Refinancing student loans: what it is & how to decide if it’s right for you
Refinancing replaces your existing loans with a new private loan, potentially at a lower interest rate or with better terms.
Federal protections are often permanently lost when federal student loans are refinanced into a private loan.
Refinancing may be more accessible to borrowers with strong credit profiles and stable income.
What is student loan refinancing?
Student loan refinancing means taking out a new private loan to pay off one or more existing student loans — ideally at a lower interest rate or with more favorable repayment terms. Borrowers may refinance federal loans, private loans, or a combination of both.
What happens to your old loans
When you refinance, your new lender pays off your existing student loans. From that point forward, you make payments only to the new lender under the new loan’s terms.
Refinancing vs. student loan consolidation
It’s important to understand the difference:
Refinancing: Offered by private lenders, refinancing creates a new loan with a new interest rate and repayment terms.
Federal consolidation: Consolidation combines federal loans while preserving federal protections like income-driven repayment and forgiveness programs.
How refinancing student loans works
Step 1: Apply with a private lender
Borrowers can apply through banks, credit unions, or online lenders. Many lenders allow pre-qualification to check rates without affecting credit.
Step 2: Credit & income review
Lenders typically evaluate:
Credit score
Income and employment history
Debt-to-income ratio
Stronger financial profiles generally qualify for lower rates.
Step 3: Loan approval and payoff
If approved, the lender pays off your existing student loans directly.
Step 4: Repayment under new terms
You begin repaying the new loan with a new interest rate, loan term, and monthly payment.
Pros of refinancing student loans
Lower interest rate
A lower interest rate may reduce total interest paid over the life of the loan, though savings depend on loan term, fees, and repayment behavior.
Lower monthly payments
Extending the loan term may reduce monthly payments, although this can increase total interest over time.
Simplified payments
Refinancing multiple loans into one can streamline repayment with a single monthly bill.
Option to remove a cosigner
Some lenders may allow cosigner release after a period of consistent, on-time payments.
Cons and risks of refinancing student loans
Loss of federal loan protections
Refinancing federal loans typically means permanently giving up access to:
Income-driven repayment plans
Public Service Loan Forgiveness (PSLF)
Federal deferment and forbearance options
Credit-based approval
Borrowers with lower credit may:
Receive higher interest rates
Be denied approval
Need a cosigner to qualify
Longer loan terms can cost more
Lower monthly payments spread out over a longer period of time may come with higher total interest costs.
Who should consider refinancing student loans?
Borrowers with strong credit
Borrowers with stronger credit scores are more likely to qualify for competitive rates.
Those with private student loans
Private loans generally lack the protection that comes with federal loans, making refinancing less risky for someone with private loans only.
Borrowers with stable employment
Refinancing may be considered by borrowers who do not anticipate needing income-driven repayment or federal hardship protections.
People focused on interest savings
Borrowers focused on reducing total interest costs may explore refinancing as one possible option.
Who should avoid refinancing student loans?
Borrowers seeking loan forgiveness
Borrowers pursuing Public Service Loan Forgiveness would lose eligibility if they refinance federal loans.
Those using income-driven repayment
Federal flexibility may outweigh the potential interest savings of refinancing.
Borrowers with unstable income
Private loans generally offer fewer options during financial hardship.
Refinancing federal vs. private student loans
Refinancing federal loans
Refinancing federal loans into a private loan typically results in the permanent loss of federal protections, which generally cannot be reinstated.
Refinancing private loans
Refinancing private loans is often safer and more straightforward, since protections are already limited.
Mixed loan strategies
Some borrowers refinance only their private loans while keeping federal loans intact to preserve benefits.
Fixed vs. variable rates when refinancing
Fixed interest rates
Generally offer stable, predictable payments
Often better for long-term budgeting
Variable interest rates
May have lower initial rates
Rates may increase over time
Because variable rates can increase over time, total repayment costs may become less predictable
How often can you refinance student loans?
Refinancing multiple times
Borrowers can refinance more than once, but it’s generally only beneficial if rates or terms improve significantly.
Risks of frequent refinancing
Multiple credit inquiries
Resetting loan terms can extend repayment and increase total interest
Common mistakes to avoid
Refinancing without understanding trade-offs
It’s important to weigh the permanent loss of federal loan protections against the benefits of refinancing.
Only looking at monthly payment
Ignoring the total interest cost can lead to paying more over time.
Not shopping around
Interest rates and terms can vary widely between lenders.
Bottom line
Refinancing student loans can help lower interest costs, simplify payments, and speed up repayment, but it isn’t a one-size-fits-all solution. The decision depends on factors such as your credit profile, income stability, loan type, and long-term goals.
If you’re searching for ways to meet your long-term financial goals, you may want to consider a high-yield savings account. Raisin can help you instantly compare the best rates in one place.
Frequently asked questions
A hard credit inquiry may cause a small, temporary dip in your credit score.
Yes, but doing so may permanently eliminate federal protections.
Yes, if you qualify and the new terms offer meaningful improvements.
Whether refinancing makes sense depends on individual circumstances, loan types, and long-term financial goals.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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