How to Refinance Student Loans

Refinancing student loans works by allowing a borrower to take out a new loan to replace student debt. A new loan with different terms can help you secure a lower interest rate or more favorable repayment options. Understanding how to refinance student loans can be crucial for borrowers looking to reduce their monthly payments or overall interest costs. 

This comprehensive guide will walk you through how to refinance a student loan or multiple loans. From exploring the ways to refinance student loans to understanding eligibility criteria and potential drawbacks, consider this your go-to resource.

Understand student loan refinance

Refinancing student loans might offer a lower interest rate, new repayment terms, or other benefits tailored to your financial situation. You can refinance federal and private student loans into a new private loan. To combine several federal loans into a new federal loan, you go through a process called consolidation. 

A Direct Consolidation Loan allows you to combine multiple federal loans into one. It averages the rates of your combined loans. Borrowers with federal student loans might prefer a Direct Consolidation Loan over refinancing because it:

• Keeps federal benefits such as income-driven repayment plans
• Doesn’t require a credit check
• May offer extended repayment terms

Here’s a snapshot of the differences between a federal Direct Consolidation Loan and refinancing with a private student loan company:

	Federal Direct Consolidation Loan	Private student loan refinance
Eligibility	Federal student loans only	Federal and private loans
Interest rate	Weighted average of loans	Based on creditworthiness
Repayment plans	Multiple federal options	Vary by lender
Loan forgiveness programs	Eligible for certain programs	Typically not available
Credit check	Not required	Often required
Cosigner options	Not applicable	May allow or require cosigners
Loss of federal benefits	Maintain many federal benefits	Lose federal benefits
Fees	No fees	Vary by lender; Fees may apply

If you’re unsure whether you have federal loans, private loans, or both, here’s how you can check:

• For federal loans: Visit the Federal Student Aid website. This government site provides a detailed overview of all your federal loans.
• For private loans: Check your credit report, which will list all private student loans. You can request a free annual report from major credit bureaus or consult your lender.

Understanding how to refinance your student loans and recognizing the difference between federal and private loans will help you choose the right refinancing path. 

The decision to refinance depends on your income, expenses, life events, goals, and current and future cash flow projections.

Erin Kinkade

CFP®

Pros and cons

Refinancing can offer several benefits and drawbacks for borrowers.

Pros

• Lower interest rates

  By securing a lower interest rate, you can save money over the life of the loan. It’s often one of the main reasons people explore how to refinance a student loan.

• More manageable payments

  Adjusting the loan terms can lead to lower monthly payments, giving you more financial flexibility.

• Tailored loan terms

  Refinancing allows you to choose a new loan term that fits your financial situation, whether you want to pay off the loan faster or extend the repayment period.

Cons

• Stringent credit requirements

  Many private lenders have strict credit requirements to refinance. If your credit isn’t strong, you might not qualify for a lower interest rate or need a cosigner.

• Loss of federal loan benefits

  If you refinance federal loans with a private lender, you lose access to federal benefits such as income-driven repayment plans, Public Service Loan Forgiveness (PSLF), and potential federal forbearance or deferment options.

Impact on cosigners

If you had a cosigner on your original loan, refinancing might affect them as well:

• Release option: Some lenders offer a cosigner release option after a set number of on-time payments. Refinancing could provide an opportunity to remove the cosigner.
• Credit considerations: Cosigners should be aware the refinancing process will involve a credit check, and they’re equally responsible for the new loan if they continue as a cosigner.

Considering the pros and cons and impact on cosigners is vital. The decision to refinance should align with your financial goals and current situation, weighing the potential savings against any loss of benefits.

When to consider refinancing

Refinancing student loans isn’t a one-size-fits-all solution. It requires considering several factors to determine the optimal time. Here’s what to look at:

Timing

Consider these factors:

• Stable income: If you have a stable income and a good credit score, refinancing could lead to lower interest rates.
• Federal loan benefits: If you rely on federal benefits, refinancing with a private lender might not be the best option.
• Cosigner involvement: Consider the impact on cosigners, if applicable.

Current financial situation

Assess your financial scenario:

• Debt-to-income ratio: Lenders look at this ratio to gauge your ability to manage monthly payments.
• Credit score: A higher score may qualify you for better rates.
• Long-term goals: Align refinancing with your financial goals, such as buying a home or saving for retirement. Here’s why:
  • Interest rate considerations: Refinancing your student loans to a lower interest rate may free up monthly income you can allocate to other financial goals, such as saving for a down payment on a house or contributing to retirement accounts. Credit scores also play a significant role in both refinancing student loans and obtaining a mortgage. If refinancing improves your credit profile, it could lead to more favorable mortgage rates.
  • Debt-to-income ratio (DTI): Refinancing for more manageable payments may improve your DTI, an essential factor in mortgage approval. It could make home buying more attainable. However, extending the loan term to lower monthly payments might mean more interest over time, which could divert funds from other long-term savings.
  • Flexibility in retirement planning: Refinancing might allow for better alignment with retirement savings goals by freeing up funds to invest. Balancing the repayment term with anticipated retirement age is crucial. You wouldn’t want student loan payments to continue into retirement because it could strain a fixed income.
  • Loss of federal benefits: Refinancing federal loans with a private lender means giving up specific protections and flexible repayment options, which might not align with long-term financial stability, especially if job loss or other financial hardships occur.

The decision to refinance should be part of a broader financial strategy, including other long-term goals. Working with a financial professional to understand how refinancing fits into your overall financial landscape is often beneficial.

Interest rates and market conditions

Interest rates and market conditions play a substantial role:

• Prevailing interest rates: If current rates are much lower than the rate on your loans, refinancing might make sense.
• Economic factors: Monitor economic conditions, which can affect lending rates and opportunities to refinance.

Ground your decision in a comprehensive understanding of your financial situation, goals, and current market conditions. Here are additional considerations:

• Check multiple lenders: Compare offers from various lenders to find the best fit.
• Consult a financial professional: If in doubt, professional advice can help you make an informed decision.

Ask the expert

Erin Kinkade

CFP®

An increase in interest rates would likely warrant remaining with your current loans, while a drop in interest rates would warrant a reason to refinance or consolidate into a lower-interest-rate loan. If economic conditions are favorable and you feel secure in your job and future outlook, it may make sense to refinance to remove a cosigner or obtain better terms (e.g., a lower rate).

Choose the right student loan refinance lender

Finding the right lender to refinance student loans is a critical step in the process. It requires careful comparison, understanding of key terms, and considering lenders’ reputations. Here’s how to navigate this essential stage:

Comparison and research

When evaluating ways to refinance student loans, take the time to compare lenders:

• Online comparison tools: Use online resources that allow side-by-side comparison of interest rates, terms, and fees.
• Ask for recommendations: Friends, family, or financial professionals who have experience with refinancing may have valuable insights.
• Read fine print: Pay close attention to the terms and conditions to avoid surprises.

Understand terms

Understanding the terminology associated with refinancing is helpful:

• Interest rates: Determine whether the rates are fixed or variable and how they might change over time.
• Repayment plans: Know your options for repayment, including the length of the loan and flexibility in payments.
• Fees and penalties: Be aware of any origination fees, prepayment penalties, or other hidden costs.

Lender reviews and ratings

Reputation matters. It’s essential to look for:

• Customer reviews: Look at online reviews to gauge customer satisfaction.
• Third-party ratings: Sites such as the Better Business Bureau and Trustpilot can provide unbiased ratings.
• Compliance and licensing: Ensure the lender complies with all legal requirements.

Consider reading our resource on best student loan refinance to explore the top lenders.

If you are concerned about job loss, you may want to consider a loan provider with unemployment protection (for example, SoFi) or maintaining your federal loans and discussing forbearance options with your loan servicer.

Erin Kinkade

CFP®

How to apply with your selected refinance lender

Understanding the refinance application process ensures you’re well-prepared. Here’s what you need to know:

Documentation needed

Collecting the necessary documents is the first step. Many lenders require:

• Proof of income: Recent pay stubs or tax returns.
• Identification: A government-issued ID.
• Loan information: Recent statements from current lenders.

Application process

Here’s a road map to the application process:

1. Prequalification 
   • Research lenders: Identify those that offer prequalification. 
   • Check rates: Agree to a soft credit check to get estimated rates.
2. Application submission 
   • Complete forms: Fill out the application with accurate information. 
   • Submit documents: Provide the required documents as mentioned earlier.
3. Approval and finalization
   • Await response: Most lenders respond within a few days.
   • Sign documents: Review and sign the final loan documents.

Common mistakes to avoid

Avoid these common pitfalls:

• Applying with a low credit score: Before proceeding, understand whether it makes sense to refinance your student loans with bad credit. You’re unlikely to qualify for the lowest rates, and applying could result in a denial, further lowering your credit rating. Consider instead what you can do to raise your credit score.
• Overlooking details: Review terms and conditions to prevent misunderstandings.
• Ignoring cosigner implications: Consider whether you should refinance student loans with a cosigner.

Refinancing student loans is a tailored process, so take the time to analyze your situation and explore the options available. If you’re looking at how to refinance a student loan, use tools and calculators to help you make the best decision. 

Check out these additional resources:

• Student loan refinance calculator
• How to refinance student loans without a degree
• Can you transfer student loans to another person?

Ask the expert

Erin Kinkade

CFP®

If your credit score is poor, it’s wise to repair and build your credit score before refinancing. If refinancing doesn’t provide an economic benefit, such as lower payments or a reduced repayment term (saving interest dollars), or if refinancing doesn’t present other benefits your current loans don’t provide, it may not make sense to make a change.

Student loan refinance FAQ

What credit score do I need to refinance my student loans?

Many lenders require a credit score of at least 650, but it can vary.

Can I refinance federal and private student loans?

Yes, you can refinance federal and private student loans. To refinance both together, you must do so with a private lender. Be aware that refinancing federal loans means losing specific federal benefits.

Consider a Direct Consolidation Loan to make your federal loans more manageable but retain federal benefits.

Is there a cost to refinance student loans?

Most lenders don’t charge a fee for refinancing, but it’s always wise to check the specific terms with your chosen lender.

How long does the refinancing process take?

The process can take anywhere from several days to a few weeks, depending on the lender and the complexity of your situation.

Can I refinance my student loans more than once?

Yes, you can refinance multiple times if you find better terms. Always consider the benefits and potential drawbacks.

What happens if I can’t make payments after refinancing?

It’s essential to contact your lender as soon as possible. Some may offer temporary forbearance or other assistance.

Will refinancing student loans affect my credit score?

Refinancing can cause a slight dip in your credit score, but responsible repayment can raise it over time.

Can I refinance only certain student loans?

Yes, you can choose which loans to refinance, giving you control over which terms you’d like to change.

Do I need a cosigner to refinance?

Not necessarily, but having a cosigner with good credit may help you qualify for better terms.