How Much Does It Cost To Refinance Student Loans?

Student loan refinancing can potentially save you money and result in more favorable repayment terms. However, it's important to understand how refinancing will impact your finances before moving forward.

This guide covers what you can expect with student loan refinancing so you can better understand the total cost to refinance and whether refinancing is right for you.

What does it mean to refinance student loans?

Refinancing student loans involves getting a new student loan from a private lender. You use the funds from the new student loan to pay off existing educational debt. You can pay off both private and federal student loans with your new refinance loan.

In some cases, refinancing may help you pay off your student loans faster and for less money. This can happen if you reduce your interest rate without extending your payment timeline. Since you are charged less to borrow, more of each payment goes to the principal and your total costs are lower.

Refinancing can sometimes extend the time you have to pay back your debt. If you choose a longer payment period, your monthly payment will be lower — especially if you also reduce your interest rate. However, the longer you pay interest, the more interest you end up paying overall, and the higher your costs become.

You'll need to consider interest costs, payoff time, and total borrowing costs when you decide if refinancing is right for you. Since you can only refinance with a private lender, you'll also need to decide if you're willing to give up federal borrower benefits before refinancing federal loans.

“Refinancing federal loans with private lenders forfeits federal benefits like income-driven repayment, deferment, and forgiveness options,” says Chad D. Cummings, certified public accountant and attorney at The Law Office of Chad D. Cummings. “Borrowers should carefully weigh potential interest savings against the loss of federal protections, particularly if their income may fluctuate.”

Current student loan refinance rates

Common refinancing fees

Understanding the fees associated with refinancing can help you decide whether to move forward.

“In general, private lenders do not charge fees to refinance education loans,” says Tom O'Hare, holistic college adviser and founder of Get College Going. This means you typically should not owe an application fee or an origination fee.

You could incur costs if you are refinancing existing student loans that have a prepayment penalty — a fee you have to pay your current lender for paying off your loans early. However, it's not common for lenders to charge a prepayment penalty.

If you have private student loans, check with your lender to see if you'll owe any fees for paying them off early. Federal student loans do not come with prepayment penalties, so this won't be an issue if you are refinancing federal debt with a private lender.

Other fees you may come across with student loan refinancing include:

• Late fees
• Returned-payment fees
• Collection fees (if you default on the loan)

Factors that affect the cost of refinancing

Although you shouldn't expect to pay an application fee or origination fee, this doesn't mean there aren't expenses associated with refinancing.

“Two cost factors are associated with private education loan refinancing: changes in interest rates and the loan term,” explains O'Hare. “Capturing a lower rate while continuing to make the highest monthly payment possible is a win. The loan obligation will be paid off faster, incurring less interest payments.”

However, some borrowers take a different approach, focusing not on lowering total costs but instead on reducing their current expenses. “Many borrowers need to refinance to lower their monthly payments, which generally requires extending the loan term,” says O'Hare. “The longer the term, the more interest paid and the higher the cost.”

O'Hare recommends making extra payments when possible if you do extend your loan term. “Even the smallest of payments, $50 per month, can shave time off of the loan term, reducing the overall cost of the loan.”

Understanding interest costs when refinancing

Your interest rate will have a major impact on the cost of refinancing. Since you must refinance with a private lender, your rate is going to be determined in part by your financial credentials. If you have a strong credit score and a higher income, you'll be viewed as a well-qualified borrower and will likely be offered a lower rate.

Many borrowers don't have these credentials when applying because they've recently graduated. Applying with a cosigner can help you get a better rate in this situation.

You'll also want to pay attention to whether the refinance loan has a fixed or variable rate. Variable-rate loans may start with a lower interest rate, but you run the risk of your rate going up over time.

You should also understand how student loan interest capitalization works. In some cases, you will accrue interest on your loan that goes unpaid - such as when you're in school and during periods of deferment. Lenders may add this interest onto your principal balance, making your loan balance bigger and resulting in higher costs as you pay interest on interest. You can aim to avoid capitalization by making payments that at least cover your interest costs, even when payments are paused.

How to calculate the true cost of refinancing

Before refinancing, it's important to understand the total costs you'll pay over the life of the loan.

“Always start with a student loan calculator to see what a new payment can look like,” says Domenick D'Andrea, financial adviser and co-founder of DanDarah Wealth Management. “You would then need to calculate what your total payments will be in both the existing and new loan.”

By looking at the short-term costs (the monthly payments), plus the long-term costs (total interest over time), you can get a clear picture of whether the new loan will save you money and help you accomplish your goals.

D'Andrea also recommends looking at the total fees involved with the new loan, including any application or origination fees, if applicable. “You would need to calculate these into the overall cost to see if it still makes sense to refinance.”

When comparing loan options, always look at the APR, or annual percentage rate, rather than just the interest rate. APR is a better measure of total borrowing costs because it takes up-front fees into account.

Finally, don't forget to consider the opportunity cost if you refinance federal loans.

“Refinancing means giving up all federal loan benefits, including fixed interest rates, income-driven and extended repayment plans, loan forgiveness, and loan deferment,” says Ryan Law, certified financial planner and director of the Utah Valley University Money Success Center. “During the pandemic, federal student loan payments and interest were put on hold for three years. Those who had refinanced missed out on this and had to continue to make payments.”

The good news is student loan interest is tax deductible for both federal and private loans, so you'll keep this benefit even if you refinance.

Is it free to refinance student loans?

Since many lenders offer no-cost refinancing, the process should be free. Of course, there are no interest-free loans, so you'll have to compare interest costs among lenders to see which offers the best deal overall.

To keep your costs as low as possible, always compare loan offers from multiple refinance lenders. You can shop online and prequalify with most lenders, so you can get multiple quotes without a hard credit check to find the loan that's best for you.