Your Guide To Refinancing Student Loans

Are you considering to refinance your Federal or Private Student Loan to save money and have lower interest rates or lower monthly payments? Here is a complete guide to refinance your student loans.

Updated by Gowtham Ramesh on 10th October 2019

If you are stuck with your student loan debt or are exhausted by its dues to a point where it gets hard for you to make regular payments, then federal and private student loan refinancing can help you.

When it comes to loans, around 44 million students have Private or Federal Loan debt. In 2018, around 69% of the college students had an average debt of $29,800 which comprised of Private and Federal Student Loans.

So, it is true that student loan debts have gone out of hand. As more and more companies have turned their heads towards this scenario, various debt relief programs for student loans have been introduced. One of the reliefs among them is student loan refinancing.

Now let's get into the details of student loan refinancing and how it can help you.

List of contents

What is Student Loan Refinancing?

Refinancing is a process through which the terms and interest rates, along with other features of your existing loans are reconsidered and restructured to meet your current financial situation. It allows you to save money on interests and make payments easier and more manageable. By cutting off a few percentages, you can save some amount throughout the duration of student loan debt repayment. 

What does it do for borrowers?

Borrowers with high-interest rates can refinance student loans and obtain a lower rate leading to saving of money on interests. These savings can then go as extra payments of debt which will help to get out of the loan faster. Furthermore, borrowers can select a long term of repayment to get a lower monthly payment.

Basically, you will be taking a new loan with a lower interest rate. The private servicer will pay off your existing loans and provide you with a new one. 

How does it work?

Federal or Private student loan refinancing is a major step to help you manage your debt when you are facing financial issues with regards to making your monthly payments.

Generally while refinancing the federal student loan, your loans are taken over by a private lender or company. Refinancing companies can usually refinance both federal and private student loans.

How much money is saved in refinancing?

While Federal Loan Refinancing, certain federal loan benefits such as income-driven repayment plans and loan forgiveness will be forfeited, so research on refinancing programs thoroughly before getting into it.

Companies generally allow you to check interest rates you qualify for, based on your credit score before filling out the application. Checking of interest rates will require a soft credit pull which does not affect your credit score.

Interest rates and refinancing 

It's a wise decision to refinance loans with higher interest rates to lower rates. Loans like Direct Subsidized and Unsubsidized Loans generally have an interest rate of 5.05% and refinancing it may not get you any better interest rate than it already has.

But loans like Direct PLUS which has an interest around 7.6% can be considered to be refinanced. 

Ways to refinance your student loans

While thinking of refinancing your Federal student loans, you must compare the following features between your current loans and the new refinanced loan.

  • Repayment term

  • Monthly payments

  • Interest rates

Federal student loans usually take around 10 - 30 years to repay (consolidated). Whereas student loan refinancing typically offers repayment terms of around 5 to 20 years. With Federal Loans, the rate is a fixed rate of loan where the interest rates will be the same during the repayment. 

Private lenders offer both fixed and variable interest rates. It might be helpful or become a burden, depending on the current or future scenario of market conditions.

If you are opting to refinance your federal student loans, go through the impact it has on your monthly payments. Doing a side by side comparison of repayment terms will give you the true benefit of refinancing.

Also learn about Student Loan Refinancing Lenders 

Refinancing Federal Student Loan

Federal Student Loans come with low-interest rates and several benefits for the protection of borrowers. Despite this fact, you may have several reasons to refinance your federal student loans including the following -

  • To make monthly payment easier with multiple other loans

  • To have better loan terms with a lower interest rate if qualified

You should not forget that once you refinance your Federal student loans, it will be paid off by the student loan refinancing company and a new refinanced loan will be set up with the new company. Your federal loan will now be converted into a private loan this way.

Eligibility and Requirements

  • To be eligible for a refinancing program of a loan with a private lender, you need to have a proper record of making regular on-time payments for your old loans and a well-maintained credit score

  • You also need to be employed with a consistent income

  • It's better to head out to the individual lenders and ask for their specific set of rules and eligibility to compare the results and choose the one that fits you good

Tips to consider while refinancing federal student loans

Refinancing is a very big decision. It's certain that refinancing is very helpful for private student loans. But, provided the federal loans come with loan forgiveness and repayment flexibility, it is hard to make decisions in the case of federal student loans. If refinancing your federal student is what you have decided upon, consider the following pointers.

  • Take only the loan that you want to refinance as it may not be beneficial for each and every loans

  • Make sure your credit report and score are good

  • You have increased chances of approval

  • Analyze the time and duration of repayment from different banks.

Refinancing Private Student Loan

A private student loan can be refinanced with a variable or fixed interest rate. The new repayment terms might be shorter or longer than your existing plan. The variable interest rate will fluctuate over the time of the loan in the market while fixed rates remain the same.

The change in the interest rate and repayment period will save money for the borrower. The borrower ultimately makes lesser payments across the lifetime of the loan.

Some may prefer to increase their repayment term which will bring the monthly payment down. This consequently results in paying more over the life of the loan, unless you receive a lower interest rate. In another way, pay more or less over the time of loan depending on the new rates and repayment terms.

Interest rates 

While refinancing with a private lender, the new rates will be based on the creditworthiness of the borrower or the co-signer's credit history, in case you have opted to have one.

If your financial situation has improved compared to the time you took the loan, then you would be getting a lower interest rate which will save you money in the interest you pay for the loan.

If a lower interest rate is not offered, compared to your existing rate of interest, it is better to avoid refinancing as you will be paying more in the long run.

Private student loan refinancing eligibility

  • To be eligible for a refinancing program of a loan with a private lender, you need to have a proper record of making regular on-time payments for your old loans and a well-maintained credit score

  • You also need to be employed with a consistent income

  • It's better to head out to the individual lenders and ask for their specific set of rules and eligibility to compare the results and choose the one that fits you good. 

Benefits of refinancing student loans

There are several advantages and limitations of private student loans. Some of them are mentioned here.

1. Easier to manage payments

By refinancing your loans you get an upper hand in managing your monthly payments. You may receive lower monthly payments either by reducing your interest rate or by lengthening your loan terms.

2. Better terms

Refinancing could give you an efficient term for your loan with payment reduction. Shorter terms with lower interest rates result in a lesser amount of loan payback over the life of the loan.

3. Lower monthly payments

Through refinancing your loan, you will be getting better interest rates compared to the old one. It will make sure that your monthly payment is lesser than the old one which makes it easier to pay off the loan amount.

4. Lower interest rate

By refinancing your loans the interest rate will be reduced based on the past history of qualifying payments, thus, the lender will provide you refinancing at a lesser interest rate.

5. Based on creditworthiness

The refinancing is generally granted on the basis of your creditworthiness. It will take place by carefully considering your credit score and the payments that you have made to the past loans.

Certain private lenders might charge your origination fee which is not present in federal refinancing. You can always talk to the leader to refinance a single loan rather than combining many into one. It is always better to evaluate your choices before getting into it.

Other options to consider before refinancing Federal student loans

The federal government has numerous income-driven repayment plans which will help you to lower monthly payments before you consider refinancing. It consists of Income-based Repayment (IBR), Income-Contingent Repayment (ICR), Pay As You Earn (PAYE) and Revised Pay As You Earn (REPAYE) plans.

Certain plans are need-oriented given to certain eligible borrowers, while others are available for most federal student loan borrowers. The income-driven plan will adjust your monthly payment according to your current monthly income. Hence, it can be a lifesaver if you are experiencing economic hardship or are in need of lower loan payments.

Options for federal employees

If you are a federal employee or a not-for-profit-employer, you might be eligible for student loan forgiveness based on the payment plan you are in. Some of the types of loan forgiveness programs are given here.

  • Loan forgiveness for Teacher

  • Loan forgiveness for Lawyers

  • Loan forgiveness for Doctors

If you refinance your federal loans with a private company, you are no longer entitled to these repayment plans or loan forgiveness programs.

Options during financial hardship and high debt situations

Under high debt, it is better to keep federal loans and apply for alternative repayment plans.

If you are facing financial hardships such as job loss, you can opt for forbearance where you can postpone monthly payments without getting into default. Once you refinance your student loans, you lose this option.

If you are positive to repay your loans under the given repayment terms and attempting to maximize your savings, credit score and have a healthy income, refinancing your federal loan is a wiser option.

Still confused? Stop wondering and get info on student loans 


If you graduated recently and are unemployed or thinking of switching jobs, then you better stick with the federal loan dues, as the generous repayment options will be available to help you until you have stabilized your employment scenario.

If you are comfortable and are in a secured financial position while having a good credit score and you are looking forward to closing your student loan debt as fast as possible, then looking into refinancing might be a good option with private loans.

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  Can you refinance private student loans into federal loans?

No, you cannot refinance your private student loans into federal loans. But if you refinance your federal loans under private lenders, it will become a private loan from that point onwards.

  Does refinancing student loan save money?

It depends on the new terms and interest rates of the new loan. Some refinancing plans will only reduce your monthly payments but increases the overall loan amount. On the other hand, if your new loan has better terms and interest rates, it will definitely save you money over the lifetime of the loan.

  Should you refinance your student loans? Is refinancing my student loan a good idea?

You should refinance your student loans only if it is in favor of your situation. If you have a hard time making your monthly repayments and are looking to lower it, refinancing your loan is a good option, it may, in turn, increase the overall amount f the loan. If you are fit to refinance your loan to a shorter term to save money in the long term than refinancing is a good option too, but it may increase your monthly payments.

  Is there a downside to refinancing student loan?

One of the main drawbacks of refinancing is that when you refinance federal loans to private lenders, it is converted into private loans immediately. This means that you lose all the benefits of federal loans.

  What credit score do I need to refinance student loans?

To qualify for refinancing student loans, you are required to have a decent credit score. There are different limits from lender to lender. Most lenders want a score of 680 or above to qualify. For example, SoFi gives refinancing options to applicants who have a score of 650 or higher.