Refinancing Student Loans: Guidelines

Learn when and why you should Refinance Student Loans.

What Does It Mean to Refinance Student Loans?

When you refinance student loans, you typically take out a new private loan and use it to pay off your other loans. This could help simplify your finances if you have many student loans. And, it could help you tackle your student loan debt in less time.

By refinancing your student loans, you could:

  • Turn many loans into one
  • Lower your interest rate
  • Lower your monthly payment
  • Pay off your student loans more quickly
  • Pay less over the life of your student loan
  • Switch variable rate loans to a fixed interest rate

You may be able to refinance private student loans, federal student loans, or both. But, don’t mistake refinancing for student loan consolidation. Only federal loans, not private loans, may be eligible for consolidation.

Consolidation means combining several Federal Student Loans or Federal Parent Loans into one. Student loan consolidation may offer some benefits similar to refinancing. These may include simplifying or lowering your monthly payment. You could also change the terms of your student loans, like the length of your repayment period.

Consolidation generally has fewer eligibility requirements than refinancing. For instance, refinancing usually requires good credit, while consolidation does not. But if private student loan consolidation is your goal, the only potential option is to refinance.

The Facts on Student Loan Consolidation and Refinancing

About 30% of students said they refinanced or consolidated their student loans. Let’s take a look at potential pros, cons, and key factors for both paths:


Student Loan Refinancing

Student Loan Consolidation

How common is it?

2.6% of students said they refinanced private loans. 4.7% said they refinanced both private and federal loans.

11.9 million borrowers took out Federal Consolidation Loans, as of 2018.

When should you do it?

Borrowers often refinance once they have graduated, found a job, and built excellent credit.

You may usually consolidate as soon as you graduate, leave school, or drop below half-time enrollment.

What are the potential benefits?

You may qualify for a lower interest rate on your private loans. So, you might be able to save money on your loans and pay them off in less time.

Consolidation may lower your monthly payment and give you longer to pay off your loans. You could also be eligible for access to income-driven repayment plan options and other potential benefits.

What are the potential drawbacks?

Borrowers who refinance federal student loans could lose certain benefits. These may include income-based repayment plans or deferment/forbearance options. It’s also important to read the fine print on your refinancing loan. Some borrowers opt for a lower payment at a higher interest rate. So, they could end up paying more over the life of the loan.

Federal Consolidation Loans may lengthen how long it takes to pay back your debt. So, you could pay more interest over time. You could also lose some borrower benefits, like interest rate discounts. And, if you’re working toward Public Service Loan Forgiveness (PSLF), consolidating could cause you to lose credit for all prior payments.

Potential short-term effects

You could qualify for a lower interest rate and/or lower monthly payment. You could also simplify your finances by paying just one student loan bill each month.

You could lower your monthly payment. You could also qualify for an income-driven repayment plan. And, you could turn many student loan bills into just one.

Potential long-term effects

You could pay less over the life of your loan and/or shorten the length of your loan.

You may take longer to pay off your loan. That means you could end up paying more over the life of the loan.

The impact of borrower credit

To qualify for the best student loan refinance rates, you typically need to have a high credit score, such as 670 or better. You should also have a low debt-to-income ratio.

Typically, no credit check is required for many federal student loans. That includes Federal Consolidation Loans.

Comparing Student Loan Refinance Companies

Many banks and financial companies refinance private and/or federal student loans. Consolidation loans, on the other hand, are only available through the federal government.

Finding a student loan refinance company for your needs may depend on:

  • The size of your debt. Many student loan companies specify a minimum and maximum amount you can borrow.
  • Your credit. Student loan refinance companies do a credit check. Many require you to have a minimum credit score, often between 650 and 680. Lenders may specify a maximum debt-to-income ratio, like 50%. Finally, lenders may need you to have a minimum credit history, often 36 months.
  • Your earnings. You may need to give proof of stable income. Lenders may specify a minimum income you have to earn.
  • Interest rates. Some lenders may offer lower interest rates, so it’s wise to compare.
  • Loan period. The loan period is how long it will take you to pay off the loan. Some lenders have a minimum and maximum loan period.
  • Your financial goals. You may be concerned about payment size, paying off your debt as quickly as possible, or saving money over the life of your loan. Many borrowers worry about all three! Look for refinancing terms that work for your short-term and long-term aims.

5 Questions to Ask When Refinancing Student Loans

Deciding to refinance your student loans can be a smart move. Or, it might not be ideal for your financial goals right now. Here’s what to ask yourself and your lender to help figure out the next steps:

1. Do I Qualify for Competitive Interest Rates?

Interest rate typically depends on many factors – some of them beyond your control. These usually include market rates, the lender, and the terms of the loan you’re considering. Your credit history will also impact the interest rate you qualify for.

Be aware of fixed vs. variable interest rates. Variable rates often start out lower than fixed, but they may increase over the life of your loan.

2. Are There Fees I Should Know About?

Some student loan refinancers charge an origination fee, though many don’t. This is usually a percentage of the debt you plan to refinance.

Other fees to be aware of include penalties for late payments. But, if you make extra payments, or pay more than your monthly bill, you might not be penalized. It is against the law for lenders to charge a prepayment penalty for student loans.

3. What Are the Repayment Options?

Find out your lender’s minimum and maximum loan periods. This is how long it should take you to repay your loan. Loan period affects the size of your monthly payment and how much interest you may pay in total.

Some lenders may also offer special repayment plans. For instance, some plans could let you make interest-only payments for the first few years after you refinance.

4. What Happens If My Life Changes?

Some private lenders may offer options if your life takes a turn for the better or worse. These may include deferring your loan if you go back to college, join the military, or something else. Lenders may also offer forbearance. That means you could put payments on hold during a period of hardship, like illness or unemployment.

5. What Extra Benefits May Be Available?

Some lenders offer a discount on your interest rate if you sign up for autopay. And, there may be other benefits available. Browse lenders to learn more about potential rate reductions and borrower services that could help you get your finances on track.

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