Pros and Cons of Refinancing Student Loans

Student loan refinancing refers to paying off multiple existing student loans (private or federal) with a new private student loan. Borrowers sometimes choose to refinance their student loans to get a lower interest rate or longer repayment terms, both of which can result in lower payments.

Even so, remember that student loan refinancing isn’t a one-size-fits-all solution. What’s right for each person can vary based on their financial goals, risk tolerance, and personal situation. The current economic environment (e.g., interest rate trends) can also affect the refinancing decision.   

For these reasons, it’s essential to consider an exhaustive list of pros and cons before deciding if you should refinance your student loans. In this article, we’ll share some of the most important things you should consider before making this decision. 

Refinancing student loans pros and cons

Refinancing student loans can be a strategic financial move, offering advantages and potential drawbacks. Understanding the pros and cons is crucial for individuals thinking about doing this. 

Pros

• Lower interest rates

  Potential for fixed interest rates

• Monthly payment reduction

  Simplified repayment

• Potential for faster loan repayment

  Customizable repayment terms

• Cosigner release

Cons

• Loss of federal loan protections

  Limited financial hardship options

• Eligibility criteria and credit check

  Variable interest rates

• Potential for higher overall costs

  Prepayment penalties

Here is a closer look at each pro and con.

Pros of refinancing student loans

Lower interest rates

Refinancing allows borrowers to potentially secure a lower interest rate on their student loans. The ability to get a lower interest rate can result in substantial long-term savings, reducing the overall cost of the loan. 

For instance, a borrower with a $50,000 student loan at a 7% interest rate could save thousands of dollars by refinancing to a 5% interest rate (assuming the repayment term stayed the same). 

Fixed interest rates

Refinancing often provides the option to switch from variable to fixed interest rates. This can offer stability and protection against potential future interest rate increases, ensuring that monthly payments remain consistent over the life of the loan.

Monthly payment reduction

By securing a lower interest rate through refinancing, borrowers often experience a reduction in their monthly loan payments. The lower payment can free up valuable income for other financial goals or expenses, providing greater flexibility in managing one’s budget.

Simplified repayment

Refinancing involves consolidating multiple student loans into a single, more manageable loan. This streamlines the repayment process, simplifying financial management for borrowers. One monthly payment to a single lender can make tracking and meeting repayment obligations easier.

Potential for faster loan repayment

For those in a solid financial position, refinancing can offer the option to choose shorter loan terms. While this may increase monthly payments, it allows borrowers to pay off their loans faster, ultimately saving on interest payments and achieving financial freedom sooner.

Customizable repayment terms

Refinancing often allows borrowers to choose from various repayment terms, ranging from shorter to longer durations. This flexibility enables individuals to tailor their loan structure to align with their financial goals and circumstances. 

For example, someone seeking to pay off their loan quickly might opt for a shorter term, while others may choose a longer term for more manageable monthly payments.

This customization in repayment terms gives borrowers more control over their financial strategy, allowing them to better adapt their loans to suit their current and future financial situations.

Cosigner release

Some student loan refinancing lenders offer the opportunity to release a cosigner from the loan after a certain number of on-time payments. This can be advantageous for borrowers who initially needed a cosigner but have since established a strong credit history.

Cons of refinancing student loans

Loss of federal loan protections

When refinancing through a private lender, borrowers may lose federal student loan protections, including access to income-driven repayment plans and loan forgiveness options. This can be a significant drawback, especially for those who anticipate relying on these protections in the future.

Refinancing federal student loans into a private loan eliminates eligibility for federal loan forgiveness programs. This may be a significant drawback for individuals working in public service or nonprofit sectors who could have qualified for Public Service Loan Forgiveness (PSLF).

Additionally, refinancing federal student loans with private lenders means forfeiting access to income-driven repayment (IDR) plans. IDR plans can be valuable for borrowers experiencing financial challenges as they cap monthly payments based on income and family size. 

Losing these options may be a significant downside for those who rely on the flexibility provided by income-driven plans during periods of financial uncertainty. Before deciding to refinance, borrowers should carefully consider their ability to manage payments without these safety nets.

Limited financial hardship options

Federal student loans offer various options for borrowers facing financial hardship, such as deferment and forbearance. Refinanced loans through private lenders may have more limited options in this regard, making it challenging for borrowers who experience unexpected financial difficulties.

Eligibility criteria and credit check

Refinancing eligibility often depends on creditworthiness. Borrowers with less-than-stellar credit may not qualify for the most favorable interest rates. Additionally, the refinancing process involves a credit check, which may temporarily impact the borrower’s credit score.

Variable interest rates

Some refinancing options offer variable interest rates, which can change over time based on market conditions. While these rates may initially be lower than fixed rates, they introduce an element of uncertainty, potentially leading to higher payments in the future.

Potential for higher overall costs

While lowering the interest rate is a common goal of refinancing, some borrowers may not secure a substantially lower rate. In such cases, the costs associated with refinancing (fees, closing costs, etc.) could outweigh the potential interest savings, leading to a higher overall loan cost.

Even though refinancing can reduce monthly payments, some borrowers may choose longer repayment terms to achieve this. While this may provide short-term relief, it could result in higher overall interest payments over the life of the loan, even if the interest rate is lower.

To put this in perspective, let’s say you refinanced a $75,000 student with a 7% interest rate and 10-year repayment term to a 5% interest rate and a 15-year repayment term. Even though your monthly payment would decrease, your total loan costs would increase, as demonstrated below.

	Original loan	Refinanced loan
Amount	$75,000	$75,000
Interest rate	7%	5%
Repayment term	10 years	15 years
Monthly payment	$870.81	$593.10
Total interest	$29,597.63	$31,757.14
Total loan cost	$104,497.63	$106,757.14

Prepayment penalties

Certain refinancing agreements may include prepayment penalties or fees for paying off the loan early. Borrowers should carefully review the terms and conditions to avoid unexpected costs if they plan to make extra payments or pay off the loan ahead of schedule.

Ask the expert

Eric Kirste

CFP®

Refinancing debt can be a useful tool to manage your liabilities, but evaluating your financial situation and goals is important before making a decision. Think about what will improve your cash flow and save you money in the long run. Compare the terms and conditions of the new loan with your current loans, and consider how refinancing could affect your financial goals. For example, if you plan to save for a down payment on a house, refinancing your loans may lower your monthly payments and free up some cash. However, if you plan to pay off your debts quickly, refinancing may not be the best option because it may extend your repayment period.

Should you refinance your student loans?

Considering if you should refinance your student loans is a critical financial choice with potentially long-lasting implications. While refinancing has clear advantages, assessing your circumstances before deciding is crucial. 

Seeking professional advice and asking yourself specific questions can guide you toward the best choice for your financial future.

Benefits of professional advice

Given the complexity of student loan refinancing and its potential impact on your financial health, consulting with a professional, such as a financial advisor or student loan expert, can be highly valuable. 

Professionals can offer personalized advice given your unique situation, considering factors like your current income, existing loan terms, and long-term financial goals. They can provide insights into the potential benefits and drawbacks of refinancing, helping you make an informed decision.

Questions to determine if refinancing makes sense

Asking the right questions is crucial in determining whether refinancing your student loans aligns with your financial goals. Considering the nature of your existing loans, financial condition, and long-term objectives are essential to making this decision. 

Whether you are planning to make this decision on your own or seek professional advice, asking yourself questions such as the following should be beneficial. 

1. What are my current interest rates? Understanding your existing interest rates is crucial. If your current rates are high, there might be potential for significant savings through refinancing.
2. What is my credit score? A higher credit score often leads to better refinancing terms. Refinancing might offer more favorable terms and conditions if your credit score has improved since you first took out your loans.
3. Do I have a stable income? Having a stable income increases your chances of securing a refinancing deal with a lower interest rate. If your income has increased or stabilized, it could be a good time to explore refinancing options.
4. Am I eligible for loan forgiveness programs? Refinancing may not be the best choice for those who work in public service or the nonprofit sector and are eligible for loan forgiveness programs, as it typically disqualifies you from these federal programs.
5. Do I have a mix of federal and private loans? Refinancing is usually more applicable to private loans. If you have a mix of federal and private loans, carefully consider the implications of refinancing federal loans, as you may lose federal protections and benefits.
6. How much do I owe on my student loans? The total amount of your student loan debt can impact the potential savings from refinancing. Larger loan amounts may result in more significant savings with a lower interest rate.

Before deciding on refinancing, carefully evaluate your responses to the questions provided. You may consider refinancing your student loans if the responses suggest potential savings, improved terms, and a stable financial outlook. 

However, if factors like eligibility for federal loan forgiveness, a mix of federal and private loans, or financial instability come into play, exercising caution or avoiding refinancing may be the more prudent path. 

Scenarios when student loan refinancing does and does not make sense are shown below:

Scenario	Consider refinancing	Exercise caution
You have high interest rates on your current loans.	✅
Your credit score has improved.	✅
You have a stable income and can comfortably manage the new terms.	✅
You have primarily private loans.	✅
You are eligible for federal loan forgiveness programs.		❌
You have a mix of federal and private loans and want to preserve federal benefits.		❌
You are experiencing financial instability.		❌
Your credit score is low.		❌

Next steps if refinancing makes sense

If, after careful consideration and perhaps consultation with a professional, you determine that refinancing is the right choice for you, the next steps involve shopping around for the best terms from reputable lenders. 

Compare interest rates, repayment terms, and any associated fees. Once you’ve selected a lender, initiate the refinancing process, keeping in mind that you’ll need to provide the necessary documentation about your financial situation.

Remember, refinancing is a significant financial decision, and it’s crucial to fully understand the terms and implications before proceeding. If uncertainties arise during the process, seeking guidance from financial professionals can provide additional reassurance and clarity.

Ask the expert

Eric Kirste

CFP®

There’s not necessarily a savings threshold at which you can confidently say it makes sense to refinance. There could be circumstances where there are little-to-no savings to refinance, but the terms improve dramatically for you, so it still makes sense to refinance.

Student loan refinance FAQ

How does refinancing differ from consolidating student loans?

Consolidating student loans is often specific to federal student loans. When you take out a Direct Consolidation Loan rather than a private refinance loan, you merge several loans into one single loan. The interest rate is a weighted average of your previous rates. 

Refinancing involves applying for a new loan with potentially better terms, often at a lower interest rate. So refinancing could save you more money in the long term if you qualify for a lower rate.

Can I refinance federal and private student loans?

Yes, but if you refinance federal loans, you lose access to certain repayment plans and forgiveness programs. This can make refinancing more appealing for private loans than federal—unless you’re certain you won’t need those benefits.

Will refinancing my student loans save me money?

It depends on your individual circumstances. If you can secure a lower interest rate than on your loans, refinancing can save you money. 

However, a longer loan term, though it reduces monthly payments, could cost you more over time. So it’s best to calculate potential savings before making a decision.

Do I meet the eligibility criteria for refinancing student loans?

Eligibility criteria for refinancing student loans differ by lender. Common requirements include: a solid credit history, a steady income, and graduating from a qualified school. Sometimes, you may need a cosigner if you don’t meet these criteria.

How does refinancing affect my credit score?

Refinancing student loans can lead to a slight dip in your credit score due to the lender’s hard credit check. However, it’s often a temporary drop. On-time payments can help improve your credit score over the long run.

Can I refinance my student loans more than once?

Yes, you can refinance student loans multiple times. If your credit score improves or interest rates go down, you might be able to secure a better loan. But always weigh potential savings against costs—such as origination fees—associated with refinancing.