How to Refinance Student Loans   

What is student loan refinancing?

When you refinance your student loans, you pay off your existing student loan debt by taking out a new loan, generally with a different lender. The new lender purchases your old debt and then provides a new loan with new terms.

For many graduates, refinancing results in lower interest rates and lower monthly payments. It can also provide an opportunity to extend your repayment term, which can further reduce your monthly payments.

See: Student Loan Refinancing: What You Need to Know

Can anyone refinance student loans?

If you have a good credit history and stable employment, you’re probably a terrific candidate for student loan refinancing.

But even if you’re not a ready-made candidate for refinancing, you may still be able to refinance with a cosigner.

You can refinance both federal and private student loans, but banks look for certain criteria when they review a loan application. Regardless of the type of loan debt you have, banks will want to see:

A good credit score

Your credit score is a numerical representation of your credit history. If you have a score between 690 and 850, you will likely be in a good position to refinance.

A low debt-to-income ratio

Your debt-to-income ratio tells banks how much money you’ll have available each month for payments. You can calculate your ratio by adding all your monthly debt payments and then dividing by your gross monthly income (what you earn before taxes). Banks are typically interested in a number less than 36%.

A responsible repayment history

Your credit score is tied to your repayment history. Banks look for low-risk candidates—people who’ve made timely payments on bills, credit cards, and student loans.

A solid employment history

Candidates with full-time jobs have more success refinancing their student loans. Lenders see an applicant with a steady job and income as more likely to pay back their loans.

A college degree

If you’ve already graduated from college, refinancing might be a good option. Banks approve borrowers who have graduated at higher rates than those who have not.

Applicants that meet these criteria have a better chance of getting approved for refinancing.

See: 6 Questions to Ask Before Refinancing Your Student Loans

What’s the difference between consolidating and refinancing?

Both consolidating and refinancing your student loans may allow you to stop making multiple payments to different lenders each month, but the two processes work in different ways and have varied benefits.

With student loan consolidation, you combine multiple student loan payments into a single monthly payment and eliminate the need to keep track of several payments or balances. You may also see a reduction in your monthly payment if consolidation allows you to pay off your balance over a longer period of time.

But consolidating loans doesn’t always mean you pay less.

In fact, if you’re consolidating federal loans through a Direct Consolidation Loan, your interest rate may go up slightly because your combined interest rate average will be rounded up. And if you extend your loan term, you may end up paying more over the life of the loan.

Refinancing, on the other hand, typically saves you a lot of money.

With student loan refinancing, you take out an entirely new loan to pay off your existing student loan or loans. You may consolidate multiple loans in the process, but you can also refinance a single loan or previously consolidated loans.

Refinancing will allow you to reduce your interest rate and lower your monthly payment at the same time. You’ll save money every month, as well as over the life of your loan.

See: Student Loan Refinancing and Consolidation Terms You Need to Know

How much can I save by refinancing my student loans?

People who refinance their student loans are often able to lower their monthly payments by $250 a month or save over $16,000 over the life of the loan.

How can refinancing create such staggering savings?

There are a few factors at work.

Interest rates may have dropped since you took out your original loans, or you may have built up your credit in the years since graduation, making you eligible for a reduced interest rate and better loan terms.

If you have federal loans, you have a standard fixed interest rate that’s the same for all borrowers regardless of your financial profile. This rate is often higher than what private lenders can offer because it has to account for high-risk applicants who are more likely to default or not finish their degrees.

Refinancing with a private lender that considers your specific financial circumstances could result in a lower interest rate.

See: Refinancing Student Loans: How Much Could You Save?

When can I refinance my student loans?

You can apply to refinance your loans anytime, but you may be a good candidate for refinancing right now if:

You need more money in your bank account

A new car note or a childcare payment could be the push you need to refinance and start saving some cash each month.  

You have a high interest rate

For people with interest rates of 6.5 percent or higher, refinancing will likely result in lower interest rates and monthly savings.

You have good credit (or a cosigner)

Lenders look for borrowers they trust to repay their loans, and a strong credit score is a positive indicator. If you don’t have a great score (690-850), a cosigner could help.

You have a low debt-to-income ratio

A low debt-to-income ratio assures lenders that you’ll have money in the bank each month to pay your loan payment. If you have a ratio between 20 and 36%, you’re in a good position.

To calculate your ratio, add all your monthly debt payments (car payment, student loan payment, credit card payment) and divide that by your gross monthly income—what you earn before taxes.

You have solid employment

Lenders have more confidence in borrowers who have full-time, steady employment, so if you’re bringing in a regular paycheck, you’re likely a better candidate for refinancing.

If you’re considering refinancing your student loans, taking a close look at your finances can help determine whether now is the right time for you to apply.

See: How to Make Student Loan Payments More Manageable

Why should I refinance my private student loans? 

Refinancing your private student loans is a big decision, and only you can determine whether it’s right for your particular financial situation.

But there are a few factors that can help you decide.

Here are some of the advantages you might see:

Lower interest rates

You may be able to get a lower interest rate by refinancing, especially if you have improved your credit score and repayment history since you took out your original private loans.

Lower monthly payments

Getting a better interest rate on your student loans means you can lower your monthly payment even if you keep your repayment term the same. You could also reduce your payment even more by spreading the repayment period out over a longer time frame.

More flexible choice of payback schedules

Your financial circumstances are unique to you, and most companies that refinance student loans allow applicants to choose a repayment timetable that meet their particular situation. You will likely be able to choose from a term between five and 25 years.

Consolidating multiple loans into a single bill

Refinancing allows you to combine multiple loans into a single monthly payment. You’ll be able to keep better track of what you owe and be more likely to avoid missing a payment, which could hurt your credit score.

Quick applications and good customer service

The application process for student loan refinancing is streamlined and often takes less than 15 minutes. If you took out college loans before 2014 or are paying more than 4% interest, you are most likely to benefit from refinancing your student loans.

There are no inherent downsides to refinancing your private student loans, but look carefully at the terms of any new loan to ensure you are getting a deal that makes the most sense for your finances.

Two common issues to consider are:

Longer payment terms

If you choose to lower your monthly payment by extending the repayment term, you will end up paying more interest—and thus more money over the life of the loan—than if you stuck with a shorter repayment term.

Variable interest rates

Very low interest rates—and the resulting very low monthly payment—can look great when you are refinancing. But be careful about focusing on short-term relief and ignoring long-term implications. An interest rate that suddenly increases in a few years could put you in a difficult situation if you’re not prepared.

See: Is Student Loan Refinancing Right for You? Take This 7-Question Quiz to Find Out

Why should I consider refinancing my federal student loans? 

Many of the same advantages you’d get from refinancing private loans apply to federal student loans as well.

If you refinance your federal student loans with a private lender, you could benefit from lower interest rates and lower monthly payments—especially because federal loans follow a “one size fits all” fixed interest rate approach.

With refinancing, you may be able to get a lower interest rate based on your own good credit scores, a cosigner’s strong credit, or assets like home equity. Also, refinanced loans often have the option of fixed, variable, or hybrid interest rates.

You could also consolidate multiple loans into a single monthly bill or change the length of your repayment term.

However, if you have federal loans, there are specific questions you’ll want to ask yourself before refinancing.

Will I lose needed benefits?

Refinancing removes your eligibility for federal income-driven repayment options. If you have a low or unsteady income, are currently unemployed, or are changing careers, you may consider waiting to refinance until your financial condition improves.

Could my loans be forgiven?

People who refinance federal loans lose access to any benefits related to Student Loan Forgiveness. If you are a federal employee, a teacher, or you work in a public service field, you could qualify for student loan forgiveness after 10 years of consistent payments. Refinancing removes that option.

As with private loans, you’ll likely have the option to extend your payment term or take a new loan at a variable interest rate. Make sure you consider the long-term impacts of these decisions.

See: Should You Refinance or Consolidate Your Student Loans?

What do I need to get approved to refinance my student loans?

You can probably gather the materials you need and fill out the online application to refinance your student loans in less than an hour.

Before you start the application, you’ll want to have these things on hand:

• The most recent loan statement for each loan you want to refinance. Make sure it shows your loan servicer name and address as well as the repayment start date, an estimated payoff date, the original loan balance, the current loan balance, the interest type, and the interest rate.
• A driver’s license, passport, or bank statement that can be used to verify your address.
• Your last month’s pay stubs.
• Your most recent tax return.
• Proof of graduation.

To make a decision about your loan, the bank will review your application and check your credit score. A score above 690 is considered good.

In your paperwork, the lender will look for evidence of a low debt-to-income ratio, solid repayment and employment history, and a college degree. Lenders want to provide loans to people they’re confident can pay back the debt. Each of these criteria helps a bank determine whether you’re a good candidate for a loan.

See: How to Get Approved for Student Loan Refinancing

How will refinancing affect my credit score?

Applying to refinance your student loans could have a slight negative impact on your credit, but if you do refinance, you may ultimately improve your credit score.

Here’s why:

Your credit score is based on your payment history and the amount of debt you have. The credit bureaus that determine your credit score consider potential new debt, reports of debt being sent to collections, and how long you’ve had credit.

When you’re shopping for a new lender, your score might drop by a few points because each time a lender checks your credit, your score takes a small hit.

You can minimize the impact by limiting your comparison shopping to a 15-day timeframe and by filling out a full application for only the best offers. Find out everything you can before you apply.

The small hit to your credit score may be worth it in the end if you do end up refinancing.

On-time payments are the most important factor in how your student loans are treated in your credit score. If refinancing means you have a lower debt-to-income ratio and are more able to consistently make on-time payments, then refinancing could ultimately improve your credit and increase your credit score.

See: 4 Ways Student Loans Can Help Your Credit Score

Am I paying too much for my student loans?

If you could choose to pay less on your student loans, you definitely would. So how do you know if that’s an option?

You can quickly and easily compare the terms of your current loan to the terms you’d have with a refinanced loan by using our Student Loan Refinancing Calculator.

Chances are if you’re paying more than 4% interest, you could have a lower interest rate—and a lower monthly payment—if you refinance.

How do I choose a lender?

With all the options out there, choosing a lender can feel pretty overwhelming. But don’t worry. With a few simple steps, you can make a well-reasoned decision.

1. Compare your options. Create a spreadsheet so that you can put in the relevant information and do an apples-to-apples comparison. Add in interest rates, loan terms, and any other factors that are important to you. (Or, just check out our picks for the best banks for student loan refinancing.)
2. Give yourself a time limit. You’ll get a ding on your credit score each time a lender performs a credit check, but keeping all your inquiries within a 15-day period can limit the impact. A shorter time frame also means interest rates are less likely to change while you’re shopping.
3. Make strategic choices. Find out as much as you can about each lender’s expectations and terms before you apply. This will help you minimize credit hits and will ensure you don’t waste time applying to a lender that isn’t a good fit.
4. Contact lenders. Call the lenders you’re considering and see what their customer service is like. Once you refinance with a bank, you’ll have a long relationship with them. Make sure you like how they work.

See: Our picks for the Best Banks for Student Loan Refinancing

How do I apply for student loan refinancing?

If you’ve decided refinancing your student loans is right for you, start by performing an initial inquiry with at least three different companies. This informal step is not the same as a full application and will not affect your credit score.

Once you’ve gotten the information—including interest rate, terms, monthly payments, and total loan payment—from several companies, compare the results side-by-side. Consider what your monthly payments will be and how much you’ll pay over the life of the loan.

After you’ve made your choice, it’s time to apply. Gather the following documents:

• Information about your loans, including loan amount—both original and current, interest rate, servicer name and address, and payoff date.
• Your driver’s license, passport, or a bank statement to verify your address.
• Your last month’s pay stubs.
• Your most recent tax return.
• Proof of graduation.

Follow the prompts of the online application and upload documents where necessary.

See: Private Student Loan Refinancing: How to Compare Rates and Choose a Lender

When will I start saving money?

Once your application is approved, you’ll likely start saving money within three to four weeks. That’s about how long it takes your new lender to pay off your old loans and request the first payment.

One word of caution: don’t stop making payments on your old loan until you receive an invoice from your new loan servicer.

Refinancing your student loans can feel intimidating, but we’re here to help. Use our our 10-second Refi Ready tool to see how much you could save.