Should I Refinance My Student Loans? Pros and Cons

Refinancing your student loans can be a smart way to lower your interest rate and reduce your monthly expenses.. According to a 2024 survey by ELFI, a division of SouthEast Bank, borrowers who refinanced their student loans saved an average of $334.37 per month.

Still, refinancing isn’t right for everyone. While it can help you save money or achieve financial flexibility, it might not align with your goals, especially if you have federal loans and rely on benefits like income-driven repayment or loan forgiveness.

Here's a closer look at the pros and cons of student loan refinancing to help you decide if you should refinance.

See Also: Best Student Loan Refinance Rates: Compare Top Lenders 

Current student loan refinance rates

How does student loan refinancing work? 

Refinancing replaces one or more existing student loans with a new private loan, which you then use to pay off your old balances. Once the refinance is complete, you’ll only make payments on the new loan, which may have a different interest rate, monthly payment, or repayment term. 

You can refinance both private and federal loans. However, refinancing federal loans turns them into private loans, eliminating access to federal benefits such as income-driven repayment, loan forgiveness programs, and certain financial relief options.

Pros and cons of refinancing student loans

Pros of refinancing student loans

Refinancing can offer several advantages if you qualify for a better loan:

• Potentially lower your interest rate: If your credit score has improved or student loan rates have dropped since you first took out the loan, refinancing could lower your interest rate and save you money over the life of your loan.
• Change your repayment term: When you refinance, you have the option to extend your repayment term to lower your monthly payment and free up cash flow, or shorten it to pay off your debt faster and reduce total interest costs.
• Remove a cosigner: If you needed a cosigner to qualify in the past, refinancing may allow you to release them from responsibility for the loan.
• Typically, no upfront costs: Most lenders don’t charge application or origination fees for student loan refinancing.
• Simplify loan repayment: If you have multiple student loans, refinancing allows you to combine them into one new loan, with a single monthly payment.

Cons of refinancing student loans

Before refinancing, consider the potential drawbacks:

• Requires good credit to qualify: Without a good credit score or a creditworthy cosigner, your refinancing options may be limited.  While some lenders offer refinancing for borrowers with bad credit, you'll likely have fewer choices and higher interest rates.
• Possibility of a higher rate: If your credit score has dropped or market rates have risen, refinancing could result in a higher interest rate than you currently have.
• Potentially higher total costs: If you choose to extend your repayment term, you'll lower your monthly payment but increase the total amount you pay in interest over the life of the loan. 
• Loss of federal benefits: Refinancing federal loans turns them into private loans. This means losing access to income-driven repayment plans, loan forgiveness, and federal relief programs like deferment and forbearance. 

When should I refinance my student loans?

The best time to refinance student loans is when you can qualify for a lower rate or better terms than you have now. You’ll typically need a strong credit score — generally a FICO score of 740 or higher — to be eligible for a lender's most competitive offers.

It can also make sense to refinance if interest rates are significantly lower than when you took out your original loans, or if you want a lower monthly payment. You can achieve this by getting a lower interest rate or, in many cases, by extending your repayment term.

“Refinancing loans is a great idea if you need to free up monthly cash flow to achieve other immediate financial goals, like saving for a wedding or purchasing a home,” says Sara Parrish, president of CampusDoor.

When to avoid refinancing student loans

Refinancing may not be the right move if you already have a low rate or a payment that comfortably fits your budget. It’s also worth avoiding if you expect changes in income or employment that could make it harder to keep up with payments.

If your credit score has dropped since you took out your loans or isn’t high enough to qualify for competitive rates, refinancing could leave you with a worse deal. The same goes if refinancing would involve the loss of valuable borrower benefits, such as forbearance options or good grade discounts.

Extending your repayment term through refinancing can also keep you in debt longer, so it’s not ideal if your goal is to pay off your loans as quickly as possible.

“In these cases, borrowers are often better served by creating a targeted plan to tackle either the lowest-balance or highest-interest-rate loans,” advises Parrish.

And a word to the wise, “Make sure you’re ready. Some of the most advantageous refinancing products require employment history and sustained income. In those cases, it can be worth waiting a year or two after graduation before making a move,” she adds.

See Also: Why Refinancing My Federal Student Loans Was the Right Choice for Me

Average refinance rates based on credit score

How to refinance your student loans

To refinance your student loans, start by comparing offers from multiple lenders.

“It definitely helps to shop around as different lenders offer different rates, payment terms, perks, and can have significant differences in forbearance provisions,” says Jack Wang, a wealth adviser at Innovative Advisory Group. “Don't just focus on the interest rate.”

One of the easiest ways to compare offers is to prequalify with multiple lenders using a tool like Credible. You’ll receive estimated rates and terms from several lenders based on your credit profile, which can help you choose the best fit.

Once you’ve compared your options, follow these steps to refinance:

• Gather necessary documents: Have your current loan statements, recent pay stubs or other proof of income, a driver’s license or ID, and tax returns ready.
• Complete the application: Each lender has its own application process, often available online, where you can submit your documents.
• Pay off your old loans: If approved, your new lender will use the loan funds to pay off your existing balances. From that point on, you’ll make payments toward your new loan only. 

See Also: Best Student Loan Refinance Companies