges on your credit score and if it increased since you took out your original loan.
  • You can use an online student loan calculator to help you tally up your total potential savings.

You can use an online student loan calculator to help you tally up your total potential savings.

Refinancing your student loan — taking out a new loan to pay off your existing loan — is one possible way to save money. You can substantially decrease your overall borrowing costs if you qualify for a lower rate and don’t extend your loan term. As an added benefit, refinancing may lower your monthly payments, freeing up cash to tackle other financial goals, like saving for retirement or a down payment on your dream home.

But refinancing isn’t the right move for everyone — whether you save money refinancing and exactly how much you save depends on many factors, such as your credit score, whether you can qualify for a lower interest rate and how much debt you have in comparison to your income.

When will refinancing student loans save 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 what 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.

How much money can you save by refinancing student loans?

The best way to figure out how much money you could save with a student loan refinance is to do the math. Compare your current loan figures to the details you believe you would be able to qualify for if you refinance your debt. You can use an online student loan calculator for a side-by-side look at your options.

Let’s say you have a student loan balance of $30,000, a 10-year repayment term and an interest rate of 10 percent. At the end of your repayment term, you will have paid $47,574.27 — your principal loan amount plus $17,574.27 in interest fees.

If you refinance that $30,000 loan into a new loan with a 10-year repayment term and a 6 percent interest rate, you will pay $39,967.38 in total — your principal loan amount plus $9,967.38 in interest. By lowering your interest rate by four percentage points, you will have saved $7,606.89 on your loan.

There’s a difference in your monthly payment, too; in the scenario above, your monthly payment would be $396.45 before refinancing and $333.06 after refinancing, a difference of around $63 a month.

When is the best time to refinance your student loans?

The best time to refinance your student loans is when doing so can benefit you in some way, which may happen for several reasons. Times when you may want to consider refinancing include:

  • Your credit score has recently improved.
  • Interest rates are rising and you want to lock in a fixed rate.
  • You want to remove a co-signer from your loan and your existing loan doesn’t feature a fast co-signer release option.
  • There are many student loans on your credit report and you want a new loan to combine the debt into a single account.
  • You need to make your monthly payments more manageable on private student loans.

What are the risks of refinancing student loans?

Although there are often benefits associated with refinancing student loans, doing so isn’t the right choice for everyone. You may encounter some risks when you take out a new student loan to pay off your debts.

  • You could lose federal student loan benefits. If you have federal student loans, it may not be a good idea to refinance those into private loans even if you can lower your interest rate. Federal student loans come with benefits that private lenders do not offer — from the current administrative forbearance that has federal student loan payments on pause to loan forgiveness and income-based repayment plans.
  • There’s no guarantee that you’ll qualify for a lower interest rate. If you apply for a new loan and you don’t qualify for a lower interest rate, refinancing probably does not make sense. Borrowers with bad credit or other qualification challenges could be in this situation.
  • The lender might charge you fees. With some refinance loans, the lender may charge origination or application fees. Lender fees can eat into the potential savings of a new loan and might even offset your potential savings to the point where refinancing isn’t a good idea. This is especially true if you’re near the end of your repayment period, where most of your monthly payment goes toward the principal.
  • It might take longer to pay off your debt. A lower monthly payment doesn’t always equal overall savings. If, for example, you opt for a new loan with a longer repayment term, there’s a chance that you could pay more money in the long run. The approach might be worthwhile if you’re desperate to reduce your monthly payments on private student loans.

Will refinancing student loans hurt my credit score?

The credit score impact of refinancing student loans can vary widely from one person to the next. Applying for a new loan could negatively impact on your credit score if the lender conducts a hard credit inquiry when it reviews your credit report. Then, the addition of a new account could reduce your average length of credit history and temporarily hurt your credit score as well.

However, there are also scenarios where refinancing student loans could help your credit. For example, refilling multiple outstanding loans into a new single account would reduce the number of accounts with balances on your credit report. That can be a good move for your credit score. Refinancing will also improve your credit score if it helps you make your full and timely payments.

The bottom line

Refinancing student loans could benefit you in many ways, especially if doing so could save you money. Yet before you start filling out new loan applications, review the risks and crunch the numbers. It’s critical to confirm that a new loan makes good financial sense for you.

If you discover a student loan refinance could work to your advantage, remember to shop around for the best rate on a new loan. Different lenders offer different interest rates and loan terms. When you take the time to research multiple loan options, you’re more likely to find a lender that offers an attractive loan package for your situation.

Frequently asked questions

  • Whether you can save money refinancing depends on the terms of your new loan. You can save a lot of money if you qualify for a lower interest rate. But on the other hand, if you take on a new loan with a much longer term or higher rate than your existing loan, you might not save money.
  • Refinancing your student loans, even if you don’t save money, may be beneficial in a few scenarios. For example, refinancing to a long with a longer term to lower your monthly payments and free up cash to put toward other financial goals could make sense if you don’t mind paying more interest over the life of the loan. Also, refinancing to a fixed-rate loan could help you avoid future interest rate increases if you have a variable-rate student loan.
  • The answer to this question depends on your reason for refinancing and your unique financial situation. Although there are no limits to how often you can refinance student loans, you should be aware of some potential risks of refinancing multiple times. For example, when you refinance too often, it could lead to a lower credit score. When you apply for refinancing, a lender usually performs a hard credit check, which may temporarily ding your credit.