Should I refinance my student loans?

If you're one of the 45 million Americans with student debt, you may wonder if refinancing your student loans is a good option. Refinancing allows you to combine your current loans into a new loan - potentially at a lower interest rate, lower monthly payment, or with better terms.

However, refinancing isn't for everyone, especially if you have federal student loans or your credit history is less than ideal. Whether you should refinance your student loans will depend on your unique situation. Here's what you need to know.

When should I refinance my student loans?

Here are some scenarios when a student loan refinance could be beneficial:

• You have private student loans: Refinancing is more advantageous for private student loans, since federal government loans offer benefits like income-driven repayment and potential student loan forgiveness that you would lose if you refinanced.
• You're able to qualify for refinancing: To qualify for a refinance loan, most lenders require that you (or your cosigner) have a stable income and a minimum FICO credit score in the mid-to-high 600s.
• You can save money on interest: If you need to free up more cash in your budget, refinancing could lower your payment. If your new loan has a lower interest rate or a longer repayment term, you can significantly shrink your monthly bill.
• You want to combine multiple loans: Combining multiple debts into one can be especially beneficial if you have several loans with different lenders and varying due dates, as it can be challenging to keep track of this each month.
• You don't like your lender or loan servicer: Perhaps you've experienced poor customer service, had trouble accessing loan information, or faced unexpected fees. If you're unhappy with your current lender or loan servicer, refinancing allows you to choose a new one that better suits your needs based on your financial situation.

When shouldn't I refinance my student loans?

While there are many scenarios where refinancing your student loan payments can be a smart financial move, there are also situations where it may not be the best option.

Here's when you might think twice before refinancing:

• You have federal student loans: Federal loans offer benefits that aren't usually available with private lenders, such as income-driven repayment (IDR), deferment, forbearance, and Public Service Loan Forgiveness (PSLF) options. Refinancing federal loans through a private lender would mean you'd lose access to these programs.
• You can't qualify for a lower interest rate: Your credit is one of the most important factors lenders consider when determining your eligibility and interest rates. If you have poor credit, you may not qualify for a lower interest rate as you would with excellent credit, which means refinancing might not save you any money.
• You're nearing the end of your loan term: Refinancing might not be worth the time and effort if you only have a year or two left on your student loans. Even if you lock in a lower interest rate, it may not be enough to impact your borrowing cost significantly.
• Your loans are in default: Defaulting on your student loans severely damages your credit, which can make it extremely challenging to qualify for a refinance loan.

Related: Can you refinance student loans with bad credit?

How to qualify for a student loan refinance

You must meet several criteria to be eligible for student loan refinancing. Specific requirements vary depending on the lender, but common factors include:

• Good credit score: Most lenders require student loan borrowers to have a FICO score in the mid-to-high 600s or greater to qualify for refinancing. A higher credit score can increase your chances of approval and help you secure a lower interest rate.
• Stable income and employment: Lenders want to know that you have a reliable income and can afford your new payments.
• Citizenship or permanent residency: Many lenders require applicants to be U.S. citizens or permanent residents. However, some companies specialize in lending to international students.
• Graduated from your program of study: Many lenders require that you graduate with your degree or certificate to refinance. Those who didn't graduate can still find options, but may have fewer lenders to choose from.
• Loan balance: It's common for lenders to set minimum and maximum loan requirements. For example, you may have to refinance at least $10,000 to qualify, or be limited to a maximum balance.
• Loan status: Your loans typically must be in good standing to qualify, so you should be current on your payments and not in default.

What if I can't qualify?

If you find that you're not eligible for refinancing, there are other strategies you can try:

• Apply with a cosigner: A cosigner is someone who agrees to share responsibility for repaying your loan if you can't. Using another signer with good credit can improve your chances of approval and help you qualify for a better rate.
• Improve your credit score: Your credit plays a significant role in determining the interest rates you're offered. You could raise your credit score by paying your bills on time, paying down your other debts, and disputing any errors on your credit report.

How much money can refinancing save me?

Whether or not refinancing will save you money depends on a few factors, including the interest rate on your existing loans, the new interest rate you qualify for on a new loan, and whether you change your loan term.

Before applying, run the numbers using a student loan refinancing calculator. Simply input the details of your current debts and the refinanced loan to see how your costs change.

Example: Let's say you have a $50,000 student loan at 7.00% interest and you have 10 years of payments left on your loan. If you refinanced into a loan with a 5.00% rate and kept the 10-year term, you could save more than $6,000 in interest. You'd also lower your monthly payments by about $50.

Related: How to refinance student loans

Alternatives to student loan refinancing

Aside from student loan refinancing, there are other ways to better manage your debt. Below are some strategies to consider:

• Income-driven repayment plans: If you're struggling to make your monthly loan payments, an income-driven repayment plan could suit you. These set your payments at a percentage of your income, and any remaining balance can be forgiven after 10 to 25 years of payment. Only federal loans are eligible.
• Loan forgiveness programs: Certain professions may make you eligible for federal loan forgiveness. For instance, public service workers, teachers, lawyers, or health care workers may qualify. Although it's not a guarantee, it's worth exploring forgiveness options to see if you qualify.
• Deferment or forbearance: In some cases, you could pause your payments with deferment or forbearance. Qualifying scenarios often include returning to school, losing your job, or excessive medical expenses. Interest will typically continue to accrue, so it may be wise to use this as a short-term solution.
• Student loan consolidation: If you have federal student loans, consolidating them into a single Direct Consolidation Loan could simplify your finances while retaining federal benefits. This option may also make you eligible for additional repayment or forgiveness programs, especially if you’re a parent who borrowed for your child’s education.

FAQ

Should I refinance my student loans again? 

You can refinance your student loans as many times as you want. However, refinancing doesn’t always make sense. You should consider refinancing again if you can secure a better interest rate and terms. 

How do you know if you should refinance your student loans? 

To determine whether you should refinance your student loans, prequalify with multiple lenders. Prequalifying gives you an estimated rate without impacting your credit score, which can help you compare offers and see if refinancing can save you money. However, think carefully before refinancing federal student loans with a private loan — this will cause you to lose access to benefits like potential loan forgiveness and income-driven repayment plans.

What is the downside of refinancing federal student loans?

Refinancing federal student loans means converting them to private loans, which results in losing federal benefits and protections. This includes income-driven repayment plans, forgiveness opportunities, and deferment or forbearance options.

Will student loan rates go down in 2024?

Student loan rates may decrease in September 2024, as the Federal Reserve has held the federal funds rate steady and hinted at possible rate cuts due to slowing inflation and job growth. This could lower the cost of borrowing for education, potentially providing relief to borrowers. 

Why are student loans so hard to pay off? 

Student loans can be hard to pay off due to high interest rates and the often low starting salaries for graduates. This can make it difficult to manage large monthly payments while covering living expenses.