What Is Student Loan Refinancing?

Student loan refinancing can help you lower your interest rate, reduce your monthly payment, or adjust your repayment timeline if you can qualify for better terms than you have now. It’s generally best for borrowers with strong credit and steady income, especially those with private student loans. If you have federal loans, refinancing may not be the right move depending on the federal benefits and repayment options you rely on.

Compare student loan refinance rates

What is student loan refinancing?

Student loan refinancing replaces one or more existing student loans with a new private loan. You can refinance federal loans, private loans, or a combination of both, often to get a lower interest rate, change your repayment term, or both.

To qualify, you’ll apply with a private lender, which will typically review your credit, income, and existing debts. If you’re approved, the new lender pays off the loans you chose to refinance, and you begin repaying the new loan under its new rate and terms.

See Also: Best Student Loan Refinance Rates

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?

Here's how the student loan refinancing process works:

1. Prequalify with several 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. Submit an application with your chosen lender

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?

In general, refinancing could be a good idea if:

• You have high-interest private student loans: If your current interest rate is very high, refinancing could save you a substantial amount of money. Since you can only refinance with a private student loan lender, you generally don't want to refinance federal loans because you’d give up important benefits. If you refinance one private loan to a new private loan, this isn't a concern.
• Your finances have improved: Better credit and higher income can help you qualify for lower student loan refinance rates. You may also qualify for a loan without a cosigner if you previously had one. 
• You can apply with a well-qualified cosigner: A cosigner with strong credit and steady income can improve your chances of qualifying for a lower rate. Over the last 12 months, borrowers who applied for student loan refinancing with a cosigner through Credible qualified for rates that were, on average, more than 1 percentage point lower than borrowers who applied without one.

See Also: Should I Refinance My Student Loans?

What are the pros and cons of refinancing student loans?

Details on the pros

• You may lower your 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 timeline: You can choose a shorter repayment term to lower total payoff costs, or a longer payoff term 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.

Details on the cons

• You could make payoff more expensive: If you choose a longer repayment term, you’ll pay more in interest and stay in debt longer. 
• You may need a cosigner: If you don't have the credit or income student loan refinance lenders require, you may not be approved unless someone with strong finances is willing to cosign and share legal responsibility for the debt.
• You can lose federal borrower benefits: If you refinance federal student loans, you'll need to give up the unique protections associated with them.

What’s the difference between refinancing and consolidation? 

Student loan refinancing replaces one or more federal or private student loans with a new loan from a private lender, potentially with a different interest rate and repayment term.

Federal student loan consolidation, on the other hand, combines eligible federal loans into a new Direct Consolidation Loan from the Department of Education. Your new interest rate is based on the weighted average of the rates on the loans you consolidate, so consolidation won’t necessarily lower your interest rate. 

The goal of refinancing is typically to save money by lowering your interest rate, while consolidation can simplify repayment or make certain federal loans eligible for repayment plans or forgiveness programs you wouldn’t otherwise qualify for.