When Refinancing Student Loans Can Save You Money

Refinancing student loans can be a great way to save money – but it’s not right for everyone. Here’s a look at when refinancing student loans can help you save, and when it may not be the best option.

What is student loan refinancing?

Student loan refinancing basically means taking out a new loan to pay off your existing student loans. The goal is to get a lower interest rate or better repayment terms than you have on your current loans.

When you refinance student loans, you take out one new consolidated loan from a private lender to pay off multiple existing federal and/or private student loans. This new refinanced loan will have just one monthly payment, one interest rate, and one loan servicer.

Refinancing can help simplify repayment and potentially lower your interest rate. But it also means giving up certain protections and benefits you get with federal student loans – so it’s not right for everyone.

Who can benefit from refinancing student loans?

In general, refinancing student loans tends to make the most sense if:

• You have a good credit score – at least 670 or higher
• You have steady income to repay the loan
• You can qualify for a lower interest rate than your current loans
• You don’t qualify for federal loan forgiveness programs

Borrowers with higher incomes and strong credit scores are the best candidates for refinancing. You’ll need good credit to qualify for the lowest interest rates.

Refinancing probably won’t save you money if your credit score hasn’t improved significantly since you took out your original student loans. Most lenders want to see your score in the high 600s or better to qualify for the lowest rates.

How much money can you save by refinancing?

Exactly how much you can save by refinancing student loans depends on a few key factors:

Your new interest rate

The lower your new interest rate, the more you stand to save. Even a small decrease of 0.5% to 1% in your rate can add up to big savings over a 10-year repayment term.

For example, on a $30,000 loan:

• 8% interest = $11,609 in interest paid over 10 years
• 7% interest = $10,150 in interest paid over 10 years

That’s a savings of $1,459 just by dropping the rate by 1 percentage point.

Your loan repayment term

Shortening your repayment term from 10 or 15 years down to 5 or 7 years means you pay off the loan faster, so you pay less interest over time.

But keep in mind, a shorter term means higher monthly payments. Make sure the payments still fit your budget.

Your total loan amount

The more student loan debt you have, the more potential savings when you refinance. With higher loan balances, even small rate drops make a noticeable difference.

For a borrower with $100,000 in loans at 8% interest, dropping the rate to 7% would save over $4,800 in interest paid over 10 years.

Federal vs. private student loans

An important consideration is whether you have federal or private student loans.

Refinancing federal loans means giving up federal benefits and protections – like income-driven repayment and forgiveness programs. You need to decide if the savings outweigh the risks.

With private loans, there are no downsides to refinancing if you can get a lower rate. Private loans don’t offer the same protections as federal loans, so you don’t give up any benefits when refinancing.

Refinancing federal student loans

While you can refinance federal student loans through a private lender, you give up all the benefits and protections those loans offer:

• Income-driven repayment plans
• Deferment and forbearance options
• Public Service Loan Forgiveness (PSLF)
• Teacher Loan Forgiveness
• Disability discharge

Make sure the savings outweigh the risks before refinancing federal loans.

For example, if you qualify for Public Service Loan Forgiveness, keep your federal loans to get the remaining balance forgiven after 10 years of payments. Refinancing would make you ineligible.

Or if you’re on an income-driven plan with a manageable payment, refinancing may not be worth giving up the possibility of loan forgiveness after 20-25 years of payments.

Refinancing private student loans

With private student loans, there are no downsides to refinancing if you can get a lower interest rate.

Private loans don’t come with the same protections and benefits as federal loans. Refinancing private loans is simply exchanging your existing loans for a new one with better terms.

For private loan borrowers, the question is not “should I refinance” but “where can I refinance for the best rate?” You should always look into refinancing if you can get a lower rate.

Where to refinance student loans

You have a few options when it comes to refinancing student loans:

• Banks and credit unions
• Online lenders
• Peer-to-peer lending marketplaces

Big national banks, local credit unions, and online lenders all offer student loan refinancing options these days.

Online lenders like Earnest, Lendkey, and CommonBond offer quick and easy loan applications online. They’re a good option for refinancing without having to go into a bank branch.

Banks and credit unions may offer competitive rates for refinancing too. If you already have a relationship with a financial institution, start there.

Peer-to-peer lending sites like LendingClub and Prosper also let you apply for a loan funded by individual investors. Rates and terms vary.

Shop around and compare multiple lenders to find the best interest rate and loan terms. Getting pre-qualified lets you compare personalized rates.

How to apply for student loan refinancing

Applying for refinancing involves just a few steps:

• Check your credit score and pull your credit reports – aim for at least 670
• Research lenders and compare interest rates
• Calculate your budget and how much you can afford in monthly payments
• Gather information needed for your application
• Complete the loan application with your chosen lender
• Wait for loan approval and review your offer
• Accept the offer if it meets your needs

Make sure to compare offers from multiple lenders. Even small differences in interest rates can really add up over the life of your loan.

Aim for the lowest rate and repayment terms that fit your budget. Use student loan refinancing calculators to estimate your new monthly payments.

Pros of student loan refinancing

Refinancing student loans can offer a few potential benefits:

Lower monthly payments

If your income has decreased or expenses have gone up, refinancing could lower your monthly student loan payments. You may be able to extend your repayment term or switch to fixed payments instead of graduated payments.

Lower interest rate

The main goal of refinancing is getting a lower student loan interest rate. Even a small rate reduction can save you hundreds or thousands over the life of your loan.

Single monthly payment

When you refinance multiple loans into one new loan, you’ll only have to budget for one student loan payment each month instead of multiple payments.

Flexible loan terms

You can often change the length of your repayment term when you refinance. Shortening the term saves money, while lengthening it lowers your monthly minimums.

No prepayment penalties

Most private student loans don’t charge prepayment penalties. Refinancing lets you pay off your new loan early to save on interest.

Release cosigner

If your loans currently have a cosigner, refinancing in only your name may be an option after a few years of on-time payments.

Cons of student loan refinancing

Refinancing also comes with some drawbacks and risks:

Origination fees

Many lenders charge origination fees of 1-5% to process refinancing. These upfront fees get tacked on to your loan balance. Shop around for low or no fees.

Loss of federal loan benefits

The big con for federal borrowers is losing access to federal repayment and forgiveness programs when you refinance.

No more COVID-19 emergency relief

During the interest-free payment pause, refinancing federal loans means taking on a loan that accrues interest again and requires monthly payments.

Potential for higher monthly payments

If you extend your repayment term but don’t get a lower rate, your monthly bills could go up. Or you may lose graduated repayment plans.

Difficult to qualify with bad credit

You need a 670+ credit score and steady income to get approved for refinancing. If your score is lower, improving your credit could take time.

Tax implications if loan is forgiven

If you expect to get public service or teacher loan forgiveness on federal loans, refinancing erases that option. You’d owe taxes on the forgiven loan amount if you got a private lender to forgive remaining.