Should I refinance my student loans?

Refinancing: What it means and what to consider

Almost $5 billion in student loans were refinanced in 2022, according to one report.^{footnote 1} There are pros and cons to refinancing—saving money is a big plus, but not everyone is eligible, and you could lose important benefits. Let’s look at what it means to refinance private and federal student loans, what to consider, and how to start the refinancing process.

Refinancing vs consolidating student loans

There can be confusion around consolidating vs refinancing your student loans:

• Consolidation means combining multiple loans into a single one. This often gives you an interest rate that’s an average of the rates of the existing loans (or a rounded-up interest rate). Usually any unpaid interest will capitalize (become part of your principal balance), so going forward you’ll pay interest on the new, higher balance.
• Refinancing means getting a new loan from a private lender that will pay off your existing loans. It’ll have a new interest rate, new terms (including how long you have to pay back the loan), and possibly a new lender. You’ll have a single payment to make instead of several. If you extend the term of your loan by refinancing (how long you’ll be paying it), you may end up paying less each month, but more over the life of your loan.

What a lender will look at when you apply for refinancing 

When you refinance your student loans you’re basically applying for a new loan. Your monthly payment isn’t guaranteed to be lower; the rate you’re offered will depend on your creditworthiness and how much interest rates are at the time.

A lender will look for many of the same factors they did when you first applied for a private student loan:

• How’s your credit? You may need a credit score that’s at least in the mid-600s.^{footnote 2} Most borrowers who refinance have been out of school for a bit and built up their credit, which could help them qualify on their own. If your credit isn’t strong enough on its own, however, you may need a cosigner.
• How responsible have you been? What’s your record of on-time payments?
• What’s your income and your debt-to-income ratio? This is a measure of your ability to take on new debt—the total of your monthly debt divided by your gross monthly income. If you have a high one, it may indicate to a lender that you’re at a higher risk of defaulting on the loan.
• Are you a U.S. citizen? With some lenders, if you’re a non-citizen or permanent resident, you may have to add a cosigner.
• How much do you have left? If you don’t owe a lot on your loan, it might not be worth refinancing; you could save a small amount, but applying for a new loan could impact your credit report.

Pros and cons of refinancing student loans 

Private student loans
These loans can be refinanced, either with your original lender (if they offer it) or a new private lender. You’ll want to consider both the interest rate and the repayment term when you’re deciding whether refinancing is right for you.

• Pro: The most common reason to refinance a private student loan is to save money over the life of your loan, usually through a better interest rate and a different term (length of time you have to pay it back).
• Con: A possible downside is whether the money you’ll save will offset any valuable benefits (including discounts) your original lender offered. Also, a longer repayment term may result in your paying more overall.

Federal student loans
These loans generally offer more flexibility and benefits than private student loans—especially in repayment options. The federal government doesn’t refinance its loans; you’ll have to refinance through a private lender.

• Pro: The biggest one is that you could qualify for a lower interest rate, which could free up money for other monthly expenses.
• Con: You might lose some of the flexibility and protections that a federal loan gives you:
  • You’ll lose the ability to switch to a new repayment plan (like income-driven repayment).
  • Popular forbearance programs, like returning to school, illness, or disability, may be different or not available with a new lender.
  • If the government offers a new loan forgiveness program, a refinanced loan (which, after refinancing, becomes a private loan) will not be eligible.

While the government does not offer loan refinancing itself, consolidation is available, and it may help you retain some of your benefits. Here are tips on finding out whether consolidation is right for you.

Things to consider before you refinance 

• Are you really saving money? If you’re just paying over a longer term, you may end up paying more over the life of your loans.
• Will you lose any current student loan benefits, such as repayment options or Public Service Loan Forgiveness?
• Will your new loan be considered a student loan or a personal loan? If it’s not a student loan, could you lose out on an interest tax benefit?
• Will you have to pay any service fees to refinance your student loans?
• Will you lose any discounts that you’ve had with your loan originator?

How to refinance your student loans 

So, you’ve decided you want to refinance your loans…here are a few steps to take:

1. Research the lenders who are highly rated for refinancing. These could include banks, credit unions, and online lenders.
2. Compare their interest rates to see who offers the best rates and terms.
3. Read the fine print: Are there fees? What are your options if you can’t make a payment? Will the rate increase at any time?
4. Complete your chosen lender’s application, upload the documents they require, and, when you’re approved, sign the final documents.
5. Make your payments to the new lender. Note: Make sure the last payment to your original lender has been made and you don’t owe them anymore.

Refinancing your student loans can be a way to cut down on your monthly payments. Do your research, consider your options, and do what’s best in the long run to get the best deal for you.