If you’re drowning in student loan payments every month, you’ve probably wondered “Should I refinance my student loans?” Refinancing student loans can absolutely take some of the pressure off and it can save you a lot of money over time. But of course, it’s important to know what you’re getting into first.
Let’s dig into what student loan refinancing is and when you should (and shouldn’t) refinance your student loans. Plus how to apply for refinancing, use a student loan refinancing calculator, and other things to consider for your debt payoff plan.
What does student loan refinancing mean?
In short, student loan refinancing means taking out a new loan to replace your existing student loan(s). People typically do this to lower their interest rates and get different repayment terms.
This can save you a lot of interest over the term of the loan, give you a lower monthly payment, and potentially allow you to pay your loans off faster.
Lenders and your loans
How does refinancing student loans work? You can refinance your student loans with the same lender you already have (if they offer you a better rate based on your new credit/income), or go to a different lender. It can't hurt to shop around to make sure you get the best deal!
Note that while you can refinance your existing private and federal loans, you can only get the new loan from a private lender. Since federal student loan rates are fixed by law, you can't refinance a loan from federal to federal. It can only go from federal to private student loans or private to private.
Student loan refinancing vs. student loan consolidation
Consolidation is a type of refinancing student loans where you combine multiple existing loans into one. With consolidation, the interest rate doesn't always change. It could be the same you had before, just in a different package that streamlines your repayment schedule.
For instance, you might have 10 separate student loans from different lenders, and you're hoping to group them all into just one loan with one monthly payment to worry about. If you consolidate your loan, you take out one big new loan and use it to pay off your 10 smaller loans.
Then, you're left with one payment on the new loan. A new payment is often lower than all your former payments totaled up.
Differences
One key difference from regular refinancing is that you can consolidate federal student loans if you have more than one. However, your overall interest rate will not change. When you consolidate federal student loans, your new loan will have a fixed interest rate calculated by averaging all the rates from your previous loans.
Thus, the main reason to choose consolidation is to make your life simpler by paying one payment to one loan.
Should I refinance my student loans?
Student loan refinancing isn't always a good fit for everyone. Even so, it usually can’t hurt to check what rate you could get with a free, no-commitment service. (I'll cover that and how to use a student loan refinance calculator next).
While individual situations vary, here are some scenarios where it might be a good—or bad—idea to refinance student loans.
When you should refinance your student loans
If you're asking should I refinance my student loans, know that a refi does make sense in some cases. In these scenarios, it's absolutely worth exploring refinancing:
You have loans with high interest
High interest is probably the biggest reason to research options to refinance student loans. Federal student loans range from 3.73 to 6.28% for the 2021-22 school year. Private loans are at 6.11% for a fixed-rate 10-year term loan.
Refinancing student loans can drop fixed loans as low as 3.22%. If your loans are on the higher side (even 6%+), you could save hundreds or thousands of dollars over the loan term by knocking off a few percentage points.
You want to go from variable to fixed interest, or vice versa
With a variable interest rate, you tie your interest rate to general market interest rates. As the market changes, your rates do too, within a specified range.
With a variable rate, you can pay lower interest than fixed-rate loans at the bottom of the range, but you also assume the risk of your interest rates increasing in the future. Increases can't happen with fixed rates.
For instance, if you get a variable loan with a range of 1.5%-10%, you'll be happy with those cheap rates at the bottom, but less so if they creep up over time.
You have a stable income and good credit
To qualify for the best refinancing rates, you'll need to prove that you're a low-risk borrower. Steady income and a strong credit score are the two main points that will work in your favor.
You have multiple loans you want to combine
If you have a whole slew of loans, you can simplify your life by consolidating or refinancing some or all of them. So, if you'd rather pay just one payment instead of several, consider refinancing.
It will accelerate your debt payoff plan
If you're motivated to knock out your student loans once and for all, getting a lower interest rate will free up more of your money to throw at the principal debt. You will compound your savings even more.
When you shouldn’t refinance your student loans
There are times when you may ask should I refinance my student loans, and refinancing simply doesn't make sense. If the following applies to you, avoid refinancing your student loans.
The new interest rate offer isn't much lower
It might not be worth the hassle of getting a whole new loan just to save a fraction of a percent in interest. Plus it will take some of your time for little payoff.
Your loans are already close to being paid off
Similarly, if you're in the home stretch and just have a small balance remaining, you might not even be paying much monthly interest anymore. It could be simpler just to stay the course where you are.
You're currently leveraging federal student loan program benefits (or want the option to)
Since you can only refinance with private lenders, you'll be giving up federal benefits if you choose to refinance your federal loans.
These could include income-based repayment, loan forgiveness for public servants, longer grace periods, and other federal loan advantages. If you have a mix of federal and private loans, you could refinance only the private loans (and/or consolidate the federal).
Applying for student loan refinancing
Let's talk about applying, now that you're aware of the pros and cons of refinancing student loans. Unlike many types of debt renegotiation, student loan refinancing is free.
That means if you have the time, it’s good to apply to as many lenders as possible. If you're worried about credit dings from multiple applications, it's usually treated as a single credit inquiry if you submit them all within a 30-day period.
Pro tip: Before you start this process, open a new email account dedicated to your loan search. You can see all your offers in one place and your normal inbox won’t get overwhelmed!
Qualifying and application process
The first step is researching to find legitimate lenders with good reputations. There are plenty of resources online where you can compare the pros and cons of various student loan refinance companies.
Before going through a full application, you can usually get a quote or "pre-qualified" rate from a lender. It would be based on your basic details like your school and degree, total debt, and income. A quote can help you decide if it's competitive enough to continue applying.
However, these are usually just estimates, and you won't get a final offer until you've submitted your specific information.
Full application
Once you've chosen lenders, go through their full application process. You'll usually need to upload documents to prove things like identity, income, and current loan information. As a result, it can take a little time.
After you've submitted your application, you may get an immediate offer or need to wait for it by mail or email. Full approval can take a few weeks, so be patient. Once the offers start rolling in, you'll be able to start sorting through them to find the best one to accept.
How to use a student loan refinance calculator
A student loan refinance calculator can help with finding the best deal. Using a calculator makes it easy to tell how much you’ll actually save with a certain offer, and answer the question, should I refinance my student loans?
To use it, simply input your current loan information (balance, interest rates, and term) and the new loan offer info. When you click to calculate, it will show results like how much money you’ll save and what your new monthly payment will be. It's a great way to see the pros and cons of refinancing student loans.
Best student loan refinance calculators
Student loan refinance calculators can save you time and help you decide if a refi is right for you. Here are some of our favorites:
Lendkey
The Lendkey calculator gives you a lot of extra info to help you research your options. It's easy to use and helpful.
Sofi student loan refinance calculator
The Sofi calculator can save you time. It's a simple process that includes interest rates and payments in an easy format.
Smart Asset student loan refinance calculator
The student loan calculator from Smart Asset offers some extra details. It includes charts and the national average for student debt.
Saving for College student loan refinance calculator
The Saving for College website has an interesting calculator with a page that includes FAQs and lender options. If you're serious about refinancing student loans, this is a good place to start.
Issues with student loans
Loans can seem like a smart choice when you're young and trying to get an education. And sometimes they do make college possible when it wouldn't have been otherwise. But there are some problems with student loans that should be addressed.
High interest
Student loan interest rates are at an average of 5.8% currently, according to Education Date Initiative. That can really add up and take over other areas of your finances, making it challenging to invest or save.
Bankruptcy doesn't always erase them
Bankruptcy is hopefully something you'll never go through, but it's important to note that your student loans are not always forgiven if you do so. While they can be erased, it may be challenging and there are requirements you must meet.
Alternatives to refinancing
Getting your undergraduate degree or masters is definitely important and necessary for some fields but requires loans in many cases. You may have discovered that refinancing isn't a good idea after weighing the pros and cons of refinancing student loans. So, what are your other options?
Payoff plan
If your options to refinance student loans are complicated, consider creating your own repayment plan. Pay extra each time you make a monthly student loan payment, even if it isn't required.
Paying extra will free you from your student loans faster, and you can also consider an autopay for your student loans if you think you're likely to forget.
Boost income
Student loans can create financial hardship for some, and there are ways past this. If possible, while you consider the question, "should I refinance my student loans", consider boosting your income through a side hustle or second job. Use as much of your paycheck as you can to pay off your student debt.
It might be challenging for a while, but eventually, you will get rid of student loans in your life for good.
Budget
To truly be free of student loan debt, it's important to know where all your money is going at all times. Budgeting helps you stay organized and make a plan for your money. When you master budgeting, you take charge of your loans, bills, savings, and future.
Student loan forgiveness
Student loan forgiveness programs may be an option depending on your circumstances. This means you would no longer be responsible for paying your student loan or some of it. To find out more, visit studentaid.gov.
Deferment
Student loan deferment means your loan payments are on pause and you don't have to pay them for a certain time. But deferment is not the same as loan forgiveness and there are some qualifications you'll need to meet. Check out this article to find out more about deferment.
Things to consider before refinancing student loans
You've answered the question, how does refinancing student loans work. Short of an emergency, refinancing shouldn’t be used as a way to push back your debt payoff plan.
If you have options to refinance student loans at a lower interest rate but extend your loan term and take longer to pay it off, you might not end up saving money in the long run.
While you’re thinking, "should I refinance my student loans", consider other strategies for faster payment of your student loans. You can check out our article on the best way to pay off student loans. If you are a current student, you can read our article on avoiding student loans in the first place.
Finally, you can check out the Clever Girls Know Podcast. You'll be inspired by stories from women who've been in your shoes and share their useful student loan payoff advice.