What Is Student Loan Refinancing? A Guide to Lowering Your Payments

Student loan refinancing is a process where you take out a new loan that you then use to pay off your existing student loans. The new loan has its own interest rate and terms, which means refinancing may allow you to secure a lower interest rate or lower your monthly payments. But there are downsides to refinancing worth considering as well — particularly when it comes to refinancing federal student loans.

We'll cover the basics of student loan refinancing, including how it works, who's eligible, and how to determine when refinancing makes sense.

What is student loan refinancing?

With student loan refinancing, you replace your existing student loan(s) with a new private loan. This new loan has a different interest rate and terms, which are determined based on your credit and other financial factors.

While the term “refinancing” is often used interchangeably with consolidation, the two are distinct processes. Refinancing is offered by private lenders, including banks, credit unions, and online lenders, and both federal and private student loans are eligible. Student loan consolidation, on the other hand, is only for federal student loans and is offered through the Department of Education.

The process of loan consolidation is similar to refinancing in that existing loans are rolled into one new loan, known as a Direct Consolidation Loan. It can confer comparable benefits, like a single monthly payment that's potentially lower, and it offers access to unique federal benefits, like loan forgiveness options.

However, unlike with refinancing, where the new loan's interest rate is determined based on your credit, the interest rate of a Direct Consolidation Loan is the weighted average of the loans you're consolidating, rounded up to the nearest one-eighth of a percent.

Current student loan refinance rates

How does student loan refinancing work?

When you refinance one or more of your student loans, the funds from the new loan you take out are used to pay off the existing student loans you've chosen to refinance. Then, rather than making multiple payments on separate loans, you only have to make a single monthly payment on your new refinance loan. Ideally, you'll qualify for a lower interest rate on this new loan, which will allow you to save money.

Keep in mind that although it's possible to refinance both private and federal student loans, the downsides of refinancing federal loans can offset the benefits. You'll lose federal protections and benefits by refinancing your federal loans into a new private loan, including access to generous deferment and forbearance options, income-driven repayment plans, and loan forgiveness and discharge. Proceed carefully and thoughtfully before refinancing federal student loans.

Benefits of refinancing student loans

Refinancing student loans can offer a number of benefits, including:

• Potentially lower interest rate and monthly payments: It's possible to secure a lower interest rate, which can result in savings over time. You can also achieve lower monthly payments by adjusting your loan's terms (though a longer loan term means paying more in interest overall).
• Simplifying multiple loans into one: If you've been juggling various loans with different payment deadlines, refinancing can save you the hassle. Because you're replacing a number of existing loans with one refinance loan, you'll have just one monthly payment to worry about.
• Customizable for your situation: Refinancing gives you a fresh opportunity to set your loan's terms. With a lower interest rate and streamlined repayment, you may be able to pay down your debt faster, or you can choose a longer repayment period with lower monthly payments if that benefits you more.

Who qualifies for student loan refinancing?

Whether you qualify for student loan refinancing — and the interest rate and terms you receive — depends largely on whether you meet a lender's credit and financial eligibility criteria.

While exact requirements vary by lender, you'll generally need to have at least a good credit score — meaning a FICO score of 670 or higher — to qualify. A lender will also consider your income, typically requiring you to make at least a certain amount annually. Plus, they'll look at your existing debt obligations in comparison to your earnings, known as your debt-to-income ratio.

The specifics of the loans you're refinancing may also impact your eligibility. For instance, some lenders may require that your loans were used for attendance at a Title IV degree-granting institution, and some lenders require you to have graduated. You'll also likely need to meet the lender's minimum loan amount requirement.

While it's possible to qualify for refinancing without a cosigner, applying with one can improve your odds of approval, as well as the terms you receive, particularly if you're not sure you'll clear eligibility requirements on your own.

“If you don't have a good credit score or consistent income, a cosigner will increase your approval rate and possibly lock in a lower interest rate,” says Celia Corley, financial adviser at Academized.com.

“But remember that the cosigner shares the loan, meaning if the borrower defaults, the cosigner is responsible for paying back the loan,” Corley adds.

When should you refinance your student loans?

Refinancing your student loans may prove beneficial if:

• You want a lower interest rate: Depending on your financial profile, you may be able to qualify for a lower interest rate when you refinance your existing student loans. This can potentially save you thousands of dollars over your repayment term.
• You want lower monthly payments: Refinancing can also offer the opportunity to lower your monthly payments, either by reducing your interest rate or extending your loan term. Just keep in mind that if you opt for a longer loan term, you'll pay more in interest over time.
• You no longer want to juggle multiple loan payments: A major benefit of refinancing is that it rolls multiple loans into one loan, streamlining repayment and giving you just one monthly due date to stay on top of.
• You have private student loans: While refinancing federal student loans has notable risks, there are fewer drawbacks when it comes to doing so with private student loans.

Learn More: When Is the Best Time To Refinance Student Loans?

When not to refinance student loans

One scenario where you definitely want to think twice before refinancing is if you have federal student loans. When you refinance federal student loans, they become a single private student loan, which means you lose the benefits and protections that federal student loans offer. This includes temporary repayment relief in the form of deferment and forbearance, access to income-driven repayment plans, and a path toward student loan forgiveness.

Additionally, notes Katherine McKay, associate director at the Aspen Institute Financial Security Program, “[i]t's risky to refinance federal student loans because you do have protections like the longer period before your loans are sent to collections that can make a huge difference.”

How to apply for student loan refinancing

Before you start filling out applications for student loan refinancing, shop around and compare lenders first. This will help ensure you're securing the best possible interest rate and terms available to you.

Start by researching different lenders to see how their eligibility criteria stack up. You may find that some are a better fit than others. From there, start comparing the rates the lenders offer. A good way to get an accurate comparison is to prequalify, which allows you to view what rate you're likely to receive without the credit impact of a hard inquiry.

Once you've narrowed it down, it's time to apply with your chosen lender. Generally the easiest way to do this is to fill out the application form online. To do so, you'll need to have certain documents on hand, including:

• Your most recent student loan statements or a payoff verification statement
• Proof of income, such as recent paystubs or your latest W-2
• Government-issued photo ID

Ultimately, when it comes to refinancing, “Really what you want to be paying attention to is what's your interest rate and how long is the term of your loan,” says McKay.

“So if you're able to get smaller payments, that might be worth doing as long as you take a look over the long term as to whether this makes it more expensive,” they said, suggesting borrowers use student loan calculators online to help them figure out these financial trade-offs.