Short Answer
To refinance student loans, compare offers from private lenders, check the interest rate, APR, fees, repayment term, and eligibility requirements, then apply with the lender that offers terms that fit your situation. Refinancing private student loans can potentially lower your interest rate or monthly payment. However, refinancing federal student loans with a private lender permanently moves the debt out of the federal student-loan system and can cause you to lose federal repayment options, forgiveness programs, deferment, forbearance, and other protections.
How to Refinance Student Loans
Student loan refinancing means replacing one or more existing student loans with a new loan from a private lender. The new lender pays off the old loan, and you then make payments on the new loan under its terms.
People generally consider refinancing because they want a lower interest rate, a different repayment term, a lower monthly payment, or to combine multiple private student loans into one payment.
Whether refinancing makes sense depends heavily on whether your existing loans are federal or private.
First Determine Whether Your Loans Are Federal or Private
Before applying for refinancing, find out what type of student loans you have.
Federal student loans are part of the federal student-aid system. Private student loans are provided by private lenders such as banks, credit unions, state agencies, or other financial institutions.
This distinction is extremely important because refinancing a federal student loan with a private lender can cause you to lose federal benefits.
If your loans are private, refinancing with another private lender generally does not involve giving up federal student-loan benefits because those loans were already private.
Understand the Difference Between Refinancing and Federal Consolidation
Refinancing and federal consolidation are not the same thing.
Federal student loans cannot be refinanced through the federal student-aid system. However, eligible federal loans can generally be combined through a Direct Consolidation Loan.
A Direct Consolidation Loan can give you one federal loan and one monthly payment. The new interest rate is generally based on a weighted average of the interest rates of the loans being consolidated, rounded up to the nearest one-eighth of one percent.
Private refinancing is different because you replace the existing loan with a new private loan.
Check Your Current Interest Rate
Before refinancing, write down the interest rate on each existing student loan.
Then compare those rates with the rates you may qualify for from refinancing lenders.
For example, imagine you have a private student loan with a 9% interest rate and receive a refinancing offer at 6.5%.
That could potentially reduce your interest costs, but you still need to consider the new loan term, fees, monthly payment, and total amount you will repay.
A lower rate alone doesn’t tell you the complete financial impact.
Compare APR Instead of Only the Interest Rate
When comparing refinancing offers, don’t look only at the advertised interest rate.
Also check the APR, which can help you compare the overall cost of borrowing when applicable fees are included.
For example, a loan with a slightly lower advertised rate could potentially have different fees or terms that change its overall cost.
The CFPB recommends looking carefully at the APR and the complete terms of a refinancing offer rather than focusing only on the monthly payment.
Check Your Credit Before Applying
Private refinancing lenders generally consider your credit history and other financial information when deciding what terms to offer.
Your credit profile can affect whether you qualify and what interest rate you receive.
If your credit has improved since you originally borrowed your student loans, you may qualify for different terms than you did when you first took out the loans.
Private lenders may also consider income and other factors when evaluating an application.
Consider a Cosigner if Appropriate
If your credit history or income isn’t strong enough to qualify for attractive refinancing terms, some lenders allow borrowers to apply with a cosigner.
A creditworthy cosigner may help a borrower qualify for a lower rate.
However, a cosigner takes on legal responsibility for the debt according to the loan agreement. Therefore, both people should understand the consequences before entering the arrangement.
Some private lenders may also offer cosigner release after certain conditions are met, but this depends on the lender and loan terms.
Compare Fixed and Variable Rates
Some private student refinancing loans may offer fixed rates, while others may offer variable rates.
A fixed rate generally stays the same according to the loan agreement.
A variable rate can change over time based on the terms of the loan and the applicable benchmark.
A variable rate may initially look attractive because the starting rate can be lower, but the rate and payment could increase later.
The CFPB specifically warns borrowers to consider the risks of switching from a federal fixed-rate loan to a private variable-rate loan.
Decide What Loan Term You Want
The repayment term is another major factor.
Suppose you have two possible refinancing options:
Option A has a shorter repayment period and higher monthly payments.
Option B has a longer repayment period and lower monthly payments.
The second option may make your monthly budget easier, but extending the loan can increase the total interest paid over time.
Therefore, don’t choose a refinancing offer simply because it has the lowest monthly payment.
Compare the total amount you will repay.
Gather Your Loan and Financial Information
Before applying, prepare the information lenders are likely to request.
This may include:
Current loan balances
Interest rates
Monthly payments
Loan servicer information
Income information
Employment information
Credit information
Identification documents
Information about a cosigner, if applicable
Having this information ready can make the comparison process easier.
Compare Several Refinancing Offers
It’s generally useful to compare multiple lenders rather than accepting the first offer you see.
When comparing offers, look at:
Interest rate
APR
Fixed or variable rate
Loan term
Monthly payment
Total repayment amount
Origination fees
Late fees
Cosigner requirements
Cosigner release conditions
Hardship or payment-relief options
Prepayment terms
The CFPB notes that private refinancing terms can vary and that borrowers should carefully evaluate the terms of a potential refinance.
Apply for the Refinancing Loan
Once you’ve compared available offers, you can submit an application to the lender you are considering.
The lender will evaluate your application and determine whether you qualify and what terms it can offer.
Receiving an offer does not mean you have to accept it.
Review the final loan agreement carefully before agreeing to the new loan.
Understand What Happens to Your Old Loan
If you accept a refinancing loan, the new lender generally uses the proceeds to pay off your existing student loan or loans.
After that, you make payments to the new lender according to the new agreement.
Before assuming the process is complete, verify that your old loan has actually been paid off and that there is no remaining balance or unexpected amount due.
Be Very Careful With Federal Student Loans
This is the most important part of student loan refinancing.
If you refinance federal student loans into a private loan, you generally lose the federal benefits and protections associated with those loans.
These can include income-driven repayment options, certain deferment and forbearance protections, and federal loan forgiveness programs.
For example, borrowers who may qualify for Public Service Loan Forgiveness could lose access to that federal program if they refinance their federal loans into a private student loan. The CFPB has specifically highlighted the loss of federal forgiveness benefits as an important refinancing risk.
This decision is generally irreversible because once the federal loan has been replaced with a private loan, you cannot simply convert that private loan back into a federal student loan.
Consider Federal Consolidation Instead
If your goal is simply to combine multiple federal student loans into one payment, you may want to investigate a Direct Consolidation Loan instead of private refinancing.
Federal consolidation keeps the loan within the federal student-aid system and can preserve certain federal protections that would be lost through private refinancing.
However, consolidation can also have consequences. For example, the new interest rate is based on a weighted average and rounded up, and consolidation can affect certain repayment-forgiveness considerations.
So federal consolidation should also be evaluated based on your specific loans and repayment situation.
When Refinancing Private Student Loans May Make Sense
Refinancing can be worth investigating if you have private student loans and your financial situation has improved.
For example, you may have:
A stronger credit history
Higher or more stable income
A lower debt-to-income ratio
A reliable payment history
A lower interest rate available from another lender
The CFPB notes that borrowers with private student loans may be able to refinance into a lower interest rate, particularly if their credit profile has improved.
When You Should Be Careful About Refinancing
A lower monthly payment isn’t automatically a better deal.
For example, a lender could reduce your monthly payment by extending the repayment period. You might pay less each month but pay more total interest over the life of the loan.
You should also be particularly careful if you have federal loans and might benefit from federal repayment programs or forgiveness.
Simple Example
Suppose you have a $30,000 private student loan with a relatively high interest rate.
After improving your credit and income, you apply for refinancing and receive a lower-rate offer.
Before accepting it, compare your current loan with the new loan.
Look at:
Current balance: $30,000
Current interest rate
New interest rate
Current remaining term
New repayment term
Current monthly payment
New monthly payment
Total interest remaining
Total interest under the new loan
Any refinancing fees
If the new loan provides a lower overall borrowing cost without introducing disadvantages that matter to you, refinancing may be worth considering.
Final Answer
To refinance student loans, first determine whether your loans are federal or private, then compare refinancing offers based on the interest rate, APR, repayment term, monthly payment, fees, and total repayment amount. If you have private student loans, refinancing with a private lender may potentially lower your interest rate or change your repayment terms.
If you have federal student loans, be especially careful. Refinancing them with a private lender can cause you to permanently lose federal benefits such as income-driven repayment options, certain deferment and forbearance protections, and federal forgiveness programs. Federal loans cannot be refinanced within the federal student-aid system, although eligible federal loans may be combined through a Direct Consolidation Loan.
The safest approach is to compare the complete cost and terms of the new loan with your existing loan before making a decision, rather than choosing an offer based only on a lower monthly payment.