Can I Refinance My Student Loan?

You’ve probably seen the advertisements: refinancing your student loans can get you a lower interest rate, reduce your monthly payment, or even save you thousands of dollars over time. Those benefits certainly are possible, but it can be hard to get approved. And even if you can refinance your student loans, should you?  

Here are some key factors to consider before refinancing your student loans, from what refinancing means to how to get approved.

Refinancing your student loans is the process of replacing your existing federal and/or private student loans with a new loan from a private lending company. Your new lender effectively pays off the balance of your existing loans with previous lenders and consolidates them into one new loan with new terms, like a different interest rate or repayment term.¹  You then pay off the new loan based on its terms.  

Depending on your individual needs and financial situation, refinancing your student loans might help you save money or better manage your monthly expenses. For example, if your new loan has a lower interest rate, you’ll likely be able to save money on interest in the long run. If you’re able to extend your repayment terms, you may be able to lower your monthly payments – but because it takes more time to pay off the loan, you may end up paying more interest.  

Because you can refinance some or all of your federal student loans and private student loans, you can simplify your monthly payments – make one monthly payment instead of several. This is not to be confused with federal student loan consolidation, which lets you combine multiple federal student loans into one loan with a new interest rate that is the weighted average rate of the loans being consolidated, rounded up to the nearest 1/8 of a percent.^1,2  This gives you one monthly payment instead of several, among other potential benefits. For more on federal and private loan consolidation, read, “How to Consolidate Debt: 9 Steps to Regain Control.”

You can refinance your federal student loans and/or your private student loans, but whether or not you should depends on whether you can afford to forfeit the luxury of government benefits, the potential savings, and your eligibility.  

There is no federal student loan refinancing program. If you refinance some or all of your federal student loans, they must be converted into a private student loan offered by a private lender – and it can’t be undone. This means you’ll lose certain government student loan protections, like federal loan forgiveness, income-driven repayment options, and the ability to postpone payments if you end up in a financial bind.^1,3 The bottom line: If the government’s student loan benefits are important to you, refinancing your federal loans may not be worth the risk.  

Refinancing your student loans might not save you money. Refinancing isn’t guaranteed to lower your interest rate or lower your monthly payments. Before applying, it’s important to make sure that your new loan terms will be more favorable than your current terms. For example, a lower interest rate might come with a shorter loan term that means a higher monthly payment. Or, an extended term might increase the total amount of interest you pay over time.^1,4 The bottom line: If your new loan terms won’t save you money or you end up with a higher monthly payment, refinancing may not be right for you.  

It can be hard to get approved. To refinance your student loans – and get approved with favorable terms – you usually need to have a good to excellent credit score, good credit history, steady employment with stable income, and a low debt-to-income (DTI) ratio.⁵ The bottom line: If your credit needs work, you have low income, and/or have lots of debt, you may want to reconsider applying to refinance your student loans.  

The good news is that the above isn’t the be-all and end-all. For example, if you don’t want to lose the government benefits of your federal loans and also have private loans, you might still benefit from refinancing the private student loans – if it’ll improve your interest rate or repayment terms.

If refinancing your student loans is right for you, here’s how to do it:  

1. Shop around. First, you’ll have to choose a lender that offers student loan refinancing. There are many options available, from lenders that specialize in student loan refinancing to banks and credit unions. But they’ll usually have different interest rates and loan terms. When choosing a lender, you’ll want to compare interest rates and loan terms to find the best potential deals.^1,4

2. Prequalify to get a good estimate of loan terms. Once you’ve found a few attractive lenders, you may be able to prequalify to get an estimate of what your new loan terms will be like. The lender may have to pull a soft credit check, and you may have to provide some info like your name, income, monthly housing payment, and amount of debt to be refinanced. Soft credit checks don’t affect your credit score.⁵

3. Choose a lender and loan terms. By now you should have a good idea of what different lenders have to offer. Ideally, you want to look for the lowest interest rate, but don’t forgo other factors that may align with your personal goals. For example, some lenders may let you choose your repayment period, and you might have the option to choose between a fixed or variable interest rate. Do the math to make sure refinancing will help, not hurt, your financial situation.  

4. Apply. You should be able to apply online, and it should be fairly easy. However, you may need some specific information, like proof of employment, proof of residency and citizenship, and loan verification statements. The lender will also likely conduct a hard credit check, which can have a slight negative impact on your credit score.  

5. Finalize the loan. If you’re approved, you can now sign the paperwork and make it final. Just be sure to carefully review all documentation – it’s a legally binding contract.  

If you’re not approved, you may be able to contact the lender to ask why. Understanding why you weren’t approved can help you target the steps you can take to improve your case and apply again, with a greater chance of approval.