What Is Student Loan Refinancing?

Refinancing your student loans can be a smart way to reduce costs and gain more control over repayment. Done strategically, it can lower your monthly payments or total interest — and potentially save thousands over the life of your loan.

This guide explains when refinancing makes sense and how to decide if it’s right for you.

Current student loan refinance rates

What is student loan refinancing?

Student loan refinancing is when you get a new loan from a private student loan lender to pay off existing federal or private student loan debt. The goal is to change the rate or terms. There’s no limit on the number of student loans you can refinance.

When you refinance student loans, you pay off existing debt with the proceeds from the new loan. Then, you pay back your new student loan lender. You can shop around to find a refinance loan with the features you’re looking for, such as a lower interest rate or a longer repayment timeline.

Refinancing loans is different from consolidating student loans, which applies only to federal student loans. 

Consolidation is done through a Direct Consolidation Loan from the Department of Education rather than a private lender. Consolidating opens up the door to different repayment plans, but it doesn't change your interest rate, as your new loan has a weighted average of the existing debt. 

When you refinance your student loans, you must apply with a private student loan lender and meet the lender's underwriting requirements, which involve a review of your credit and income. Consolidation does not require this type of financial review.

How does student loan refinancing work?

If you want to refinance your student loans, you'll need to take several steps to find a new lender to pay off your existing debt. 

Here's how the process works: 

1. Shop around to get quotes from different private student loan lenders 

There are many different student loan refinance lenders, so your first step should be comparing them. 

“Do your research prior to applying for a refinance, as different lenders have different loan terms and different requirements,” advises Domenick D’Andrea, a financial adviser and co-founder of DanDarah Wealth Management. 

Most student loan lenders offer rate quotes online and allow you to prequalify without a hard credit check. This means comparing loan options will not affect your credit score. Try to get at least three quotes from different lenders to find the best rate. With a comparison tool like Credible, you can evaluate prequalified offers from multiple lenders at once.

As you compare lenders, key things to look for include:

• Annual percentage rate (APR): Comparing the APR can be more accurate than looking at just interest alone, as APR shows total borrowing costs. 
• Fixed or variable rate: Fixed-rate loans will not change over time. Variable-rate loans have a rate tied to a financial index. This means monthly payments and total costs can change. Variable-rate loans may start with lower rates, but are riskier because you don't know if rates will go up. 
• Repayment timeline: Costs for loans with shorter payoff times are typically lower. Since you pay interest for a shorter time period, your rate is usually lower. Loans with longer repayment times typically cost more overall, but the monthly payments are lower even if the rate is higher because you have a longer time to pay off the full balance. 
• Lender policies: Does the lender offer forbearance in case of financial hardship? Will loans be discharged due to death or disability? Is there an autopay discount, or do you get member benefits like discounts on other loans? Consider all these factors.

By looking carefully at the details, you can find the right lender for you.

2. Apply for student loan refinancing

When you’ve found a lender offering the terms you’re looking for, it's time to submit a full application. At this point, you’ll undergo a hard credit check, so you will get an inquiry on your credit report.

You should also be prepared to provide financial documentation and information about current loans. This could include:

• Proof of identity, including a government-issued ID
• Proof of residency
• Proof you graduated
• Proof of employment and income
• Payoff verification statements from your current lenders

After your lender checks your credit and reviews your financial information, you’ll get final approval to borrow if you qualify. You should again review the terms and conditions carefully to make sure your final loan offer is what you expected. 

3. Sign your loan documents

You'll need to sign the final documents to complete the approval process. This includes the promissory note, which discloses all the terms and conditions of your loan. 

Once you’ve signed your documents, you have a three-day right of rescission, which means you can cancel your student loans with no penalties within that period. 

4. Wait for your existing student loan debt to be paid off

After all the documents are signed, your new student loan lender will repay your existing student loans that you included in your refinance. The timeline for this will vary by lender.

You should continue to make any payments due to your old student loan servicer until you have confirmation that your loans have been paid off. 

5. Begin making payments to your new student loan servicer

Finally, once the process is complete, you'll begin making payments to your new student loan servicer. You may want to sign up for automatic payments, as many student loan lenders offer autopay discounts.

Who should consider refinancing their student loans?

Now that you know how student loan refinancing works, there’s an even more important question: Should I refinance my student loans?

In general, refinancing could be a good idea if:

• You have private student loans: Since you must refinance with a private student loan lender, you generally don't want to refinance federal student loans because you’d have to give up important benefits. If you refinance one private loan to a new private loan, this isn't a concern. 
• You’re a well-qualified borrower or have a well-qualified cosigner: If you have excellent credit and steady income, or have a cosigner with these financial credentials, then you’re more likely to be offered a refinance loan at a favorable rate. 
• You have a high interest rate: If your current interest rate is very high, refinancing could save you a substantial amount of money. 

In general, when you can lower your interest rate on private student loans, refinancing typically makes good sense. However, you’ll want to be careful about extending your repayment timeline. If you make your payoff period longer, you could end up paying more over time, even if your new loan has a lower rate, because you pay interest for a longer period.

However, remember that if you refinance federal student loans, you’ll lose access to federal protections like income-driven repayment plans, deferment and forbearance options, and potential loan forgiveness programs. It’s important to ensure the long-term savings outweigh the benefits before moving forward.

What are the pros and cons of refinancing student loans?

There are both pros and cons of refinancing student loans. 

The biggest benefits include:

• You may be able to lower your student loan interest rate: If you can reduce your rate, you can make paying off your debt more affordable. That's because more of each payment will go to reducing the principal balance. 
• You can change your monthly payment and payoff time: There's a trade-off to make here. You can choose a shorter repayment time to make total payoff costs lower or a longer payoff time if you want to lower your monthly payments as much as possible.
• You can remove a cosigner: If you previously had a student loan cosigner and you can now qualify to borrow on your own, you can remove the cosigner so they’re no longer responsible for the debt.
• You can change your loan servicer: If you don't like your servicer's policies, such as forbearance options or discounts on other loans, you can switch to one with policies you prefer.

The biggest downsides include:

• You could make payoff over time more expensive: If you choose a loan with a longer term, you’ll potentially increase total interest costs and be in debt for a longer period. 
• You may need a cosigner: If you don't have the credit or income that student loan refinance lenders require, you may not be approved unless you have someone willing to cosign. 
• You can lose federal borrower benefits: If you want to refinance federal student loans, you'll need to be willing to give up the unique advantages associated with federal student loans.

The pros and cons of student loan refinancing differ from those of consolidation. The biggest benefit of consolidation vs. refinancing is that you keep your federal borrower benefits while getting access to more repayment options. The biggest downside to consolidating is that you do not change your interest rate.

What types of student loans can be refinanced?

You can refinance federal student loans and private student loans. However, for most people, it only makes sense to refinance private student loans.

If you refinance federal loans, you’ll lose benefits, including:

• Access to income-driven repayment plans that offer loan forgiveness over time
• Access to Public Service Loan Forgiveness, which is an important student loan forgiveness program for those who do public service work
• Generous options for deferment or forbearance 

“In the event of loan forgiveness or postponement with hardship protection, you would no longer qualify,” explains Steve Azoury, a chartered financial consultant (ChFC) and owner of Azoury Financial. “Also, private student loans would require stable employment, and without any federal protection, the lower rate alone may or may not be to your advantage.” When should you refinance student loans?

If you’re eligible based on your financial credentials and can qualify for a refinance loan, refinancing can make good sense. Some factors that affect when it’s the right time include:

• Market rates: When rates are falling, you have more opportunities to find affordable loans with the best student loan refinance companies.
• When you’ve improved your credit: Better credit provides the opportunity to qualify for lower student loan refinance rates. You may also be able to qualify for a loan without a cosigner if you previously had one.
• When you’ve increased your income: Like better credit, a higher income makes it easier for you to qualify for a loan on your own to remove a cosigner. It also increases the chances of getting approved at a lower rate.