What Is Student Loan Refinancing?

When you refinance your student loans, you borrow a new loan to pay off your current student debt. With this process, you could take advantage of a lower interest rate, a more favorable repayment schedule, or a lower monthly payment.

While student loan refinancing can help make your debt more affordable, carefully consider the benefits and drawbacks before starting. Here’s what you need to know about refinancing your student loans.

How student loan refinancing works

When you refinance your student debt, you take out a new loan from a private lender and use that money to pay off your original student loans. Ideally, the new loan will have a lower interest rate, better terms, or other benefit. Then, you’ll start paying back the new loan to the refinance lender.

In many cases, borrowers refinance to pay off multiple student loans at once. This ensures that you will now only have a single loan to manage moving forward, rather than juggling several debts with different servicers, interest rates, repayment terms, and monthly payments.

See Also: Is It Worth It to Refinance Student Loans?

Refinancing vs. consolidation 

While refinancing and consolidation are sometimes used interchangeably, these are two different processes in student lending. Although both strategies replace your original loans with a new one, they have different pros and cons. 

Student loan refinancing can be used for any education debt, including private and federal student loans. However, you can only refinance via a private lender. That means that refinancing federal student loans will result in a private debt, and you’ll lose access to federal protections such as income-driven repayment plans and forgiveness opportunities. 

Student loan consolidation, on the other hand, occurs when you combine your federal student loans into a Direct Consolidation Loan. Converting your existing federal loans into a consolidation loan can combine your debts into one account and reduce your monthly payment, but it won’t lower your interest rate. 

Unlike private refinancing, federal loan consolidation maintains your eligibility for federal perks like income-driven repayment, loan forgiveness, and forbearance and deferment options. 

Benefits of student loan refinancing

There are a number of reasons why you may choose to refinance your student loans. Potential benefits include:

• Lowering your interest rate: Borrowers with good-to-excellent credit may qualify for a better interest rate on their refinancing loan than they received for their original debts. A lower rate can reduce the lifetime cost of the loan, potentially saving you a lot of money.
• Adjusting your repayment terms: Extending your repayment timeline is one of the simplest ways to lower your monthly payment — though it will likely increase your loan’s lifetime costs. Alternatively, if you shorten the repayment term, it will typically increase your monthly payment but lower the overall cost of your debt.
• Simplifying your debt: If you have multiple loans, refinancing can be a useful way to streamline the repayment process. Rather than tracking several different due dates, payment amounts, repayment terms, interest rates, and servicers, refinancing can combine your debt into a single loan to manage. 
• Removing a cosigner: Applying for a private student loan with a cosigner can get you a lower interest rate than you might qualify for on your own, but not all loans allow the primary borrower to release the cosigner later. Refinancing your loan offers the chance to remove a cosigner and take over the loan entirely on your own.
• Changing loan servicers: Different loan servicers offer different perks and support. If you’re unhappy with your current lender or think another company could do the job better, refinancing allows you to switch.

Check Out: When to Refinance Student Loans

What to consider before refinancing

Though refinancing can be a good idea for many borrowers, it’s not the right choice for everyone. Before you decide to refinance, make sure you’ve asked yourself these questions:

• What are the current interest rates? When interest rates are generally high, even well-qualified borrowers may not be able to lower their rates enough to make refinancing worthwhile.
• What is my credit score? You’ll need good credit to qualify for the best refinancing rates. If you’re still working to increase your credit score, refinancing may not save you money. If you have less-than-stellar credit, consider waiting to refinance until you’ve improved your score or adding a well-qualified cosigner to your application.
• Am I eligible? Eligibility requirements vary from one lender to another, but it’s important for borrowers to determine if they can qualify for a refinancing loan before getting started. In addition to credit requirements, lenders may require you to earn a minimum annual income, have graduated with a degree, or maintain U.S. citizenship.  
• What benefits will I lose? If you plan to refinance federal student loans, familiarize yourself with the benefits and protections that are only available to federal borrowers. These include benefits like income-driven repayment plans, paths to loan forgiveness, and more flexible deferment and forbearance options.

Read More: Should I Refinance My Federal Student Loans?

How to choose a student loan refinancing lender

If you’re considering student loan refinancing, it pays to choose the lender carefully. Here’s how to choose the right lender for your needs:

• Shop around: As with any financial product, it’s smart to compare quotes among multiple lenders. Specifically, make sure you compare interest rates and loan terms among lenders, not just your monthly payment for each one. That’s because a lower monthly payment may have a significantly higher lifetime cost.
• Look into discounts and fees: Review each lender’s potential discounts and fees. For example, a lender might offer a rate discount if you sign up for automatic payments or already have an existing account. Alternatively, a lender’s fees could increase your overall costs, even if it has a lower interest rate than a lender without fees.
• Use a refinancing calculator: Comparing potential savings among lenders with different rates and terms can get complicated. Consider using a refinancing calculator to help you determine how lenders stack up.
• Check the lender’s reputation: Looking up the lender on sites like the Better Business Bureau or the Consumer Financial Protection Bureau can help you determine how a lender treats its customers and what common complaints come up. If you’re not familiar with the company, this is an important task to complete before applying for a refinancing loan.

Check Out: 10 Best Student Loan Refinance Companies: Reviewed and Rated

5 steps to refinance your student loans

If you’re ready to refinance your student loans, you’ll need to follow these five steps:

1. Assess your goals

Before you start the process, you need to be clear on why you’re considering a refinance loan. Do you need more breathing room in your monthly budget? Do you want to pay off your loan as cheaply as possible? Knowing your situation and goals will help you find the right loan.

2. Check your credit

Since your credit history is a big factor in your new interest rate, it’s important to check your credit report before applying. You can view your report for free at AnnualCreditReport.com or a third-party service. 

If you find any errors on your credit report, dispute those items with the appropriate credit-reporting agency. If you learn your credit isn’t as strong as you’d like, work to improve your credit before applying or start your search for a cosigner.

3. Compare quotes

Borrowers should compare offers from several different lenders before making a final decision. Make sure you review the interest rates, repayment terms, monthly payments, lifetime costs, discounts, and fees.

You can also prequalify with many lenders. After inputting a few pieces of personal information, you’ll receive estimated rates and terms that you may qualify for. This process typically doesn’t impact your credit and you can get a more detailed look at what’s on offer.

4. Gather necessary documentation

When you’re ready to apply, you’ll need to input some specific information. Lenders may ask for your Social Security number, a driver’s license or other government ID, loan payoff statements from your existing student loan servicers, proof of graduation, and proof of income (such as pay stubs).

5. Apply and wait for approval 

Once you submit a loan application, the lender will let you know whether or not you have been approved — sometimes in just a few minutes. But it may still take several weeks for your loan to be completely processed. Your new lender must work with your old one to pay off your debt.

Until your new loan is fully processed, continue to pay your original loans on their payment due dates. Once complete, the refinance loan will pay off your original loans, and you’ll be notified to start making payments to the new lender.

Check Out: Current Student Loan Refinance Interest Rates

Alternatives to student loan refinancing

Student loan refinancing isn’t the right choice for every borrower. Depending on why you you want to refinance, you may find that one of these options may work better for you:

Federal student loan consolidation

Borrowers with federal student loans may choose to consolidate their student loans with a federal Direct Consolidation Loan rather than refinancing. A consolidation loan generally won’t save you money over the life of the loan since it doesn’t lower your interest rate. But it doesn’t require a credit check and it maintains your eligibility for federal loan benefits and protections. 

If you simply want to streamline multiple federal student loans into a single loan, this may be a good option for you.

Income-driven repayment

These repayment plans are only available to federal student loan borrowers, including those who have consolidated with a Direct Consolidation Loan. Income-driven repayment sets your monthly payment based on your income and family size, ensuring that your payments remain affordable. Additionally, any balance that remains after making payments for 20 or 25 years is forgiven.

Loan forgiveness programs

Federal student loans offer several paths to loan forgiveness, including Public Service Loan Forgiveness, Teacher Loan Forgiveness, and discharge of any balance remaining after 20 or 25 years of income-driven repayment. Pursuing loan forgiveness could potentially save you more money than refinancing your student loans.

Making extra payments

Borrowers who want to be debt-free as quickly as possible may not need to refinance to achieve this goal. Instead of refinancing with a new lender, simply send extra payments each month — but make sure you let your loan servicer know that you want your additional payments applied to your principal balance. If you can afford it, paying off your loan ahead of schedule can save you thousands in interest. 

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