What Is Student Loan Refinancing?

Student loan refinancing can be a financial game-changer that can help you save money and simplify your finances. But it’s helpful to be aware of the complexities and caveats.

In this guide, you’ll find out more about what student loan refinancing does and get a comprehensive understanding of this financial tool. If you’re looking for how to refinance or wondering whether you can refinance, we have resources on both topics.

With a clearer grasp of what student loan refinancing is, you’ll be equipped to decide whether it’s the right option for you.

What is student loan refinancing?

Refinancing a student loan means taking out a new loan to replace one or multiple student loans. You essentially swap out your current loans for a single new one, typically with different terms, such as a lower interest rate or a more manageable repayment plan.

What does refinancing student loans do?

When you refinance, you’re not just shuffling numbers. You’re making a strategic move to better your financial situation. Here’s what it boils down to:

• Simplified payments: Instead of multiple monthly payments to different lenders, you have one monthly payment.
• Interest rates: You could secure a lower interest rate, saving you money over the life of the loan.
• Repayment terms: You can choose new repayment terms that better fit your current financial situation.

See more about how student loan refinancing works.

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What happens when you refinance a student loan?

What’s the difference between refinancing and consolidation?

Consolidation often refers to combining multiple federal loans into a single federal loan via a Direct Consolidation Loan. 

Refinancing and consolidation share the same main concept, but these are the differences: 

	Refinancing	Consolidation
Purpose	Lower interest rate, more manageable monthly payments, combine multiple loans	Combine multiple loans
Loans eligible	Federal and private loans	Federal loans only
Interest rate	Typically lower	Weighted average of consolidated loans
Available through	Various private lenders	Federal government (Direct Consolidation Loan)
Loan types combined	Federal and private can be combined	Only federal loans can be combined

Note: Certain private lenders, such as Discover, refer to their refinance loans as “consolidation loans.” But if it isn’t a Direct Consolidation Loan through the federal government, it’s a refinance loan, as described in the table above.

Why refinance student loans?

Refinancing can offer a way out if you’re burdened by high-interest student loans or seeking more flexible repayment terms. But it’s not a one-size-fits-all solution. Here’s what you need to know.

Pros

• Lower interest rates

  Refinancing can snag you a lower interest rate, potentially saving you thousands over the loan’s life.

• Flexible repayment terms

  Different loan lengths and payment structures offer you control over your monthly budget.

• Monthly payment reduction

  A lower interest rate or longer repayment term can also reduce your monthly payments, making them more manageable.

Cons

• Loss of federal benefits

  If you refinance your federal loans with a private lender, say goodbye to federal loan protections, such as income-driven repayment plans and potential loan forgiveness.

• No turning back

  Once you refinance a federal loan with a private lender, you can’t revert it to a federal loan.

• Credit check

  Refinancing often requires a hard credit inquiry, which could lower your credit score by a few points.

Eligibility criteria to refinance student loans

If you’re considering taking the plunge to refinance, ensure you’re eligible. Requirements can differ from one lender to the next, but several common criteria can act as your compass.

Common requirements

• Credit score: A strong credit score is often essential. Many lenders look for a score above 650.
• Steady income: A stable income makes you a less risky borrower in the eyes of lenders.
• Debt-to-income ratio: This ratio measures your total debt against your income. Lenders consider a lower percentage better.

Why it’s essential to shop around

Lenders have their own sets of unique criteria, which means one lender’s “no” could be another’s “yes.” 

Shopping around helps you lock in the best refinance interest rates and offer higher chances of approval, and many lenders will allow you to prequalify and get preliminary rates without affecting your credit score.

Find out more about the best lenders to refinance student loans.

Read more: Can you refinance student loans?

Refinancing federal vs. private student loans

Navigating the intricacies of federal and private student loans can seem challenging. 

Let’s clear up what sets them apart.

	Federal student loans	Private student loans
Flexibility	✔️ Income-driven repayment plans  ✔️ Loan forgiveness	❌ Limited built-in options
Loss of benefits	⚠️ Lose federal benefits when switching to private	❌ Not applicable
Protection	✔️ Deferment  ✔️ Forbearance	❌ Limited options
Lender options	🏦 Federal government only	🏦 🏢 Multiple lenders available

You can combine federal and private loans through refinancing, but remember: When you combine them into one loan, you lose access to the federal loan benefits mentioned in the table.

Scenarios to consider when combining private and federal student loans

Despite the drawbacks, refinancing federal student loans into private loans makes sense in certain situations. These might include:

• You have high-interest federal loans: If your federal loans have higher interest rates than private lenders offer, combining could be beneficial.
• You are on solid financial footing: If you have strong credit and a stable income, you might not need federal protections, making it less risky to combine loans.
• You have a mix of variable and fixed rates: Some might opt to combine loans to convert all their debt into a single fixed or variable rate, depending on their financial goals.

It can make sense to refinance private and federal student loans together if you get a windfall and can pay off the refinance loan quickly, or if a private lender has much better terms and offers benefits equal to what federal loans can offer.

Erin Kinkade

CFP®

What affects your refinance loan terms?

Navigating the world of refinance terms isn’t as daunting as it might seem. One of the most significant benefits of student loan refinancing is securing more favorable terms. Here’s a look at factors that influence your loan term.

Role of credit score

In most cases, we recommend refinancing your student loans only if you can secure a lower interest rate. For most private lenders, your credit score plays the biggest part in your interest rate.

• High score, low interest: For example, a 750 credit score may secure you an interest rate of just 5%.
• Low score, higher interest: A score of 600, however, could land you an interest rate of around 10%.

Here’s what that difference could mean for a $10,000 student loan over a 10-year repayment term:

	5% fixed APR	10% fixed APR	Difference
Monthly payment	$106.07	$132.15	$26.08
Total amount paid	$12,727.48	$15,857.48	$3,130.00

Loan term length

You’ll often get to choose your term length when you refinance. Ensure your choice works to your advantage, whether it’s a longer term but shorter payments or shorter term with higher payments:

• Short term: Five years will give you a lower rate but higher monthly payments.
• Long term: A 20-year term can lower your monthly payments but means paying more over the life of the loan. 

Here’s how loan terms could differ based on your choices:

	5-year term	20-year term	Difference
Monthly payment	$386.66	$143.29	–$243.37
Total amount paid	$23,199.60	$34,389.60	$11,190.00

You can see how choosing a 20-year term means more manageable monthly payments—but in this scenario, it also means spending over $10,000 more in repayment. 

More about the impact of interest rates

A common reason to refinance is to switch from variable to fixed interest rates—or vice versa.

• Fixed rates: Offer payment stability but might start higher.
• Variable rates: Could start lower but rise.

Ask the expert

Erin Kinkade

CFP®

Fixed rates might lock you into a higher initial rate, so be sure you can afford the payment and the overall terms are beneficial. Otherwise, wait until rates are lower. If you choose a fixed rate and rates fall, you can consider refinancing again. For variable rates, the loan payments fluctuate with the interest rate environment, which makes them difficult to manage within a strict budget. If you have a steady income and excess monthly income, this may be a good option for you if the terms and other benefits meet your needs.

As you’re comparing quotes, don’t forget to consider the APR. This is the interest plus any fees.

Steps to take before you refinance

Before refinancing, a few preparatory steps can save you time and money. Here’s your to-do list.

Check your credit score

• Why it’s important: Your credit score is a major player in the interest rate game. The higher your score, the better the terms you’ll receive.
• Where to check: Many online services offer free credit score checks, or you can request a report from a major credit bureau.

Shop around for rates

• Don’t settle: One lender’s offer shouldn’t be your only reference point. Different lenders offer unique rates and terms.
• Get multiple quotes: Aim to get at least three quotes to gauge your options.

Read the fine print

• What to look for: Fees, prepayment penalties, and variable interest-rate caps are tucked away in the fine print.
• Why it matters: These details can affect your long-term costs and flexibility, so be sure you know what you’re getting into.

The impact of refinancing on your credit

As you look into refinancing, it’s crucial to understand its effect on your credit score. Here’s what you should know.

Short-term credit score dip

• Why it happens: Lenders perform a hard credit check, which can cause a small dip in your credit score.
• Is it a big deal? The impact is often minimal and recovers over a few months.

Long-term benefits

• On-time payments: If you secure a lower interest rate and make consistent on-time payments, your credit score can improve over time.
• Lower debt-to-income ratio: Refinancing can also reduce your monthly payments, improving your debt-to-income ratio.

Remember, these potential benefits are most impactful if you manage your new loan wisely. Stick to your payment schedule, and you could see a positive long-term effect on your credit score.

Is refinancing right for you?

Deciding to refinance isn’t a one-size-fits-all choice. Here’s what you should consider.

Consider refinancing if:

• You qualify you lower interest rates: A lower rate can save you significant money in the long run.
• You’ve improved your credit score: If you’ve landed a stable job and improved your credit score, lenders might offer better rates and more desirable terms.

Think again about refinancing if:

• You plan to go back to school: You could lose the opportunity to defer repayment if you go back to school.
• You’re close to loan forgiveness: You might lose eligibility if you refinance.
• You want to retain other federal loan benefits: Refinancing federal loans with a private lender means giving up certain protections, such as income-driven repayment plans.

Refinancing can offer benefits such as lower monthly payments and quicker debt payoff, but it comes with its own set of considerations. Be sure to weigh the pros and cons, and consider your unique situation. 

FAQ

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

Credit score requirements differ among lenders, but generally, a score of 650 or higher is a solid starting point. The higher your score, the better the rates you can expect to receive.

Can I refinance my student loan more than once?

Yes. Borrowers often refinance again to secure a lower interest rate or to adjust their repayment terms. This can save you more money over the life of your loan.

Does refinancing cost money?

Most student loan refinance lenders don’t charge upfront fees. However, some may charge late payment charges or returned payment fees. Always read the fine print.

Can I refinance only some of my student loans?

Absolutely. You might opt to refinance high-interest loans while keeping low-interest loans as they are. This strategy allows you to take advantage of better terms on certain loans without losing federal protections on others.