What Happens When You Refinance a Student Loan?

When you refinance student debt, you replace existing student loans with a new one. Student loan refinancing is offered by private lenders, including traditional banks and online loan companies. It can make sense if you want to change your loan terms or move to a different lender. 

Federal and private loans are eligible for refinancing, though it doesn’t always benefit borrowers to refinance federal student debt. Learn what happens when you refinance a student loan and what you can expect from the process. 

How does student loan refinancing work? 

Student loan refinancing involves taking out a new loan through a private lender to pay off existing student debt balances. Going forward, you’d make payments to the new loan according to the schedule set by the lender. You might refinance private student loans with your current lender or a different one. 

Here’s what happens when you refinance student loans, step-by-step. 

1. Determine which loans to refinance. You might refinance some or all of your student loan debt. If you have federal loans, refinancing into a private loan means forgoing income-based repayment plans, deferments, loan forgiveness eligibility, and other benefits. 
2. Compare lenders. Once you know which loans you’ll refinance, it’s time to compare lenders. As you weigh student loan refinancing options, consider the interest rates, fees, and repayment terms offered. Getting multiple rate quotes can give you an idea of what you might pay with different lenders. 
3. Review eligibility criteria. Eligibility for student loan refinancing varies by lender but generally depends on your credit scores, income, and existing debt load. Lenders may also consider your degree or field of study and career prospects. 
4. Apply. If you’ve selected a lender, you must apply for a refinance loan. You’ll provide the lender with details about your existing loan and information about your finances and employment. 
5. Pay off the old loans. Once approved, you’ll sign the loan paperwork. Your lender will then use the proceeds from the new loan to pay off your existing balances. You’ll need to keep up with payments to the old loans until you receive a payoff letter telling you the balance is $0. 

Why refinance student loans? There are many reasons for doing so. For example, you might refinance if you:

• Are hoping to get a lower interest rate
• Would like to reduce your monthly payments
• Want to combine federal and private loans 
• Need to change your loan repayment term
• Would prefer to work with a different lender

The terms you qualify for typically depend on your credit score, income, and your choice of lender. The higher your credit score, the lower your interest rate is likely to be. Choosing a fixed or variable-rate refinance loan also makes a difference. 

Variable-rate student loans tie the interest rate to a benchmark rate. Your loan’s rate moves in sync when the benchmark rate increases or decreases. Fixed-rate student loans have the same interest rate for the loan’s entire life. 

Refinancing to improve cash flow can help your long-term financial outlook by allowing you to afford purchasing a home, paying down other debt, and/or increasing contributions to your 401(k) plan to maximize the company match.

Michael Menninger

CFP®

What happens to your monthly payments when you refinance a student loan?

Refinancing student loans can change your monthly payments if you get a different interest rate or loan term. Lower rates can lower your payments, while higher rates can increase them. A shorter loan term would translate to a higher monthly payment, while a longer term would result in a lower payment. 

Here’s an example. Assume you’re refinancing $30,000 in student loans. You originally had a 10-year repayment term, of which you have five years left, and your interest rate is 8.5%. 

You plan to refinance to a new loan at 4.5% but you’re debating whether to choose a five or 10-year repayment term. Your current monthly payment is $740. Here’s what your new payments would look like. 

	5-year term	10-year term
Monthly payment	$560	$310
Monthly savings	$180	$430

A longer term can put more money back into your budget each month. However, the trade-off is paying $7,300 in interest versus the $3,500 you’d pay with a shorter loan term. You’d have to decide whether a lower payment would be worth the added interest you’ll pay. 

This example assumes you get a significantly lower rate. But what happens if you refinance your loans at 6.5% instead? Here’s how the payments would work out. 

	5-year term	10-year term
Monthly payment	$587	$340
Monthly savings	$153	$400

Using a student loan refinance calculator to run different scenarios can give you a better idea of how your payments will change, based on your new loan term and rate. 

Pros and cons of refinancing 

Student loan refinancing can offer advantages and disadvantages to borrowers. Here’s how they compare. 

Pros

• Streamlined payments

  Refinancing student loans allows you to combine multiple loans into one, so you have fewer monthly payments to make.

• Lower rates

  Student loan refinance rates may be lower than the rate you’re currently paying, which could save money on interest.

• Lower payments

  A new loan term or rate could reduce your payments, making them more manageable for your budget.

• New lender

  Refinancing can allow you to move your debt elsewhere if you’re unhappy with your current lender.

Cons

• Lower rates not guaranteed

  You’ll typically need good to excellent credit to qualify for the lowest refinance rates.

• Cosigner may be needed

  You may need a cosigner to qualify for a refinance loan if you have thin or poor credit.

• Loss of federal protections

  Refinancing federal student loans into a private loan eliminates federal loan benefits and protections.

• Payments may be higher

  Choosing a shorter loan term or qualifying for a higher interest rate could increase your monthly payments.

Am I eligible to refinance my student loans? 

Lenders set their own requirements to qualify for student loan refinancing. Some of the factors lenders consider include:

• Credit scores and overall credit history
• Income and employment history
• Debt-to-income (DTI) ratio, or how much of your income goes to debt repayment
• Amount of student loans you’re refinancing

You may need a minimum amount of student debt to be eligible for refinancing. Lenders can establish minimum credit score and income requirements, as well. You may need a cosigner to get approved if your score is below the minimum. 

Lenders can also consider your citizenship or residency status, degree program, and career path. If you’re not a U.S. citizen, you may need a cosigner who is a citizen or a permanent resident to get approval from a lender. 

Getting prequalified or preapproved can help you decide which lender to go with. Prequalification and preapproval are not firm loan offers. They’re simply informational tools you can use to see how likely a lender is to approve you for a refinance loan and at what terms. 

Ask the expert

Michael Menninger

CFP®

A good candidate for student loan refinancing is someone with high-interest loans who wishes to lower their payments for improved cash flow. Another good candidate is someone who wants to lower their DTI so they can purchase a house or increase payments on other high-rate debts, like credit cards. A third category of candidates is someone who wishes to get a cosigner off the existing loans.

When is the best time to refinance? 

The best time to refinance student loans is typically when you can get more favorable terms, either in the form of a lower interest rate or monthly payment. Generally, it could make sense to look into student loan refinancing if:

• Interest rates are down or rate cuts are on the horizon. 
• Your credit score has improved, allowing you to qualify for better rates. 
• You’re concerned about rising rates and want to switch from a variable to a fixed rate. 

Refinancing your student loans may not make sense if rates are increasing or you’ve already paid off most of what you owe. If your loan term is almost over, you’ve likely already paid most of the lender’s interest, so refinancing wouldn’t save you anything. 

Alternatives to refinancing

Some alternatives to student loan refinancing can help you achieve some of the same goals.

Federal Direct Loan Consolidation

A federal Direct Consolidation Loan allows you to combine multiple federal student loans into one, simplifying repayment and potentially lowering your monthly payment by extending the repayment term. However, it’s important to note that consolidating might result in paying more interest over time.

You can only consolidate other federal loans into a Direct Consolidation Loan. Doing so maintains your eligibility for federal benefits such as income-based repayment programs and student loan forgiveness—benefits you give up when you refinance federal loans with a private lender.

Federal income-driven repayment plans

Federal income-driven repayment plans adjust your monthly student loan payments based on your income and family size. These plans can significantly reduce your payments, especially if you have a lower income. Depending on the plan, any remaining loan balance may be forgiven after 20 to 25 years of qualifying payments.

Contact your lender

If you’re struggling with loan payments, contacting your lender is a good first step. Many lenders offer options such as temporary forbearance or deferment, which can provide short-term relief. Additionally, your lender may have alternative payment plans or hardship programs that can help manage your debt.