Can You Refinance Student Loans? Pros and Cons

Written by: Matt Kuncaitis
Updated: 4/08/21

For many people, student loan repayment can be a tremendous burden, especially when dealing with multiple loans at the same time. Even if you can use deferment or forbearance to reduce or postpone payments, those payments will eventually come due. Student loan debt can also make it difficult to move on to other financial life goals

A solution might be refinance student loans, which means paying off old loans and getting a new loan with different repayment terms and possibly a better interest rate. Refinancing may even result in a faster repayment process.

However, before moving forward with refinancing, you should fully understand the benefits and drawbacks of this process and whether this arrangement will benefit you in the long run. Here’s what you need to know about the pros and cons of refinancing student loans. 

Can You Refinance Your Student Loans?

Although you can secure student loans through private lenders and the government, the rate on federal student loans is set by Congress and not subject to change, regardless of your current credit score or income. Therefore, a private lender is the only choice when it comes to refinancing. You can refinance both federal and private student loans with private student loans.

When refinancing student loans, the lender pays off your existing loans, issuing a new student loan with new repayment terms and a new interest rate. You should consider refinancing your student loans if you can secure more favorable terms or a lower interest rate. Many undergraduate and graduate school students find that refinancing helps them take advantage of the benefits that come with lower payments.

How Does Student Loan Refinancing Work?

The refinancing process can vary between lenders, meaning borrowers should carefully evaluate which loans might work for them and get multiple offers before moving forward. However, in general, those interested in refinancing should have:

  • A strong credit history
  • A good credit score
  • A history of on-time payments
  • A good debt-to-income ratio

It might be smart to solicit offers from a few lenders when you qualify. You can then submit your application for approval. If approved, the new lender will pay off your old loans and issue you a student loan with new repayment terms.

Why Would You Need to Refinance Your Student Loan?

There are various reasons you might want to refinance your student loans. Some reasons include:

  • Securing a lower interest rate
  • Paying the loan off faster
  • Saving money over the course of the loan

These can prove beneficial to many students, but it’s important to consider the advantages and disadvantages of refinancing student loans before making such an important financial decision. We review the benefits and drawbacks of refinancing below.

What Are the Pros of Refinancing Student Loans?

Many people choose to refinance their student loans due to the various benefits that can improve their financial health. For example, some borrowers may want to free up funds to accomplish other life goals and build financial security. Some of the most significant benefits that borrowers seek include:

Lower Monthly Payments

The right refinancing arrangement can lower monthly payments. When you refinance your student loans, you’ll have new loan terms that govern how your loan is structured and your repayment responsibilities. If you’ve struggled to make payments on time, refinancing can help you keep up with the loan terms and avoid missing payments, which can worsen your financial situation.

Lower payments can arise from a few situations. For example, say you have paid off $10,000 of a $40,000 loan. Now, you owe $30,000, scheduled to be repaid over the next 10 years. If you refinance that remaining $30,000 loan over 15 years, each monthly payment will be lower.

Lower Interest Rates

Many borrowers elect to refinance due to student loan refinancing rates. However, the interest rate you receive relies on your credit score and how the lender judges your ability to repay the loan.

A lower interest rate can reduce the amount you pay over the life of the loan and possibly result in your paying off your loan faster. This especially true if you qualify for a fixed rate student loan, in which the interest rate will stay the same throughout the loan’s lifetime.

New Repayment Plans

When you refinance student loans, you’ll receive a new loan with new repayment terms. If you’re struggling to meet your current repayment terms, this can provide an opportunity to extend repayment. As a result, your monthly payments might be lower, allowing you to save for other financial endeavors. 

Simplify Student Loan Payments

By the time some borrowers graduate, they may have several student loans from different lenders. They might even have a mix of federal student loans and private student loans. Student loan refinancing can combine multiple loans into a new loan with one monthly payment. This can make managing the repayment period significantly easier and allow you to set up automatic payments.

Release Any Co-Signers

You may have required a co-signer when taking on your original student loans. At the time, this probably wasn’t ideal but was necessary to secure the funding you needed. With refinancing, qualifying borrowers can release their co-signers from taking on the responsibility of repayment. 

What Are the Cons of Refinancing Student Loans?

Although many benefits come with refinancing old loans, there are also some disadvantages that students and grads should review. Make sure to weigh these drawbacks against the benefits to make the best decision for your situation.

Negative Credit Score Impact

As a part of the application process for a refinanced loan, lenders will pull your credit report. While this is typical when securing a personal loan, it can hurt your credit score. 

Therefore, before applying to refinance your student loans, make sure you understand your eligibility and the terms of the refinance. You should be aware of the impact on your credit score and plan if you know you’ll need a strong credit score for anything else around the same time.

Paying More Interest Over Time

The potential benefit of a lower monthly payment when you refinance student loans is often achieved by extending payment for additional years. This usually means that you’ll end up paying interest on these loans for a longer period of time, and therefore pay more interest before the loan is paid in full. This trade off might still make sense; lower monthly payments can be a key reason to refinance, especially in the early years of a career. Most student loan refinancing products do not have a prepayment penalty – so you could get the benefit of lower monthly payments in the early years, but then accelerate payments as your income increases. This can curtail paying interest over a longer period of time.

Worse Repayment Terms

The terms you’ll receive with your new loan will vary depending on your circumstances. If you’re interested in going through the refinancing process, carefully review the terms of your current student loans and the new loan terms to determine which will benefit you the most. You’ll want to look at your monthly payments, how long it’ll take you to pay off your current loans, and the amount of interest you’ll pay over the long run.

With student loans from the federal government, you should also pay attention to the benefits you might lose if you refinance them with a private lender. Specifically, you may lose access to student loan forgiveness programs like Public Service Loan Forgiveness (PSLF), income-based repayment, and certain benefits related to the COVID-19 pandemic.

Higher Interest Rates

You should also be mindful of interest rates when refinancing. While you might qualify for a variable interest rate that is initially lower than what you’re currently paying, this might not be permanent, and you could potentially end up with a much higher interest rate. Generally, fixed interest rates are better because they improve budgeting, and borrowers don’t have to worry about sudden increases.

Review the interest rate offered on the new loan and how that will impact your monthly payment and the total interest paid over the life of the loan to judge if the terms are favorable and justify student loan refinancing. 

Application Fees

Those preparing to refinance their education loans also need to consider any application or origination fees they might need to pay. These fees will sometimes be listed in different parts of the loan application, such as the disclaimer. Make sure that the new amount owed, when combined with any fees, still benefits you as a borrower.

What Is the Difference Between Refinancing and Student Loan Consolidation?

Federal student loan consolidation refers to combining several federal student loans into one. This method will not give you a lower interest rate, but it can give you a lower monthly payment if the length of the loan is longer with consolidation. Consolidating your federal loans may help you become eligible for certain repayment or loan forgiveness programs. It also offers the convenience of having only one bill to pay versus several every month.

On the other hand, student loan refinancing involves applying for a new loan from a private lender with a new interest rate and new loan terms. If you agree to the loan terms, the lender will pay off your old loans and charge you through the new loan. This option can work best for people who have good credit scores and qualify for a lower interest rate, which will lower their monthly payments. It can also help bring several loans together into a single bill.

Let CollegeFinance.com Help You Find the Best Refinance Lender Offers

Refinancing your student loans can help you obtain better terms and a lower interest rate, therefore, saving money over the life of the loan. Understanding what goes into student loan refinancing, how to prepare for the application, and the benefits and drawbacks of going through the process can help you make the best decision to fit your needs.

Finding the best refinance lenders to fit your financial goals doesn’t have to be difficult. At CollegeFinance.com, we can help potential and current borrowers learn more about federal and private lenders, understand their loan terms, explore their repayment options, and more. We’re here to help you make the most of your college education.