Should you refinance your student loans?

Struggling with student loan debt? You’re not alone. In the third quarter of 2023, the total outstanding federal student loan debt topped $1.6 trillion, spread across more than 43 million borrowers, according to StudentAid.gov. Federal loans dominate the market, but borrowers of private student loans owe nearly $129 billion, according to Enterval Analytics’ 2023 report.

Refinancing your student loans may help you save on interest or lower your monthly payments, but this option isn’t right for everyone. Refinancing federal loans in particular may mean forfeiting loan forgiveness or access to income-driven repayments in the future, so consider your situation carefully before you jump in.

When to refinance your student loans

Refinancing student loans might save money and alleviate financial stress, but only in certain situations. Refinancing might be a good choice if:

• You have private student loans. Federal loans carry some benefits you would permanently lose if you refinance into a private loan, like loan forgiveness and income-driven repayment plans. If you already have private loans, these benefits don’t apply to you and refinancing could be worthwhile. Read about our top picks for the best private student loan refinance lenders.
• You have high credit scores. The financial value of refinancing depends on whether you can qualify for a lower interest rate than what you’re currently paying. Those with credit scores in the mid-700s and above — or a cosigner or co-borrower with such scores — are most likely to qualify for the lowest interest rates and reap the biggest benefit.
• You’ll get a lower interest rate. Not every refinancing scenario will help you save money. But it might be worth considering if you’ve run the numbers using a refinancing calculator (like Calculator.net’s) and see a clear financial benefit.
• You’ll get a more affordable payment on your private loans. Refinancing into a longer loan term could deliver near-term relief through lower monthly payments, but it comes at the cost of accruing interest. While you’ll pay potentially thousands more in interest over the life of the loan with a longer repayment term, you may decide that the trade-off is worth it for more flexibility in your budget.
• You want to ditch a variable interest rate. Refinancing from a variable-rate loan to a fixed-rate loan could provide more predictability in your cash flow, particularly if you have several years of repayment left. That said, if fixed rates are high, you may consider waiting for them to drop before refinancing.

When to avoid refinancing your student loans

For many student loan borrowers, a refinance may not be the best financial move. Think twice before refinancing if these situations apply to you.

• You have federal student loans. Refinancing means losing federal loan repayment protections, including loan forgiveness, income-driven repayment plans, forbearance options or loan deferment. Once you refinance into a private loan, you can’t undo it.
• You’ve made progress toward forgiveness. Federal loan forgiveness programs require borrowers to make a certain number of qualifying payments before their loans can be forgiven. For example, if you’ve been working toward Public Service Loan Forgiveness (PSLF) for five years, your remaining balance would be wiped out in five more years. If you refinance your loans, you’ll lose federal forgiveness eligibility and would have to repay the entire balance.
• You’re an active-duty service member. The Servicemembers Civil Relief Act (SCRA) imposes a 6.00% interest rate cap on student loans borrowed after August 14, 2008 and before entering active duty. Any interest above 6.00% is forgiven, and this applies to both federal and private loans. If you’re an active-duty service member and refinance your student loans, you’d lose this benefit.
• You can’t get a lower interest rate. Maybe your credit scores are poor and you can’t find a cosigner, or perhaps the high-rate environment is to blame. Whatever the reason, if your new loan has a higher interest rate than you currently pay, you may not see any financial benefit from refinancing.
• You’re not confident in your income. If you have federal loans and your future earning potential is uncertain, think twice before refinancing federal loans into private loans. If your income drops, you could adjust your payments on a federal loan using income-driven repayment. Private loans don’t have that option.
• You’ve defaulted on your loans or declared bankruptcy. In many cases, borrowers with a loan in default are not eligible for refinancing. To qualify, you’d need to bring your accounts into good standing, and you may need to make a certain number of payments to prove your creditworthiness. Similarly, most lenders won’t consider your application if you have a bankruptcy on your credit reports, which can take up to 10 years to fall off.
• The cost outweighs the benefit. Refinancing may come with origination fees, which could eat into your savings. If refinancing doesn’t save you money or help you accomplish your financial goals, it’s probably not worth it.

How much can student loan refinancing save you?

The amount you save with a student loan refinance depends on your interest rate, balance and loan term. You may save thousands over the life of the loan, or you may not save much at all.

For example, let’s say you have a private loan with a $30,000 balance, an 8.00% interest rate and seven years of repayment remaining. That would mean your monthly payments are $468. Refinancing into another seven-year loan at 6.00% would bring your monthly payments down to $438, saving you $30 per month and $2,464 overall.

Alternatively, refinancing to a longer term would shrink your monthly dues even more. While this strategy can save you money in the short term, it’s likely to increase your overall cost of borrowing. Using the same figures above, if you extended the term on your refinance loan to 10 years at 6.00%, your monthly payment would be $333, saving $135 each month. The longer term would mean you’re making payments for an extra three years and paying almost $700 more in interest than you would with your current loan. (You might decide that breathing room in your current budget is worth the increased cost over the long haul.)

The math changes dramatically if your loans originated during a period of low interest rates. For instance, if you took out subsidized federal loans between July 2020 and June 2021, your interest rate is likely around 2.75%. It would be hard to beat that rate with a private lender, and you’d lose the benefits and protections of federal loans.

Am I eligible for student loan refinancing?

Specific requirements vary by lender, but you can get pre-qualified with multiple private lenders to understand your eligibility without damaging your credit scores. Most lenders consider factors like:

• Credit scores: The higher your scores, the better. Many lenders require credit scores of 650 or higher, but if your score is on the low side, you can expect higher interest rates.
• Debt-to-income (DTI) ratio: This compares your total monthly debt payments to your gross monthly income. For example, if you pay $2,000 in monthly dues on various debts (like credit cards and mortgage payments) and you earn $5,000 pre-tax, your DTI ratio is 40% (2,000 / 5,000 = .40). A low DTI demonstrates sufficient room in your budget to pay your debts as agreed, and many lenders require a DTI of 50% or lower.
• Annual income: Although they may not disclose it publicly, most lenders set a minimum annual income requirement, commonly $35,000 or more. You may have to submit pay stubs or tax documents to verify your income.
• Loan balance: Lenders set minimum and maximum borrowing amounts for refinance loans, and if your remaining balance is too small or too large, you may not qualify.
• A degree: This isn’t quite as common as the other eligibility criteria, but some lenders require you to hold a degree from an eligible school. Current students are typically not eligible for refinancing.
• Permanent residency: Refinancing student loans can be challenging for international students because most lenders require you to be a U.S. citizen or permanent resident. However, some lenders (like SoFi or Citizens Bank) allow non-permanent residents to apply with a stateside cosigner.

Alternatives to student loan refinancing

If refinancing your student loans isn’t a good option, consider these strategies to make your loans more manageable.

Apply for an income-driven repayment plan

Best for: Low-income earners with federal loans

There are four plans available under income-driven repayment (IDR) — including the new SAVE plan — and all of them forgive any remaining loan balance at the end of the repayment period. Depending on the plan, your payments may be between 10% and 20% of your discretionary income, or your income level and family size might qualify you for a $0 monthly payment. Apply and recertify your plan annually at Federal Student Aid.

Apply for student loan forgiveness

Best for: Those who work in public service, pay under an IDR or qualify for an LRAP

If you work for a nonprofit or the government and have Direct Loans, you may qualify for PSLF after 120 qualifying monthly payments. Be sure to certify your employment each year or whenever you switch jobs. Borrowers who are eligible for income-driven repayment (IDR) may also receive loan forgiveness at the end of their repayment period (20 or 25 years, depending on the plan).

Some private loan programs and careers also offer paths to forgiveness. For example, many law schools and state bars offer Loan Repayment Assistance Programs (LRAPs) and forgiveness for graduates who work in the public sector for the government. Additionally, some universities provide LRAPs to low-earning graduates — Butler University, for example, will assist you with repayment if you earn less than $57,000 a year.

Consolidate your federal student loans

Best for: Borrowers with multiple federal loans (private loans aren’t eligible)

If you’re repaying multiple federal loans, you could combine some or all of them into a federal Direct Consolidation Loan. While this option won’t lower your interest rate, it can streamline your experience so you’re making one monthly payment with a fixed interest rate. Your rate is a weighted average of the interest rates for the consolidated loans, rounded up to the closest one-eighth of a percent.

Just be mindful that consolidating a loan may have unintended consequences, such as losing the interest coverage on a subsidized loan or resetting your progress toward programs like PSLF.

Make extra loan payments

Best for: Borrowers with high income, high-interest loans and extra cash

Paying down high-interest debt is a key step toward financial freedom and security. If you have loans that don’t qualify for forgiveness and can afford to make extra payments, be sure that your loan servicer applies the additional payments to the principal. You can make extra payments in a few different ways, including:

• Submit biweekly payments: Rather than making one monthly payment toward your student loans, you can make two half-payments each month. This strategy results in one extra payment per year, so you’ll repay your loan faster and pay less in interest overall. Some loan servicers will even allow you to set up automated biweekly payments.
• Pay more than the minimum each month: If you have some wiggle room in your budget, putting extra money toward your student loans each month can help you pay down the balance more quickly. Just be sure that your servicer applies the extra money to your loan principal rather than interest or fees.
• Make lump-sum payments as possible: When you receive a chunk of cash, like a tax refund or birthday money from grandma, make an extra principal-only payment toward your student debt.
• Use the debt avalanche (or snowball) method: With debt avalanche, you pay as much as possible toward the debt with the highest interest rate and make minimum payments on the rest. This strategy can save you money on interest payments. With debt snowball, you focus on paying off the smallest balance before moving on to larger ones. Repaying small balances quickly can give you the psychological boost needed to continue prioritizing your debt.

Tip: Enroll in automatic payments to score an industry-standard rate discount of 0.25 percentage points if your servicer offers it. It might not seem like much, but the savings can add up to hundreds or even thousands of dollars over the life of your loans.

Alternatively, if you have low-interest loans and you’re not maxing out your retirement savings, you might be better off paying your student loans as agreed and putting extra cash into retirement so the money can compound over the coming decades.

Explore deferment or forbearance plans

Best for: Borrowers experiencing temporary financial trouble

During loan deferment, you don’t need to make any payments toward your student loans. During forbearance, you may be able to skip payments or make smaller payments. Interest will typically continue accruing in both scenarios. Although these plans are a hallmark feature of federal loans, many private lenders also offer hardship forbearance options or in-school deferments.

If you’re working toward federal loan forgiveness, that period may not count toward those requirements. IDR may be a better option than forbearance or deferment if you qualify.