Refinancing 101: Should You Refinance Your Student Loans?

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In years past, you were stuck with your student loan interest rates and repayment plan. But as more and more borrowers felt the pinch of student loan repayment, a new industry was born to help make things more manageable: student loan refinancing.

You might have heard about student loan refinancing, but you might not know if it’s right for you. In this guide, we’ll look at how to decide whether to refinance your student loans.

  • What is student loan refinancing?
  • Should you refinance? What to consider first
  • How to determine your refinancing eligibility
  • How to find the best student loan refinancing company for you
  • How to prepare for refinancing
  • Choosing your refinancing terms
  • Deciding to refinance your student loans
  • What is student loan refinancing?

    Student loan refinancing is the process of obtaining a new loan at a new interest rate. Typically, you can refinance both your federal and private student loans, which involves paying off your old loans and getting a new one with different repayment terms and (hopefully) a better interest rate.

    Student loan refinancing is different from consolidation, though many people erroneously use the terms. Consolidation typically refers to taking out a Direct Consolidation Loan and combining all your federal student loans into one loan with one interest rate.

    While there are some similarities with refinancing, consolidation doesn’t offer any interest savings. Private student loan borrowers are not eligible for consolidation. As a result, refinancing can be a good option for private student loan borrowers or those with a combination of federal and private student loans.

    The key benefit of refinancing is the potential to save money in interest over the life of the loan. For example, as of July 1, 2021, federal Direct PLUS loans have an interest rate of 6.28% (though all interest charges were waived during 2021 as part of the Covid pandemic student loan repayment freeze).

    Through refinancing, you might be able to get approved for a lower rate and save money, especially if your loans are older and carry higher interest rates than what the government is offering currently.

    Should you refinance? What to consider first

    Student loan refinancing is a great way to make payments more manageable, but there are important things to consider before you decide to refinance your student loans.

    Through the process of refinancing, you are essentially applying for a private loan. If you already have private loans, that might not be an issue. But if you have federal student loans, you’ll give up your federal student loan protections, including:

  • Income-driven repayment (IDR) plans: IDR plans are a smart option for those struggling to afford their payments. With a longer repayment term and a monthly payment that is a percentage of your discretionary income, you can dramatically reduce your minimum payment with an IDR plan. But when you refinance, you’re ineligible for IDR plans.
  • Loan forgiveness: Federal student loans have some loan forgiveness options, such as the Public Service Loan Forgiveness and Teacher Loan Forgiveness When you refinance, you’re no longer eligible for these programs.
  • Deferment and forbearance: If you fall on serious financial hardship, postponing your payments through deferment or forbearance can help. But if you refinance, you may have limited options to postpone your payments.
  • When you refinance your student loans, you work with a private lender, losing out on the federal protections offered to you with your federal student loans. This doesn’t mean that you shouldn’t look into refinancing as a viable option, but it’s something to consider before moving forward.

    The process of refinancing is irreversible, so you can’t go back and get these benefits at a later date. Once you refinance, you’re going to be with your refinancing company for the duration of your repayment.

    How to determine your refinancing eligibility

    Because student loan refinancing companies are private lenders, there is more than one option for student loan refinancing. There are many companies in our student loan refinance marketplace from which you can choose. Before you pick one, it’s key to determine whether you’re eligible for a refinancing loan.

    Student loan refinancing companies tend to have stricter eligibility terms than you’d have with federal loans. Before you go through the hassle of applying, do your research on the requirements for each lender.

    Most lenders require you to have a good credit score, though each lender is different. Lenders also want proof of a stable income and cash flow to support your new loan.

    If your credit isn’t great, or if you don’t make enough money, you might need a cosigner to qualify for a loan. A cosigner acts as a guarantee to the lender. If you fall behind on your payments, the cosigner becomes responsible for repayment. Having a cosigner reduces the risk to the lender, making it more likely to approve you for a loan.

    To find out if you qualify, research several different student loan refinancing lenders and review their eligibility requirements. Be sure to read the fine print since refinancing may not be available in all states.

    How to find the best student loan refinancing company for you

    Once you’ve assessed your eligibility and narrowed it down to a few possibilities, it’s time to choose the best lender for you. Here are some questions to ask that could help you find the best lender for you:

  • Does the lender offer fixed or variable interest rates?
  • How much could you save with their interest rate? Use our student loan refinancing calculator to see estimate potential savings.
  • What are the repayment terms and how will that affect your monthly payment?
  • Do the lenders offer any perks? For example, some allow you to make interest-only payments if you experience financial hardship.
  • What are others saying about the lender? Does it have a good reputation?
  • Is there an origination fee or prepayment penalty?
  • What are the minimum and maximum amounts of debt it will refinance?
  • What kind of customer support does it offer? Is it easily accessible?
  • After doing a comparative analysis between lenders, pick your top three and start applying.

    Why three? Even after you’ve assessed your eligibility and chosen your top three lenders, you still have to get approved for refinancing. Each lender has its own requirements, and some are stricter than others. Depending on your credit score and your income, one lender might be more likely to approve you than another.

    In the end, you want to have options and find the best lender for you.

    How to prepare for refinancing

    Before you apply for student loan refinancing, do a quick financial audit and prepare some documents to help the process move along smoothly. Here are some steps to take to prepare for refinancing:

  • List all your federal and private student loan totals.
  • Write down your loans’ interest rates next to the total.
  • Create a third column and include your loan servicer’s information, including phone, email and mailing address.
  • Gather your most recent pay stubs.
  • Collect last year’s tax return.
  • Check your credit reports from the three major bureaus using AnnualCreditReport.com.
  • Check your credit score for free at LendingTree.
  • Taking these steps can help you prepare to refinance your loans and have all your information in one place.

    Choosing your refinancing terms

    Through student loan refinancing, you may be able to choose from various repayment terms and interest rates.

    Consider your repayment term and assess how it will affect your monthly payment. In other words, will your monthly payment be going up, staying the same, or going down? It all depends on the repayment terms that you choose.

    Most refinancing companies offer repayment terms between 5 and 20 years. Of course, we believe it’s best to pay off your loans as quickly as possible. But you should also make sure that whatever repayment term you choose is manageable for you and allows you to reach other financial goals, too, such as saving for retirement.

    With interest rates, assess the impact of choosing a fixed or variable rate. Fixed rates are typically a tad higher than variable rates — but they are fixed, meaning they won’t go up or down over the life of your loan.

    Variable rates tend to be lower and can be an attractive option. Variable interest rates are tied to the markets — often the London Interbank Offered Rate (LIBOR).

    Before you opt for a variable rate to save money, understand that rates can increase anytime. If benchmark interest rates are rising overall, as was the case in 2022, you could very well end up with a higher interest rate down the line than if you had selected the fixed-rate option.

    If you think you can aggressively pay off your loans in a few years, a variable-rate loan could help you achieve that. But if you choose a longer repayment term, you may be better off with a fixed interest rate.

    To save extra money on interest, see if your prospective lender offers autopay discounts. Some lenders will reduce your interest rate by 0.25%, which can help you save money over time.

    Deciding to refinance your student loans

    Refinancing your student loans could be a great way to save money on your student loans, but it’s still a major financial decision. Carefully assess the costs and the benefits of student loan refinancing and choose what’s right for you.

    Ready to refinance your loans? Compare offers from multiple student loan refinancing companies to make sure you get your best rate and loan repayment terms.

    Interested in refinancing student loans?

    Refinancing 101: Should You Refinance Your Student Loans?