The Complete Guide To Refinancing Student Loans

You’ve probably seen ads promising you could save thousands on your student loans by refinancing. While this may be true for some people, the benefits of refinancing are different for everyone. The financial help you receive from refinancing will depend on your existing loans and your current financial situation. 

This article covers what student loan refinancing is and how it works. You’ll also learn how to determine whether refinancing is right for you and how to compare lenders to maximize your benefits.

What Happens When You Refinance Student Loans?

When you refinance your student loans, you take out a new loan to pay off your existing student loans. The biggest incentive for many people considering refinancing their loans is to get a lower interest rate. This can potentially save you thousands of dollars over the life of the loan.

Refinancing may also help you choose repayment terms that fit your budget and financial goals better. Like loan consolidation, refinancing is a way to combine several student loans into one loan with one monthly payment, loan servicer, and interest rate. 

Can You Refinance Private Student Loans and Federal Student Loans? 

Yes. You can refinance private student loans, federal student loans, or a combination of both private and federal loans. That said, refinancing federal loans has some consequences you should consider before you apply.

Don’t know what kind of loans you have? We can help! Read our popular article How To Get Your Federal Student Loan Info From the NSLDS to see if your loans are federal or not. If they aren’t in the federal database, they’re probably private.

Refinancing Federal Student Loans

Only private lenders offer student loan refinancing. You can’t refinance federal student loans directly through the federal government. This means that when you refinance, your new loan will be a private loan, regardless of whether your existing loans are private, federal, or a combination of both.

Refinancing federal student loans into a private loan means you’ll give up all the benefits and protections that apply to federal student loans. This includes flexible repayment options, such as income-driven repayment plans, and student loan forgiveness options like Public Service Loan Forgiveness. Before you refinance, you should also consider that federal loans come with fixed interest rates and often offer the lowest rates on the market.

If you have several loans and you’re struggling to stay organized, you can look into consolidating your student loans instead of refinancing if you want to keep the federal benefits listed above. To learn more, jump down to the section “Is Student Loan Consolidation Better for Me?” or read our Comprehensive Guide to Consolidating Federal Student Loans.

If you can’t afford your monthly payment, consider switching to an income-based repayment plan, checking to see if you qualify for any forgiveness programs, and/or applying for forbearance or deferment for a temporary payment pause.

Refinancing Private Student Loans

Refinancing private student loans is more straightforward since most private lenders offer few or no protections for borrowers. You’ll still want to be clear about your current loan terms and shop around to find the best student loan refinance option. Look at things like the interest rate (and whether it’s a variable rate loan or fixed interest rate loan), the repayment terms, the monthly payment, and any fees involved (origination fees, underwriting fees, etc.).

When Should You Refinance Your Student Loans?

It depends. Refinancing isn’t a one-size-fits-all solution to student loan debt. Here are some factors to consider as you decide when and whether you should refinance your loans.

What Type of Loans Do You Have?

As stated above, refinancing private student loans tends to be less risky and more straightforward than refinancing federal loans. That said, the Department of Education offers many different types of federal student loans, and some have more benefits than others.

What Are Your Current Loan Balances and Terms?

Check your NSLDS report to see your current loan balances, interest rates, and repayment terms for your federal loans. Federal loans range from 10- to 25-year terms. Current rates range from 4.99% to 7.54% and vary by loan. You can usually get a small autopay discount if you set up automatic payments as well. 

If you have private loans, check your most recent statement to see your loan balance, interest rate, and repayment term. You can also call and speak with your loan servicer directly.

Why do you need this information? When you’re shopping around for a refi loan, you’ll want to compare these terms. Keep in mind that a longer repayment term often means a lower monthly payment but more interest paid in the long run. That will depend on what your interest rate is (which may change over time if you have a variable APR) and whether you pay any additional money toward your principal balance each month or year.

What’s Your Financial Situation and What Are Your Goals?

There are a lot of things to consider here, including:

• Your current income

• Job stability and career prospects

• How much you’re currently paying on other debts

• Your credit score

• Whether you have a co-signer available

If you have a steady income, no or little other debt, and you’re easily covering your monthly expenses without stress, you may decide to aggressively pay down your student debt. If you’ve had trouble finding a job in your field or you aren’t making enough money to cover your regular expenses, you may decide against refinancing for now since you’ll lose access to the flexible repayment options the federal government offers. 

If you decide refinancing is right for you, the amount you’ll save depends on your personal situation. The potential risks and rewards of refinancing student loans are different for every borrower. Run the numbers! Ask prospective lenders lots of questions and use online loan calculators to compare various options.

Do You Qualify for Student Loan Refinancing? 

One of the most important considerations when it comes to refinancing is whether you qualify for better rates and terms — or whether you qualify for refinancing at all. Not everyone with student loan debt is qualified to refinance. As part of the application process, lenders will look at your financial situation and how you’ve handled debt payments in the past. Two big factors they’ll consider are your credit score and debt-to-income ratio.

What's Your Credit Score?

As with any private loan, your credit score plays a major role in whether you’re eligible to borrow and what interest rates you can expect. Most refinancing lenders require a credit score of at least 650. To qualify for the best loans and rates, though, you’ll need a FICO Score in the 700s. You can increase your credit score by always making on-time payments and not maxing out your credit cards.

What's Your Debt-to-Income Ratio?

Another important number lenders use to evaluate your loan eligibility is your debt-to-income (DTI) ratio. Your DTI ratio tells lenders how much of your monthly income you’re already obligated to pay toward other debts. To calculate your DTI ratio:

• Add up all your minimum monthly debt payments. Only include debt payments, such as your mortgage, car note, and credit card payments. Don’t include ongoing expenses, such as utilities or your cell phone bill.

• Divide the total by your usual monthly income from all sources. Use your gross income, before taxes and other deductions.

• Multiply your result by 100.

You’ll need a DTI ratio of less than 50% to qualify to refinance your student loans. The lower your DTI ratio, the better your refinance offer will be.

Will My New Interest Rate Be Lower?

Getting a lower interest rate is most borrowers’ main goal when refinancing their student loans. Still, there’s no guarantee that refinancing your student loans will result in a lower interest rate. To determine your interest rate, private lenders consider your credit score, DTI ratio, credit history, and income level. 

The loan amount you’re seeking and the length of the new term also affect your interest rate. Loans with shorter repayment terms typically have lower interest rates, but not always. Finally, outside factors, such as legislation, inflation, and economic policy changes, also influence interest rates.

Can a Co-Signer Help Me Lower My Student Loan Payments?

If you don’t think you qualify to refinance your student loans, a co-signer may be able to help. Even if you do qualify for a new loan, applying with a co-signer can lead to better terms and interest rates if the co-signer’s credit score and DTI ratio are better than yours. 

If a friend or a family member has excellent credit and is willing to cosign on your new loan, you can often get a lower interest rate than you could get on your own. An interest rate reduction saves you money over the life of your loan. A lower rate can also help you either reduce your monthly payment amount or pay your loan balance off faster. 

Beware though: If you fail to make your student loan payments (default on your loan), the co-signer will be on the hook to repay them unless they previously signed a cosigner release.

Is Student Loan Consolidation Better for Me?

If you have federal student loans, you also have the option to consolidate those loans through the U.S. government with a Direct Consolidation Loan. This type of consolidation is only for federal loans. You can’t use it to combine federal and private loans.

The Direct Loan consolidation program allows you to combine multiple federal student loans into one federal student loan. Consolidating your loans often makes them more convenient to manage since you’ll only have one monthly student loan payment to make. In some cases, consolidation allows you to extend how long you have to repay your loans as well.

Federal consolidation is different from refinancing. Refinancing your student loans involves trading in your old loans for a new, private loan. Consolidating your education loans combines your existing federal loans into one federal loan. 

Also, while refinancing your loans usually results in a lower interest rate, federal consolidation doesn’t lower your interest rate. Under the Direct Loan consolidation program, your interest rate will be the weighted average of the interest rates you have on all your loans.

Will My Monthly Payments Be Lower if I Refinance My Student Loans?

Besides getting a better interest rate, lowering their monthly payments is often another key goal for borrowers who refinance their student loans. Whether your monthly payments will be lower after refinancing depends on your new interest rate and the length of the new loan repayment term. The new lender will determine your interest rate, but in many cases, you’ll have a say in choosing the length of your new repayment term. You should choose a loan term that fits your goals.

Choosing a shorter repayment term usually results in a lower interest rate. This option will save you the most money overall and will help you pay your loan off faster. Your monthly payments, though, will usually be higher than if you choose a longer loan term. A shorter repayment term is a good option if you have enough income to easily cover your living expenses and debt payments each month, and if you’re confident in your job security.

Choosing a longer repayment term, on the other hand, will usually result in a lower monthly payment. But it will take you longer to pay off your loan. You could have a higher interest rate, and you’ll probably pay more in interest overall than if you choose a shorter loan term. 

A longer loan term is a good option if your monthly budget is tight. It’s also a good choice if you’re hoping to buy a house, car, or other large purchase soon because the lower monthly payment gives you more flexibility to save for a down payment and improves your DTI ratio.

Whatever loan term you choose, keep in mind that if your circumstances or goals change in the future, you can always refinance again.

What Will the Monthly Payment Be After I Refinance My Student Loans?

To calculate how much your monthly payment will be after you refinance your student loans, you’ll first need to know a few different numbers. These numbers represent all the factors that go into calculating your monthly loan payment. They include:

• The amount of the new loan (the initial principal balance)

• The new interest rate

• The total number of monthly payments (the length of the repayment term)

The formula for calculating monthly payments is complicated, but you can skip the algebra by using an online payment calculator. The calculator can show you what your monthly payment would be for different interest rates and loan terms.

How Do I Get the Best Rates?

If you choose to refinance your loans, make sure you get the best rates available by taking the time to shop around and compare rates from different lenders. Some lenders provide a quick online estimate or a prequalification quote. These kinds of quotes let you see approximately what interest rate you’d qualify for, without impacting your credit score with a hard inquiry. Other lenders may require you to complete a loan application before telling you your interest rate. 

You can put the information you receive into an online loan calculator to figure out how much money each loan would cost you overall. Use these total-cost figures to compare loans from different lenders. When comparing loans, don’t forget about other loan features, such as hardship protections or terms that may work against you like late fees or prepayment penalties.

Your credit score and DTI ratio both play a big role in determining the interest rates available to you. If the refinance rates you’re offered don’t seem that great, you may want to hold off on the refinance for a while. Focus on improving your creditworthiness before attempting another refinance. 

You can improve your DTI ratio and credit score by paying off debts, paying your bills on time, and monitoring your credit report.

Let’s Summarize…

Refinancing your student loans means taking out a new, private loan to pay off your existing student loans. Refinancing can mean a single, lower monthly payment, a lower interest rate, and a repayment term that better suits your goals. Your financial circumstances and your credit history determine whether you qualify to refinance and how much you could save. For some borrowers, staying eligible for federal benefits may outweigh the advantages of refinancing. 

Paying off your student loans is a big accomplishment and a major financial milestone. Whether you choose to refinance or not, staying informed about your options will help you reach that milestone sooner.