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Will refinancing student loans save you money?

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Student studies in front of a chalkboard
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If you’re looking for a way to lower student loan payments or save money in overall interest fees, refinancing student loans might be a strategy worth considering. In general, refinancing could save you money if your finances have improved significantly since you took out your loan. However, it’s not the right move for everyone — if you opt for a longer repayment term when you refinance, your loan could end up costing you more.

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 end up paying $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 has the potential to benefit you in some way, and that 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. There are some risks you may encounter when you take out a new student loan to pay off your existing 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 find themselves in this situation.
  • The lender might charge you fees. With some refinance loans, the lender may charge origination fees 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 is going 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. But if you’re desperate to reduce your monthly payments on private student loans, the approach still might be worthwhile.

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 have a slightly negative 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, if you refinance multiple outstanding loans into a new single account, that 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 payments in full and on time.

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 that 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.

Written by
Michelle Black
Contributing writer
Michelle Lambright Black is a credit expert with over 19 years of experience, a freelance writer and a certified credit expert witness. In addition to writing for Bankrate, Michelle's work is featured with numerous publications including FICO, Experian, Forbes, U.S. News & World Report and Reader’s Digest, among others.
Edited by
Student loans editor