Student loans can be a burden, and they’re also incredibly common. According to The Education Data Initiative, 42.8 million borrowers have student loan debt.
And with sky-high interest rates — federal PLUS loans are currently at 7.54% (as of November 2022), and private student loans can have rates over 14% — your loan balance can quickly balloon out of control. But what can you do to take charge of your education loans?
One option is refinancing student loans, a strategy that can lower your interest rate and reduce your monthly payment. This can give you breathing room in your budget to handle other payments or start an emergency savings fund.
Keep reading this guide to learn how to refinance student loans and how to decide whether it’s right for you.
What is student loan refinancing?
Student loan refinancing is a process to help you manage your school debt. When you refinance, you apply for a loan from a private lender for the same loan amount as your current education debt, including any private and federal student loans. You use your new loan to pay off your old ones.
Advantages of refinancing student loans
There are multiple advantages to doing a student loan refinance. After you refinance, you will have a single loan and a single monthly payment rather than the several you may have right now. You’ll also have a new interest rate, length of loan, and minimum monthly payment. Ideally, you’ll have a lower interest rate than your old loan(s) and a payment amount that better fits your budget.
You can also decide to refinance some or all of your debt. For example, you can refinance just your private student loans if you wish, and leave your federal student loans as they are if this makes the most financial sense.
Drawbacks of refinancing student loans
The primary drawback to refinancing student loans is that you lose federal protections. For example, you would lose eligibility for student loan forgiveness through the Department of Education.
Some student loan refinancing companies offer payment pauses if you experience unemployment, are deployed, or experience other financial hardships. As you research student loan refinancing companies, look into what options they offer if you experience financial difficulties.
Student loan refinancing example
To understand the power of refinancing your student loans, let’s take a look at a theoretical (but realistic) example of your original student loan vs. a refinanced student loan:
|Original student loan||Refinanced student loan|
|Loan term||10 Years||10 Years|
|Loan interest rate||7.08%||5%|
To start, pretend you have $30,000 in student loan debt at a 7.08% interest rate, a 10-year repayment term, and a monthly payment of $350. By the end of your loan term, you will have repaid a total of $41,948. That’s far more than you originally owed because the interest charges on this loan would cost you nearly $12,000.
But let’s say you decided to refinance your student loans and qualified for a 10-year loan at a 5% interest rate. Your monthly payment would drop to $318 — a savings of $31 per month — but you’d also repay a total of just $38,184 over the length of your repayment term.
The short story? Taking a few minutes to refinance your loans could allow you to save more than $3,700. Pretty cool, right?
Refinance student loans in these situations
For some borrowers, refinancing their student loans could be a smart strategy for paying off their debt. You should consider student loan refinancing if:
- You have high-interest student loans. If your loans have high interest rates, your balance can balloon over time. By refinancing your loans, you could qualify for a lower interest rate and help you save money over the length of your repayment.
- You have good credit. For refinancing to be worthwhile, you need to have a good credit history. Otherwise, you won’t qualify for a loan with a low interest rate, thereby negating student loan refinancing benefits.
- You have a cosigner. If your credit is less-than-stellar, student loan refinancing can still work for you if you have a cosigner. A cosigner is a friend or relative with good-to-excellent credit who applies for the loan with you and guarantees the loan. Having a cosigner increases your chances of getting approved for a loan with a low interest rate.
- You want to pay off your debt early. When you refinance your debt, you can get an interest rate reduction or choose shorter repayment options. Both approaches cut down on the amount of interest that accrues, which helps you pay off your loans years earlier.
- You need a lower monthly payment. As you compare refinancing offers, you can choose a longer repayment term. Some lenders offer terms as long as 20 years. With a longer term, you can greatly reduce your monthly bill. You may pay more in interest charges over the length of the loan, but it’s certainly a better choice than using a credit card to pay your loans.
However, student loan refinancing isn’t for everyone. You should think twice about refinancing your debt if:
- You have federal student loans. If you have federal student loans and refinance them, you’ll lose federal benefits such as access to income-driven repayment plans and loan forgiveness programs.
- You have poor credit. Since these are private loans, they do go through underwriting. That means lenders look at your financial situation and your credit history, including your debt-to-income ratio. Your DTI ratio compares your monthly debt payments to your monthly income. If your credit is poor or just fair, you may not get approved for a loan at all. Or, you may not qualify for a low interest rate.
- You don’t have a cosigner. If you don’t have a cosigner for your loan as a recent graduate, you may struggle to find a refinancing lender willing to work with you.
How to refinance student loans
Here are the basics steps for how to get a loan for refinancing student debt:
- Research potential lenders. It’s a good idea to research several potential lenders, including banks, online lenders, and credit unions. You can start by checking out our list of the best student loan refinancing companies.
- Get a rate quote. Many companies allow you to get a student loan refinancing rate estimate with just a soft credit check, which has no impact on your credit score. Getting a rate quote from different lenders can help you decide which lender is the best option for you and which lender might be offering the lowest rate.
Lenders may offer fixed interest rate refi loans, which means the interest rate will not change for the life of the loan, or variable interest rate loans. With variable-rate loans, the lender could change the interest rate. Consider which of these options you're more comfortable with.
You should also consider how long of a repayment period you want. A shorter repayment period means a higher monthly payment, but you'll pay less in interest over the life of the loan.
- Gather your information. You'll typically need to provide:
- Your address
- Social Security number
- Proof of income, such as a W-2 form or pay stubs
- Employer’s name and address
- Loan balances
- Names of current loan servicers
- Complete your loan application. Many lenders allow you to complete the loan application process online. Once you’ve submitted your information, the lender will review your loan application and make a decision. In many cases, you’ll find out within a day or two if the lender approved or denied your application.
- Continue making payments on your debt. Even after your new loan is approved, make sure you keep up with your current student loan payments until you receive a notification that the debt has been paid off by your new lender. It can take up to 45 days for your loan to be processed and disbursed. If you skip your payments during that processing time, you could damage your credit.
- Confirm the refinance loan with your new lender. Once the loan is disbursed, the new lender will send you a notification and will let you know who your loan servicer is. Your loan servicer is the entity to which you’ll make payments and ask any questions about your refinanced loan. Taking the time to set up an online account with your new loan servicer can simplify your ongoing payment process.
4 alternatives to refinancing your student loans
Although student loan refinancing can be an effective strategy for repaying your loans, it’s not for everyone. If you decide that refinancing isn’t right for you, consider these four alternatives:
1. Sign up for an income-driven repayment plan
If you can’t afford the payments on your federal student loans, consider applying for an income-driven repayment (IDR) plan. Under an IDR plan, your loan servicer extends your repayment term to 20 to 25 years. Your monthly payment will also be limited to 10% to 20% of your discretionary income. Some borrowers can qualify for payments as low as $0.
2. Defer your payments or enter into a forbearance
If you have lost your job and can’t pay your bills, have a medical emergency, or are facing a financial hardship, you may be eligible for a loan deferment or forbearance. With deferments and forbearance, you can temporarily postpone making payments on your loans without entering into default.
Although deferments and forbearance are normally associated with federal student loans, some private loan lenders also offer deferments in some situations. Contact your loan servicer to find out whether you’re eligible.
3. Take advantage of interest rate discounts
Student loan refinancing isn’t the only way to lower your interest rate, so make sure you take advantage of any discounts your lender may offer. For example, many lenders offer a 0.25% discount if you sign up for autopay. Automatic payments are also a great way to make sure you never make a late payment, so these sorts of offers are great opportunities. Others offer loyalty discounts if you connect your loan account to a checking or savings account with that same financial institution.
4. Make extra payments
You can save money and pay off your debt ahead of schedule by making extra payments. Even small amounts — such as an extra $25 per month — can help you save hundreds or even thousands over the length of your education loan.
Student loan refinancing vs. student loan consolidation
Student loan refinancing and student loan consolidation are two terms that are often confused with one another, but they’re very different processes.
Student loan refinancing
With student loan refinancing, you work with a private lender to combine and refinance your existing debt. If you have a good credit score and regular income, you may be able to qualify for a loan with a lower interest rate than you had previously. However, if you refinance federal student loans, you’ll lose out on federal perks like access to income-based repayment plans or Public Service Loan Forgiveness (PSLF).
Student loan consolidation
Student loan consolidation is only for federal student loan borrowers. With this strategy, you take out a Direct Consolidation Loan for the amount of your eligible federal loans. The new loan consolidates your federal loans together, so you only have one payment to remember and one loan servicer.
With student loan consolidation, you can extend your repayment term to up to 30 years and reduce your monthly payment amount. However, you won’t get a lower interest rate as you can with student loan refinancing. Instead, your new interest rate will be based on the weighted average of your current student loans, rounded up to the nearest one-eighth of 1 percent.
Consolidating your federal loans with a Direct Consolidation Loan allows you to keep your federal loan benefits. After consolidating, you can still apply for income-driven repayment plans and qualify for loan forgiveness programs.
FAQs about student loan refinancing
When should you refinance your student loans?
Refinancing makes sense in the following scenarios:
- You have high-interest debt. If you have high-interest student debt, you can get a lower rate and save money by refinancing your loans.
- You need a lower monthly payment. If your current monthly payments are too expensive, refinancing and choosing a longer repayment option can make them more affordable.
- You want to pay off your loans early. By refinancing and getting a lower interest rate on your student loans, more of your monthly payment can go toward your principal rather than interest. Student loan refinancing can help you become debt-free sooner.
How much does it cost to refinance a student loan?
In most cases, student loan refinancing is completely free. Refinancing lenders don’t usually charge origination fees, application fees, or prepayment penalties, so there’s no cost to refinance your student debt. If you find a lender that does charge any of those fees, it’s a good idea to shop around for another refinancing company.
What is the best company to refinance a student loan?
When refinancing your student loans, there’s no one best company for everyone. Instead, compare offers from multiple lenders to find the right lender for you. Get rate quotes to ensure you get the lowest interest rate, and make sure you consider other perks such as financial hardship programs or interest rate discounts.
If you’re not sure where to start, the top student loan refinancing companies we recommend you consider are Credible, LendingTree, and LendKey.
Does refinancing hurt your credit?
Many student loan refinancing lenders allow you to get a quote from them with just a soft credit inquiry, which doesn’t show up on your credit report as a negative. If you decide to move forward and submit an application, the lender will then perform a hard credit check.
According to myFICO, most people will see their credit score drop by less than five points after a single credit inquiry. Most likely, the benefits of your new loan will outweigh the ding to your credit in the long run.
Is there a downside to refinancing student loans?
Although student loan refinancing can be an effective repayment strategy, it isn’t a good choice for everyone. That is especially true if you have federal student loans. When you refinance your debt, your federal loans become private loans and you lose some benefits.
For example, you’ll no longer have access to perks such as income-driven repayment plans, loan forgiveness options, student loan debt cancellation programs, and federal forbearance or deferment. So make sure you research your options and fully understand them before you move forward with student loan refinancing.
The bottom line on managing your student loan debt
If you’re overwhelmed with student loan repayments, student loan refinancing can be a smart way to lower your interest rate, reduce your monthly payment, and pay off your loans ahead of schedule.
However, it’s important to understand both the pros and cons of a student loan refinance before moving forward with your application. Look at all the details, including whether it's a fixed-rate loan or has a variable APR. Make sure you weigh its benefits and drawbacks and your personal finances so you can make an informed decision about whether student loan refinancing is right for you.
Disclaimer: All rates are accurate as of November 2022.