Quick Guide: How To Refinance Student Loans – And Why

Wondering if you should refinance your student loans? You’re not alone.

Before doing so, there are many factors to consider. While paying off any kind of student debt isn’t exactly anyone’s idea of a good time, refinancing your current student loan can make your debt repayment journey a bit easier.

Refinancing your student loans means consolidating them into one payment that has a lower interest rate. That way you can simplify your student loan payments and save money at the same time. You may also be able to pay off your debt faster.

But there are also downsides to consider, and consolidation may not be the right fit for everyone. Let’s take a look at how to refinance student loans and some important considerations before doing so.

What Does It Mean To Refinance A Student Loan?

Refinancing a student loan is a process similar to other types of debt consolidation loans. A lender will pay off your existing student loan and replace it with a new one. Often, borrowers can get a lower interest rate when they refinance or one that offers a longer repayment term. By refinancing at a lower interest rate, borrowers can save money throughout the life of the loan.

For example, say you took out $20,000 in student loans with a 7% interest rate over the next 15 years. That means you’ll be paying $179.77 each month. If you were to refinance that to one offering a 5% interest rate, also over the next 15 years, your monthly payments will be lowered to $158.16, saving you nearly $3,890 overall.

When Should I Refinance My Student Loans?

You’ll need to qualify to refinance your student loans, but you don’t need a perfect credit score. Refinancing either federal or private loans is an option even if you’ve already done so in the past. Though you can’t refinance private loans back to federal ones, it can work the other way around. Another option is a direct consolidation loan, which allows you to combine one or more federal student loans into a new loan.

Here are several circumstances when it’s a good time to refinance your student loans:

• You have a history of on-time payments: Paying back debt consistently and on time will signal to lenders that you’re a trustworthy borrower. Lenders will look at your credit history to determine whether to approve you for a refinance.
• You have good credit: The higher your credit score, the more likely you’ll be approved at a competitive interest rate. You may be able to qualify with a co-signer if your credit isn’t great, but there are risks associated with that, too. You can access your credit score using Rocket Money^SM today.
• You have sufficient income: Lenders will look at whether you can afford to pay off refinanced loans, so if you got a raise or landed a new job with a higher income, you have a higher chance of qualifying. This could also allow you to pay off your student loan debt faster.
• You have student loans with high rates: Interest rates that are high indicate that you have an opportunity to find ones that are lower. By securing a lower rate, you’ll save more in interest over the life of the loan. If you have a variable rate loan, consider refinancing to a lower fixed-rate one.
• You have private loans and can qualify for a lower rate: Refinancing from one private loan to another is a good bet since you’re not at risk of losing any federal loan benefits or programs.
• Refinancing could help pay off your loans early: When you refinance, you could choose a shorter repayment term and pay your loans off sooner. Plus, paying student loans off early means you’ll pay less in interest over the life of your loan.

Pros Of Student Loan Refinancing

Here are possible advantages to student loan refinancing: 

• Save money in interest: The biggest reason most people choose to refinance their student loans is that they qualify for a lower interest rate. This typically happens if you improve your credit score or lower your debt-to-income ratio.
• One payment plan: Paying back loans to several loan services gets confusing. You can refinance several loans into a single loan and make one monthly payment. You can do this with private student loans, or you can take out a federal Direct debt consolidation loan with federal student loans. You can also transfer a Parent PLUS Loan in your parents’ name into a new loan with your name on it instead.
• Apply with a co-signer: If you don’t have the best credit score or credit history, you can use a creditworthy co-signer to get a better interest rate.
• Alter your repayment plan: Refinancing allows you to change your repayment plan. You can lengthen your plan for a smaller monthly payment or shorten it to pay off your student loans more quickly.

Cons Of Student Loan Refinancing

There are downsides to refinancing your student loans as well: 

• Strict requirements: If you’re refinancing a private student loan, private lenders typically have strict eligibility requirements. You’ll need to meet minimum credit score requirements and show proof of stable income.
• Credit score determines interest rate: You won’t always qualify for a lower interest rate when you refinance. A co-signer could help you qualify for a better rate, but you can’t guarantee that someone will agree to cosign on the loan.
• It could take longer to repay: Whichever type of loan it is, refinancing won’t make sense if you choose longer student loan repayment terms. Say you have a few years to pay off your student loans, refinancing to a new one could mean a longer repayment term and the lower interest rate won’t make much of a difference. In other words, stretching out your payments could mean that you’re paying more in interest overall.
• You could lose federal repayment protection: Refinancing student loans won’t make sense if you want to keep your federal loan benefits. You could lose access to income-driven repayment plans and a loan forgiveness program. For example, if you’re trying to pursue student loan forgiveness or loan forgiveness forbearance, refinancing federal loans into private loans makes you ineligible for such programs. This includes other programs run by the Department of Education, such as Teacher Loan Forgiveness and Public Service Loan Forgiveness.

The Best Way To Refinance Student Loans In 6 Steps

Follow these steps to refinance your student loans:

1. Figure Out If Refinancing Is Worth It

It might be worth refinancing your student loans if:

You have loans with high interest rates: This reason is even more pertinent if you have variable rate loans, as your rate could go even higher in the future. Shop around to see if you can get a lower fixed rate with another lender, which can save you big bucks and get you a lower monthly payment. If you don’t qualify for a lower interest rate, see if you can get a creditworthy cosigner to help.

Your financial situation is better: If your credit score has gone up, your income has increased and you have a history of on-time payments, chances are you’re more likely to meet eligibility requirements and be approved for a much lower rate on your private student loans. You could also pay off your student loans earlier, but make sure your repayment terms don’t include any prepayment penalties.

You have private loans: You don’t need to worry about losing benefits on your federal loans, so you might as well try to see if you can qualify for a lower monthly payment with a new lender.

2. Know Your Credit Score

When a loan application goes through the underwriting process, your lender will run a credit check to see if your credit score is high enough to quality for a refinance.

Before filling out loan applications, find out your credit score to see if refinancing your student loans is even worth it. There are free credit reporting tools like the Rocket Money app or your credit card issuer where people can check their credit scores and credit reports. You can also access your credit report annually for free through AnnualCreditReport.com or from any of the three major credit reporting agencies.

3. Look For Competitive Rates, Low Fees And Reputable Lenders

Don’t just go with the first offer you receive to refinance your student loan debt. Shop around and compare rates and fees from reputable lenders to find the best student loan for you.

Understand how interest is calculated and what fees you’ll need to pay. Fixed interest rates won’t change over the life of the loan while variable rates fluctuate over time. Some lenders also charge origination fees which are a percentage of your loan amount charged by the lender for processing your loan. These fees add to your loan balance and can increase your costs over time.

4. Pick The Best Loan Offer

After you review student loan refinancing rates, pick the best offer with a loan term that fits your needs. Shopping for the best rate is always advised whenever you’re taking out a new loan or credit card.

5. Apply For Your Loan

When you fill out your loan application you’ll need to submit important information and documents to your lender. You may be asked:

• Social Security number
• Pay stubs
• Driver’s license or government-issued ID
• Proof of employment
• Proof of graduation
• Loan payoff statements from current lenders or servicers

6. Accept The Refinancing Offer And Start Paying

After you’re approved, you’ll sign your loan documents. Once it’s filed, the repayment period on your new loan will begin, however, the new lender may not pay off your old loans immediately. In this case, continue making your student loan payments so you aren’t charged late fees that could potentially lead to negative credit reporting.

Student Loan Refinancing FAQs

Here are the most frequently asked questions on how to refinance student loans:

Does refinancing student loans help?

Refinancing student loans can help save you money if you qualify for a lower interest rate. You can also choose a longer repayment term to lower your monthly payments.

What are the risks of refinancing student loans?

If you don’t qualify for a lower interest rate, refinancing doesn’t make sense. Also, you could lose certain protections by refinancing federal student loans, including access to student loan forgiveness, repayment assistance programs and income-driven repayment plans.

What type of student loans can be refinanced?

You can refinance federal and private student loans. However, not all lenders will refinance federal PLUS loans.

Why is it hard to refinance student loans?

Lenders don’t want to take on loans they deem too risky. This is why borrowers must meet strict eligibility requirements, like having a stable income and a decent credit score.

Are there alternatives to refinancing my student loan?

If you have federal student loans, consider federal student loan consolidation or an income-driven repayment plan. This can help lower your monthly payments.

The Bottom Line: Refinancing Your Student Loans Can Pay Off

Understanding if and when you should refinance your student loans is crucial if you want to save money and improve your overall financial situation. That way when you’re ready to do so, you’ll know that your decision will benefit you.

Need help keeping track of your loan payments? Download the Rocket Money app today to get full visibility into what you’re paying every month.