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Student Loans

How Much Does It Cost to Refinance Student Loans?

You’re not alone if you’re looking to refinance your student loans. Thousands of people swap out their old student loans for new ones to save money with a different interest rate or term length each year. 

But what is the cost of refinancing student loans? If you refinance some loans, such as a mortgage, you could end up paying thousands of dollars out-of-pocket.

Thankfully, most lenders don’t charge any upfront costs to refinance your student loans. That’s not always the case, though; other not-so-obvious costs may be worth considering.

What is the cost to refinance student loans?

Student loan borrowers, rejoice: most lenders do not charge fees to refinance your student loans

As with most types of loans, however, you may still be charged a fee after the fact, depending on how you handle the loan. As long as you pay on time, you generally won’t incur any extra fees. 

That said, it’s still important to check with each lender when you’re shopping around to refinance your student loans. In particular, keep an eye out for these fees:

  • Application fee: A fee some lenders charge to process your loan application, regardless of whether you’re approved or not. 
  • Origination fee: If you are approved, some lenders charge a percentage fee when funds are disbursed. Yrefy, for example, charges 5%, and MPOWER charges 2%.  
  • Late fee: If you miss your payment due date, you may be charged a fee if you don’t pay up during a specified grace period. 
  • Returned payment fee: If you do make a payment and it’s returned by your bank because you don’t have enough money in your account, some lenders charge a fee.
  • Prepayment penalty: Lenders on the less-scrupulous side sometimes charge you a fee if you pay off your loan early since they won’t be benefiting from all that unpaid interest. 
  • Forbearance fee: If you run into short-term money problems, some lenders charge you to enter forbearance. Sallie Mae used to charge a forbearance fee, for example.
  • Collection fee: If you default on your private student loans, your lender may pass certain fees onto you if it places your accounts into collections or takes you to court. 

Try to avoid origination fees, or at least calculate those into the total interest cost when deciding to refinance. I would avoid any loan that has a prepayment penalty or forbearance fees.

Jim McCarthy

CFP®

Total interest paid

The biggest cost to refinance student loans for most borrowers is the total amount of interest you pay. Refinancing your loans for a longer term length is a popular way to lower your payments, for example, but that often means paying higher interest costs in the long run. 

You can check your cost savings by using a student loan refinance calculator. We’ll discuss this in more depth below.  

Debt-to-income ratio

Your monthly student loan payment may change when you refinance your loan, and that can impact your debt-to-income (DTI) ratio: the percent of your monthly income that goes towards debt. 

Many lenders consider this number when deciding whether to approve you for other types of loans, especially mortgages. For example, getting approved for a mortgage may be harder if you’re paying more than 43% of your monthly income toward debt.

Variable-rate loans

Some borrowers opt for adjustable-rate student loans because the rates are usually lower than fixed-rate loans—at first, that is. As we’ve been moving into a higher interest rate environment, those rates have been notched upward, causing big swells in borrowers’ monthly payments too. 

For example, if you were paying 7.9% APR on a $50,000 balance, your monthly payment would be $704. But if rates jumped up to 11.2%, you’d instead be paying $86 more per month; a big jump for most people’s budgets. You can remove that volatility, however, if you refinance for a fixed rate. 

Federal student loan benefits

Most experts caution against refinancing federal student loans because they come with way more protections and options if you run into problems. That could save you thousands if you qualify for a loan forgiveness program on your student loans. 

That said, if you or your cosigner has good credit, you may be able to score a lower interest rate by refinancing your federal student loans with a private lender if you’re comfortable living a bit more dangerously. If you repay your loans quickly, you can lessen this risk. 

Credit score

Refinancing your student loans will have a small, temporary impact on most people’s credit scores. This is due to the hard credit inquiry most lenders perform when you submit a full loan application (not when you check your rate, however; that’s a soft credit inquiry). 

A hard credit inquiry for most borrowers will drop their credit score by five points or less. That inquiry will fall off your credit report after two years, although your score generally returns to normal after just a year. 

However, be careful if you’re applying for a mortgage, as many lenders will decline you if you’ve applied for other credit—even a refinanced loan—in the months before you apply. 

Student loan interest tax deduction

Most borrowers can take advantage of a juicy tax deduction of up to $2,500 on student loan interest without even itemizing their deductions. 

If you’re not paying that much in interest yet and if refinancing would boost that amount, this can help you lower your tax bill further. However, it’s a moot point if you’re already paying more than that each year. 

Cosigner

If you have private student loans, chances are you needed a cosigner to help you get approved in the first place since most students have no income or credit. Each payment you make—on-time or late—also gets recorded on your cosigner’s credit report, which can help or hurt them.

Many borrowers opt to refinance to remove their cosigner from the loan, so their cosigner isn’t liable to repay it in case they default; a move which can impact their credit for better or worse as well. 

If you’re still unable to qualify on your own, you’ll need to consider cosigner impacts for your new loan too.

How much can you save by refinancing student loans?

There are two main ways to measure how much you “save” on your student loans: 

  1. How much you save per month (i.e., short-term savings)
  2. How much you save on total interest over the life of your loan (i.e., long-term savings).

Sometimes the two match up, but they’re not always the same. 

Here’s an example based on someone refinancing a $75,000 loan balance two years after graduating. Note that this borrower would save money on their monthly payments but not on the total interest cost of the loan:

Original loanRefinanced loan
APR8.50%7.50%
Remaining term length810
Monthly payment$1,079$890
Total interest paid$28,623$31,832

You can generally shrink your monthly payments by refinancing for a longer term. However, most lenders charge higher rates for longer-term loans, and you’ll pay that higher rate for longer. 

You’ll get the best of both worlds if you can refinance for a lower rate and the same (or shorter) term length. 

The decision to refinance mostly depends on individual budgets, but the goal of any refinancing should be to lower the total interest paid over the life of the loan.

Jim McCarthy

CFP®

How to choose the right student loan refinance option

Here are a few tips to make sure you’re getting the most out of your student loan refinance, whether that’s a lower monthly payment, overall cost savings, or both:

  • Check your credit report and dispute any errors if you find them.
  • Check your credit score and see what rates lenders are offering these days for people with your credit profile.  
  • Use a loan refinance calculator to see your financing costs and monthly payments. 
  • Check your rates with at least three student refinance lenders; ideally, more.
  • Ensure you’re eligible for all interest rate discounts, especially for things like autopay.

FAQ

What’s the difference between refinancing and consolidating student loans?

Refinancing student loans entails obtaining a new loan from a private lender to pay off one or more loans. This can lower interest rates and save you money over the loan term. It also allows switching from a variable interest rate to a fixed one. 

Consolidating student loans often combines multiple federal student loans into a single one. This process doesn’t usually lower your interest rate but can streamline repayment. It might also grant access to alternative repayment plans or loan forgiveness programs.

Can you refinance federal and private loans together?

Yes, you can refinance federal and private loans together. Remember: When you refinance federal loans with a private lender, you’ll lose access to benefits such as income-based repayment options and potential loan forgiveness programs. 

Before deciding to refinance, consider the potential loss of these benefits against the advantages of a lower interest rate or simpler repayment plan.

How often can you refinance student loans?

There’s no limit to how many times you can refinance student loans. If market conditions change or if your credit score improves, you might be able to secure a better interest rate by refinancing again. 

However, always remember that refinancing involves application processes, credit checks, and sometimes, fees. It’s crucial to ensure the savings outweigh the costs before you decide to refinance again.