How to Refinance Student Loans

Like most other types of loans, you can refinance student loans.

When you refinance a loan, you’re trying to make payments more manageable by combining all of your student loans – which could include both private and federal – into a single, more affordable loan payment or a lower interest rate. In addition to interest rates, you can revise other aspects, like the terms and repayment schedule.

Refinancing student loans has its pros and cons. Understanding the advantages and disadvantages of student loan refinance options can help you make an informed decision since everyone’s situation is different.

Pros

1. Lower interest rates: This is perhaps the most compelling reason to refinance. A lower rate with a refinance loan can save you thousands over your repayment period and possibly lower your monthly payment.
2. One payment instead of several: With multiple student loans, consolidation through refinancing can simplify your finances with just one monthly payment and one interest rate.
3. Change to pay your loans off faster: Refinancing can be a type of student loan relief option if you are looking to pay your loans off faster. With a lower fixed-rate loan, more of your money can go toward repaying the principal balance.

Cons

1. Loss of federal benefits: Refinancing federal student loans into a private loan means giving up benefits like income-driven repayment plan options and loan forgiveness programs.
2. Everyone doesn’t qualify: You may not qualify to refinance your student loans if you don’t have good credit or meet the lender’s income requirements.
3. Extended loan term: While choosing a longer repayment term for your refinance loan can lower your monthly payments, it can also increase the total amount of interest you’ll pay.
4. Your interest rate could change: While federal student loans tend to have a fixed interest rate, some private lenders offer variable rate loans, meaning your rate may start lower but could change over time, affecting your minimum monthly payment.¹

If you decide that student loan refinancing is the right option for you, consider these steps.

1. Do your research. Research lenders and what they are offering. Look for eligibility requirements you can meet and features that best suit your needs. Consider factors like flexible repayment terms, whether you want a fixed or variable interest rate, and if you can apply without a co-signer or if certain lenders allow you to use a creditworthy co-signer.
2. Shop around for the best rates. Check rates and compare among banks, credit unions, and online lenders. The goal is to find the lowest rate possible. You may be able to submit a prequalification form with some lenders to see what rates they might offer.
3. Choose your loan terms and lender. Select the lender with eligibility requirements you can meet and terms that best suit your needs. This includes the payment options you prefer and how easy the process of transferring your loan balance is, like if you’re trying to refinance Parent Plus loans from a parent’s name to your name.
4. Submit an official application. Gather all your documents. Refinance lenders will ask for your social security number, proof of income through pay stubs or bank statements and address, proof of graduation, government-issued photo ID, and other documents. If you apply with a co-signer, you must also submit their information.
5. Fill out the paperwork. Once approved for the loan, you’ll need to sign the paperwork to accept it officially. You can typically do this online or in person.
6. Keep paying your old loans. After you’ve been approved, you may still need to wait a couple of weeks before your new lender pays off your former loans. While waiting, continue to pay off your current loans until the process is finalized with your new lender.

How to refinance federal student loans

Depending on if you’re looking to refinance federal or private student loans, there are some nuances you need to know.

When you refinance a federal student loan, it becomes a private student loan. You refinance the loan with a private lender like a bank or online lender – the federal government does not offer refinancing.

Refinancing federal student loans disqualifies you from any government-sponsored forgiveness initiatives and programs. Consider this option if you’re comfortable with forgoing Department of Education protections like deferment, income-driven repayment, and forbearance.

If you’d like to keep these protections, you’d probably be better off consolidating your loans rather than refinancing them.

How to refinance private student loans

Private student loans are simpler to refinance since they are already with a private lender. You just need to choose a lender with better interest rates and apply for approval.

A good credit score will make it easier to get approved for refinancing. Lenders want to know that you are financially responsible with credit, and your credit score is a key indicator of your creditworthiness.

Most lenders prefer a minimum credit score of 670 to qualify for the best rates, but others may allow at least a 650 credit score depending on factors like your income and debt-to-income ratio.^2,3

You may be able to check your rate online or prequalify, which won’t result in a hard credit inquiry until you complete the application. Prequalification involves a soft credit check, streamlining the application process and giving you an idea of the terms you can expect.⁴

Some lenders will work with borrowers with bad or low credit scores as well. Just keep in mind that a lower credit score usually results in a higher interest rate, which might cancel out the benefits of refinancing in the first place. If you have bad credit, consider applying with a co-signer who has good credit to help you get approved with a better rate or terms.

Refinancing your student loans can be helpful if you want to lower your interest rates or monthly payments. But there are also some downsides to refinancing, especially if you have federal student loans since you’d have to give up your federal relief benefits.

Refinancing is worth looking into if it makes sense financially and will help you reach your personal financial goals, like paying off your student loan in a set amount of time or reducing your monthly expenses with a lower debt payment.

Heading to college? Understand the current landscape of student loans, credit cards, and student jobs with our college finance guide.