How Does Student Loan Refinancing Work?

For many borrowers, student loans can be a financial drain for years. If you’re feeling the strain of student loan payments, refinancing can offer a solution in the form of a lower payment, a lower interest rate, or both.

If you’re new to student loan refinancing, we’ll cover what student loan refinancing is, what types of loans you can refinance, and how student loan refinancing works. Then we’ll dig into who is eligible for refinancing and when you should consider it.

In this guide:

• What is student loan refinancing?
• What types of loans can you refinance?
• How does student loan refinancing work?
• Student loan refinancing eligibility
• When should you refinance your student loans?
• FAQ

What is student loan refinancing?

Student loan refinancing is when a private lender pays the remaining balance on your private or federal student loans and then issues you a new loan. Ideally, the new loan will have a lower interest rate, so you can save money by spending less on interest.

Fees aren’t typically associated with student loan refinancing—you just have to pay interest on the new loan. However, fees can apply in some cases, so be sure to check the loan terms before moving forward.

Erin Kinkade, CFP®, describes a borrower who could benefit the most from refinancing their student loans as: “one with a credit score that has improved since they initially applied for the loan(s); one whose loan has a higher interest rate than other lower-rate options; one who has a cosigner and wants to release them, or vice versa, to obtain more favorable terms. If refinancing results in more favorable terms that fits your budget and financial goals, it might make sense.”

What types of loans can you refinance?

As we mentioned, it’s possible to refinance federal (government-backed) and private (bank- or lender-backed) student loans. Within each category of loans are several types you can refinance. Here’s a quick look at the various types:

Federal student loans

• Direct Subsidized Loans: These loans are need-based assistance available to undergraduate students. With these loans, the government pays the interest while the student is in college and, in some cases, during deferment.
• Direct Unsubsidized Loans: These loans are available to students at all levels of postsecondary education. Eligibility is not based on need, but students are responsible for making any interest payments on the loans.
• Direct PLUS loans: These loans are available to graduate and professional students, as well as parents of dependent undergraduates. Eligibility is not based on financial need. However, a credit check is required to apply.
• Direct Consolidation Loans: These loans combine multiple federal student loans into a single payment.
• Federal Perkins Loans: This program was discontinued in 2017, but many students still have outstanding balances on them. They were needs-based loans available to graduate and undergraduate students.
• Federal Family Education Loan (FFEL) Loans: This program was discontinued in 2010, but many students still have balances. These loans were funded by private lenders but guaranteed by the federal government.

It’s possible to refinance a wide variety of federal student loan types. However, as we’ll explore shortly, that isn’t always wise. Whether refinancing federal student loans is the best choice depends on the situation.

Private student loans

You may be able to refinance a private student loan. These are often available from banks, credit unions, and other financial institutions. One reason you may want to refinance a private student loan with another private lender is that your credit score may have improved, which can qualify you for better terms.

Refinancing is related to student loan consolidation, but the two are not the same. Student loan consolidation is typically available with federal student loans. It allows you to combine multiple student loans into a single loan with one payment, making your repayment easier to manage.

On the other hand, if you hear about student loan refinancing, it often refers to private lenders buying out your existing federal or private loan. The purpose is usually to get a lower monthly payment, lower interest rate, or both.

Keep in mind that refinancing federal student loans can pose several potential risks. For example, you may give up certain forgiveness or repayment options, such as income-driven repayment (IDR) and Public Service Loan Forgiveness (PSLF). You might also miss out on forbearance and deferment options, which might allow you to suspend payments in some situations.

>>Read more: Can you refinance international student loans?

How does student loan refinancing work?

The process of refinancing your student loans may vary by lender. However, these are the steps you can generally follow:

1. Research and compare lenders: Start by researching and comparing lenders that offer student loan refinancing. Pay attention to the rates and terms each lender offers, as well as any fees.
2. Get quotes: Lenders often have a prequalification or rate quote tool on their websites. You can use these tools by providing basic information, such as your name and address, you can get a refinancing quote with no impact to your credit score. These quotes may not match your exact student loan payment, but they can give you an idea of how much you’ll pay with each lender.
3. Fill out an application: Once you decide which lender to use for your refinancing, you will have to fill out an application. The application asks for granular details, such as proof of income, proof of graduation, and details about your current student loans. The lender might also make a hard inquiry on your credit report.
4. Receive an offer: If the lender approves your application, they will give you an offer with a potential loan term, monthly payment, and rate.
5. Accept the offer: If you decide to accept a refinancing offer, you’ll sign an agreement with the new lender, which will outline the details and terms of the new loan.
6. Begin your new loan payments: Your lender will pay off the old loan, and then you will start making payments with the new lender based on the terms outlined in the loan agreement.

Remember: It’s important to compare multiple offers before accepting a new loan. Shopping around for better rates and terms can save you thousands in the long run.

Example

To see the potential benefits of student loan refinancing, let’s take a look at a hypothetical refinance example. Say your current loan balance is $30,000, and you have 12 years left to repay it. The new loan will have the same 12-year term, but you’re refinancing because you’re eligible for a lower rate.

Here’s how the numbers stack up:

	Current loan	New loan	Difference
Interest rate	7.25%	4.99%	2.26%
Monthly payment	$313	$277	$36
Remaining term	12 years	12 years	—
Total interest	$15,004	$9,934	$5,070

With the new loan, you could reduce your monthly payment by $36 and over $5,000 in total interest—just because of the lower rate. Even with the same term, you still save a significant amount.

Student loan refinancing eligibility

Most lenders offering student loan refinancing will have a few basic requirements. These requirements help the lender ensure you can make your payments.

Here are requirements lenders may have before they’ll approve you:

• Credit score: A good credit score will increase your chances of being approved for a loan. You should aim for a score in the mid-600s or higher, and some lenders might have higher requirements.
• Stable income: Most lenders prefer to see your income is stable and high enough to afford your loan payments. Depending on the lender, they might have a specific minimum income requirement.
• Debt-to-income ratio (DTI): This is the ratio of your monthly minimum debt repayments to your before tax, aka your gross monthly income. The lower the ratio, the lower your debt burden. Keeping a low DTI can make you a more attractive borrower. Specific requirements vary, but most lenders look for a DTI of 50% or lower.
• Education: Some lenders require borrowers to have completed a degree, be it an associate, bachelor’s, master’s, or doctorate.
• Minimum financing amount: Some lenders might have a minimum amount you can refinance, such as $10,000. If the lender you are considering has a minimum and you don’t meet it, you’ll have to look elsewhere.

While some lenders might have requirements you must meet before they will approve your refinancing application, the specifics will often vary. Check with your lender to find out what they require.

When should you refinance your student loans?

There might never be a “perfect” time to refinance, but certain factors might tip the scales in its favor. Ask yourself whether you’re having trouble managing your payments or whether the money you’re spending on student loans would be better spent elsewhere.

CFP® Erin Kinkade advises considering your goals and loan type when determining whether to refinance: “What goal are you trying to achieve? Can refinancing help you meet your goals? If you have federal student loans with benefits you’ll lose if you refinance to a private lender, it’s crucial to understand the change and whether you’re comfortable with losing those benefits.”

You might consider refinancing in these situations.

Lower rates

If interest rates are lower than when you took out the loan or your credit score has improved, you might be able to secure a better rate. In either case, you might be able to reduce your payment and save money in the long run.

Shorter term

You could also opt for a shorter loan term. A shorter term likely means your payments will be higher, but you’ll spend less on interest, and will repay the loan sooner. However, your payments may be higher with a shorter term.

Stable income and employment

Another reason to consider refinancing is if you have a stable income and employment. Lenders may offer you more favorable terms if you can show your finances are reliable.

These are just some factors to consider when deciding whether you should refinance your student loans. Before moving forward with refinancing, consider your situation and whether you would benefit from it.

Start by calculating your new student loan payment. Depending on the situation, you might find refinancing would be well worth it.

FAQ

What are the downsides of refinancing?

There could be several downsides to refinancing. For instance, if you refinance federal student loans, you might give up income-driven repayment or deferment options. You could also lose a repayment grace period (often lasting six months) after graduation on federal student loans.

Even if you don’t have federal student loans, you might incur fees when you refinance. You also won’t have the option for federal consolidation loans—only private consolidation loans, if available.

How long does refinancing take?

The time it takes to refinance can take anywhere from a few days to several weeks. The total time it takes depends on several factors, such as how long it takes you to research and how long it takes the lender to approve your loan.

The longest part of the process can be verification and underwriting, which may take one to two weeks. However, a waiting period where the loan is transferred to the new lender can also take around one week.

How do I identify the right student loan refinancing lender?

Generally, you should look into multiple lenders, comparing rates, terms, and monthly payments. Look for fees and additional perks, such as referral bonuses, autopay options, or discounts for current customers if you’re refinancing through your bank.

Most importantly, be sure to get multiple quotes and compare their terms. If you are unsure, you may want to seek the advice of a financial professional, especially one who has familiarity with student loans.

Can refinancing affect my credit score?

Prequalification for student loans won’t affect your credit score. However, if you apply for refinancing with a specific lender, it may perform a hard credit inquiry as part of the application process. Hard inquiries can drop your credit score by a few points, but the effects should fade over time.

Can I refinance with a cosigner?

It may be possible to refinance with a cosigner; many lenders allow it. Adding a cosigner can have several benefits, including higher approval odds and lower rates. However, downsides can include a strain on your relationship with the cosigner and risk to their credit. It’s important to keep making your payments when you have a cosigner and communicate with them if you ever have problems paying.

Can a cosigner be removed from a refinanced student loan?

It depends on the lender, but some may have a cosigner release option that allows this. To be eligible, the primary borrower must demonstrate their ability to pay on their own. For instance, they might have to make a certain number of consecutive monthly payments and have a stable job and income. You usually need to apply for a cosigner release, so check with the lender to see whether an application is available.