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What Is Refinancing Student Loans?

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In a Nutshell

The benefits of student loan refinancing are different for everyone. How much refinancing can help you 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.

Written by Attorney Paige Hooper
Updated November 9, 2021

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. How much refinancing can help you 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 Is Student Loan Refinancing?

In short, refinancing your student loans means getting a new loan to pay off your existing student loans. In many cases, the new loan offers a lower interest rate than your old loans. Refinancing also gives you the ability to choose repayment terms that better fit your budget and goals. Refinancing is also a way to combine your student loans into one monthly payment, with one loan servicer and one interest rate.

Can I Refinance Private Student Loans and Federal Student Loans? 

Both private and federal student loans can be refinanced. Refinancing, though, has consequences for borrowers with federal loans. These consequences don’t apply to borrowers who refinance private loans.

You can’t refinance federal student loans directly through the federal government. In other words, you can’t trade your existing federal loan (or loans) for a new federal loan. You also can’t replace an existing private student loan with a new federal loan. This means that when you refinance, your new loan will be a private loan, regardless of whether your existing loans are private loans or federal loans.

Why does that matter? If you had private loans to begin with, it doesn’t matter that much. But if your initial student loans were federal loans, refinancing them into a private loan means giving up all the benefits and protections that apply to federal student loans. This includes federal repayment assistance programs, such as income-driven repayment plans, as well as federal actions such as the CARES Act payment and interest freeze. While private lenders do offer some protections for borrowers, they’re often far less generous than those available for federal loans.

If you’re not sure whether your loans are federal or private, check your loan statement. If you’re still unsure, try logging into the Federal Student Aid portal. If your loans aren’t in the federal database, they’re probably private.

Is Refinancing Student Loans Right for Me?

It depends. Refinancing isn’t a one-size-fits-all solution to student loan debt. Whether refinancing your loans is a smart move for you depends on a long list of factors, such as:

  • The type of loans you currently have

  • Your existing loan amounts, interest rates, and repayment terms

  • Your immediate and long-term financial goals

  • Your current income and job stability

  • How much you’re currently paying on other debts

  • Your credit score and whether you have a co-signer available

Even if refinancing your loans is a good option for you, how much you’ll save depends on your personal situation. The potential risks and rewards of refinancing student loans are different for every borrower.

Do You Qualify for Student Loan Refinancing? 

One of the most important considerations in deciding whether to refinance your student loans is whether you qualify for better rates and terms — or whether you qualify for refinancing at all. Refinancing means taking out a new loan from a private lender, and not everyone with student loan debt is qualified to refinance.

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 making all your payments on time and not maxing out your credit cards.

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 amount of the loan 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.

How 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. A lower interest rate 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.

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 loan. Consolidating your loans often makes them more convenient 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.

To be clear, federal consolidation is different from refinancing. Refinancing your student loans involves trading in your old loans for a new, private loan. Consolidating your 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, the interest rates on your current student loans are averaged together and the result is rounded up to the nearest 1/8%. That result becomes your new interest rate on your consolidated loan.

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Student Loan Refinancing Ends Your Eligibility for Federal Loan Forgiveness Programs  

When you refinance your student loans, whether federal or private, what you’re really doing is taking out a new, private loan and using the new loan to pay off your existing student loans. Because you’re paying those loans in full, the loans themselves don’t exist anymore (the debt still exists, but as the new loan). Put another way, if you have federal student loans, then refinance them, you no longer have those federal loans — you paid them off when you refinanced. 

Because you don’t have federal loans anymore, you’re no longer eligible for any federal loan forgiveness programs. This includes income-based forgiveness programs, such as Pay As You Earn and Income-Based Repayment, as well as occupation-based forgiveness programs, such as those available for teachers, nurses, and public service workers

You Can’t Use Student Loan Deferment and Forbearance After Refinancing Federal Student Loans

Federal forgiveness programs aren’t the only benefits that are only available to federal student loan borrowers. The federal government also offers loan deferment and forbearance options for borrowers who are having difficulty making their student loan payments. 

Loan deferment allows you to temporarily pause your loan payments if you can’t afford them because you’re unemployed, attending school at least half time, or on active military duty. There are also other qualifying events. Deferment also stops interest from accruing for certain types of federal loans. Loan forbearance is like deferment, except that there’s usually not a qualifying event, and interest continues to add up during the deferment period. 

After you refinance your federal student loans, you no longer qualify for federal deferment or forbearance. If you have a hard time making your payments after refinancing, your options will depend on the terms of your new loan. Some lenders offer temporary hardship suspensions or other kinds of protection, but not all lenders offer these benefits. If you choose to refinance, read your loan paperwork carefully to learn about what happens if you can’t afford your payments in the future.

Depending on your current financial situation, losing these federal protections may or may not be a major factor in determining whether to refinance your student loans. If you have good credit, stable employment with great job security, and plenty of income to cover your expenses, then it’s less likely that you might need a deferment or forbearance in the future. In that case, the benefits of refinancing might outweigh the loss of your federal protections.

On the other hand, if you’re newly employed, have inconsistent income, or are struggling to make ends meet each month, federal protections like deferment and forbearance could be extremely valuable. In this case, you may not qualify for the best interest rates through a private lender, and refinancing might not be worth the risk.

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.

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 chose 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 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 pre-qualification quote. These kinds of quotes let you see approximately what interest rate you’d qualify for, without impacting your credit. 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 late fees or hardship protections.

Your credit score and DTI ratio each 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 monthly payment, a lower interest rate, a lower monthly payment, 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.

Written By:

Attorney Paige Hooper


Paige Hooper is a seasoned consumer bankruptcy attorney with 15 years of experience successfully representing debtors in Chapter 7, Chapter 11 and Chapter 13 cases. Paige began practicing bankruptcy law in 2006 and started her own solo, multi-state bankruptcy practice in 2012. Gi... read more about Attorney Paige Hooper

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