10 Must-Know Pros and Cons of Refinancing Student Loans

So, you’re looking into refinancing your student loans.

This can be a solid solution for some borrowers. If you refinance, you could benefit from lower interest rates, smaller monthly payments, and easier loan management. Plus, refinancing allows borrowers to release their cosigner. 

But it’s not the right option for everyone.

Depending on your loan type, you could lose federal loan protections, switch to a variable interest rate that costs more, or negatively impact your credit score.

Here are the must-know pros and cons I’d recommend you consider before deciding whether or not to refinance your student loans. 

✅ Lower interest rates

Most student loan borrowers refinance to secure a lower interest rate. The interest determines how much it costs to borrow money — a higher rate means it costs more. You can take different steps to lower your interest rate, but refinancing is the most effective. 

Once you refinance the new loan terms, including the interest rate, replace your previous loan. Depending on your current interest rate, you could lower it by multiple percentage points and save thousands of dollars. 

For example, imagine you have a $20,000 loan with a 10-year repayment term and a 7% interest rate. The total interest charges are $7,866.04. Imagine you have the same loan with a 5% interest rate. The total interest charges decrease to $5,455.72. 

✅ Reduced monthly payments

You might be able to refinance to a longer payment term or lower interest rate to reduce your monthly payments. You might pay more toward interest if you refinance to a longer payment term, but your monthly payment will decrease. 

For example, let’s say you have a $15,000 loan with a 6% interest rate and a 5-year repayment term. Your monthly payment is $289.99. But if you refinance to a 10-year term, your new monthly payment is $166.53—more than $100 lower.

✅ Simplified loan management

Refinancing can make it easier to manage your student loans, especially when you combine multiple loans into one. Instead of handling different payments and due dates, you only need to make one monthly payment to a single lender.

It might seem like a small change, but having one monthly payment can make it easier to make on-time payments, which can help you increase your credit score and avoid defaulting on your loan. 

✅ Switch to a fixed or variable rate

When refinancing, switching to a variable or fixed interest rate can help you save money. Both types of rates have unique perks that can help you save money. 

Fixed rates allow you to budget for consistent monthly payments that won’t change throughout repayment. Variable rates, on the other hand, might be lower than fixed rates. Lower rates help you save money and reduce your monthly payment. However, variable rates can go up, raising your payment.

✅ Opportunity to release a cosigner

You usually can’t release a cosigner without refinancing. Your cosigner, usually a family member, signs the loan with you when you apply to vouch for your creditworthiness. If you default on the loan, the cosigner is responsible for repayment. It’s a big responsibility, and many cosigners want the borrower to remove them from the loan after graduation.

Depending on your loan terms, refinancing might be the most effective—or only—way to release the cosigner.  

✖️ Loss of federal loan protections

If you’re refinancing a federal loan and replacing it with a private loan, you’ll lose federal loan protections. Once you have a private student loan, you won’t be able to use income-driven repayment plans, student loan forgiveness, deferment, or forbearance protections. 

The federal loan protections can lower your monthly payments. Sometimes, it also allows you to pay nothing toward your balance. It’s important to consider how a lack of protections could impact you in the future, especially during less-than-ideal scenarios like job loss. 

✖️ Eligibility requirements

You might not meet the eligibility requirements even if you want to refinance your student loan. Borrowers typically need a strong credit score and stable income. For example, you probably won’t qualify for refinancing if you don’t have a credit score of 650 or higher and consistent income from a job. 

It can be a frustrating part of the refinance process and prevent some borrowers from taking advantage of it.

✖️Potential to pay higher interest

Depending on when you receive your student loans, you might not be able to refinance them to a lower interest rate. For example, interest rates for federal loans from 2018 to 2023 are lower than current rates. If you took out a student loan during those years, you won’t be able to refinance to a lower rate since student loan interest rates are higher now. 

Even if you need to refinance for a different reason, like a cosigner release, it might not make sense to do so with a higher rate. 

✖️Variable rate risks

Most private student loan lenders offer two types of interest rates: variable and fixed. Refinancing to a variable rate can come with additional risks because the loans fluctuate as federal interest rates change. 

If federal rates decrease, your student loan rate decreases. The reverse is also true — as federal rates increase, your student loan rate increases, making your monthly payment more expensive. 

For example, let’s say you refinance a $30,000 student loan with a 10-year repayment term to a variable interest of 4%. Your monthly payment is $303.74. Federal interest rates increase, and your lender increases your rate. The new rate is 7%, and your monthly payment increases to $348.33. 

Fluctuating rates can make it harder to budget and plan, which might be a dealbreaker for some borrowers.

✖️Impact on credit score

When you apply to refinance, the lender runs a hard inquiry on your credit report. Hard inquiries cause your score to decrease temporarily. It’s not permanent, but it does have a short-term impact on your credit. 

Closing your old loan account can also cause your score to drop, especially if it’s one of your oldest loans. Opening a new loan can have a similar impact. The score changes are temporary, but it might not be the best time to refinance if you’re planning to make a big credit-based purchase, like a house or car, in the near future.  

Key Takeaways from a LendEDU Expert

We typically only recommend refinancing student loans if the existing rates are substantially higher than the current rate, and we haven’t seen that in a few years.

Another reason may be debt consolidation to allow for additional cash flow to pay other debts with higher interest rates.

Lastly, it would be to release a cosigner.

Michael Menninger, CFP®