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Published: Sep 29, 2023 10 min read
Illustration of a professor calculating on a chalk board the student loan interest rate
Chris Gash for Money

Millions of Americans are managing student loan debt, and paying down that debt often means postponing other financial goals like putting together a down payment for a home or saving for retirement.

The struggle is particularly acute for many borrowers right now, as they're working education loans back into their budgets now that the federal pandemic forbearance period has ended and monthly federal student loan payments have returned.

Refinancing student loans may be one way for borrowers to create a little more breathing room in their monthly budgets.

With interest rates on all types of financial products relatively high at the moment, many federal student loan borrowers will have a harder time saving money on interest with refinancing right now (more on that below), but you may be able to lower what you owe on a monthly basis.

Read on to learn about how refinancing can improve your financial picture.

Table of Contents:

Why refinance student loans?

Student loan refinancing can help make paying off your debt more manageable — especially if you have a very high interest rate or multiple loans that you’re struggling to keep track of. When you refinance, you are taking out a new loan. Your refinance lender (usually a bank, a credit union or a fintech company) will work with your current loan servicers to pay off your existing loans. Refinancing can help you get a lower interest rate or secure a lower monthly payment (and sometimes both). It also allows you to reduce the number of loan accounts you have open and release a co-signer.

But remember: if you have federal student loans that you want to refinance, you’ll have to do so with a private lender. That will mean you’re no longer eligible for federal student loan protections like Public Service Loan Forgiveness, repayment options including income-driven repayment plans, or other assistance programs, like extended periods of deferment or deferment.

The Biden administration’s broad student loan forgiveness program was blocked by the Supreme Court earlier this summer. It’s not yet clear what President Joe Biden’s next move will be, but it’s fair to assume that any new student debt relief program rolled out by the federal government will likely be limited to federal loans. That means refinanced loans would not be eligible.

It’s also worth keeping in mind that interest rates can vary widely among private student lenders depending on your individual circumstances. Some have only fixed interest rates, while others have fixed and variable interest rates.

Think carefully about whether refinancing federal loans with a private lender is the right choice for you before you move forward. If, on the other hand, you already have private student loans, then refinancing is simply a matter of finding a new loan with better terms.

Benefits of refinancing student loans

The benefits of student loan refinancing depend on your goal, whether that's paying off your loans faster, reducing your interest rates or lowering your monthly payment.

Most borrowers, though, look to refinancing as a way to save money over the life of their loan. Refinancing doesn't reduce your loan amount, but you can potentially pay less in interest.

To have a strong chance of qualifying for the loan terms that will give you the most savings, either you or your co-signer will need a very good credit score. As of September 2023, the market refinance rate for borrowers with credit scores of 780 and higher is 6.14% for a 15-year fixed loan, while the rate is 8.5% for borrowers with scores less than 680, according to Credible.

If you have private student loans, you can shop around to see if you can get better rates with refinancing than what you have with your current student loan, just keep in mind that a loan application will show as a hard pull on your credit report. Unlike some other types of loans, student loans seldom have origination fees, so if you can get a lower rate there's little downside to refinancing.

Here’s a more detailed look at how you can save:

Shorter repayment term

Oftentimes, a new refinancing loan can come with a shorter repayment period than your original loans. Shorter student loan repayment terms tend to result in the biggest savings when it comes to refinancing, because they help you pay less interest over time and knock out your debt ahead of schedule. But if your new loan term is going to be shorter you will need to be able to afford what will likely be higher monthly student loan payments.

Lower interest rates

Securing a lower interest rate is one of the biggest benefits of refinancing. That’s harder today than it was a couple years ago, because interest rates on all types of loans are high while the Federal Reserve fights inflation. Refinance companies are currently offering loans with annual percentage rates (APRs) between 4.85% and 14.48%, according to Credible. For reference, the fixed interest rate for federal undergraduate loans has ranged from 2.75% to 5.50% in the past decade. Graduate and Parent PLUS loans have carried rates between 5.30% and 8.05% in that time.

Still, if your financial situation and credit score have improved since you started college, there’s a chance you can get a refinanced loan with a more favorable interest rate, which means you’ll end up paying less in interest over the life of your loan.

Here’s an example of how you can save by refinancing to a lower interest rate: If you owe $25,000 on your student loans at an interest rate of 6.5% and a term length of 15 years, you’ll end up paying more than $14,000 in total interest over the course of the loan. If you refinance to a 4.5% interest rate and keep the same 15-year term, you’ll save some $4,700 in interest. If you refinance to a 10-year term, but keep your original interest rate, you’ll save more than $5,100. If you do both, you’ll save a grand total of $8,100.

Note that while a variable-rate loan will often have a lower rate at origination, but the amount of interest you pay will go up if benchmark interest rates rise, and that could end up costing you down the road.

Each lender has its own underwriting model that considers details like credit score, debt-to-income ratio, earnings potential and more when determining your eligibility for a loan, so be sure to shop around to ensure you find the lowest interest rate. (You can start your search by reviewing our Best Student Loan Refinance lenders.)

Reduced monthly payments

If you’re struggling to make your loan payments every month, refinancing can help ease some of that burden by lowering your monthly payment. The lowest refinance rates are usually tied to the shortest repayment terms. But you may still be able to reduce your interest rate while also getting a longer repayment term (depending on your credit history, of course). Keep in mind that a longer loan term likely means you’ll end up paying more in interest over time.

Loan consolidation

If you have multiple outstanding student loan balances, refinancing your current loans can help you consolidate them into just one, with one single monthly payment and a new interest rate. Your credit score might take a temporary hit after you consolidate — having longstanding accounts generally helps your credit, while having newer accounts tends to lower your score.

One important difference to keep in mind here: Student loan consolidation and student loan refinance can mean two different things. Refinancing loans always means taking out a private loan — there is no option to refinance within the federal student loan portfolio. But if you have federal student loans, you can consolidate those loans within the federal system. You’ll get what’s called a Direct Consolidation Loan. Doing so won’t reduce your interest rate (your new rate will be a weighted average of your current interest rates), but it does combine all your accounts into a single loan.

How Student Loan Refinance Saves Money FAQs

What is the best way to pay off student loans?

The best way to pay off your student loans is to do so at the fastest rate you can comfortably afford. The goal is to pay as little interest as possible over the life of your loan. Still, it's important to make your payments on time, so don't lock yourself into a plan that doesn't work for your monthly budget.

Does refinancing student loans actually help?

Refinancing your student loans can be a big help, but it all depends on your individual circumstances. If refinancing can help you secure a lower interest or lower monthly payment and you don't mind foregoing your access to federal loan benefits (both current and new benefits announced in the future) it could make sense to refinance. You'll end up saving money on interest and could even pay off the entire loan faster.

Why are student loans so expensive?

Student loan interest rates tend to be higher than rates on mortgages or auto loans because student loans are unsecured debt. That means there's no collateral (like a home or a car) for a bank to take if you don't pay, which makes it a riskier investment for lenders. While student loans do tend to have lower interest rates than other types of unsecured debt (like personal loans and credit cards), interest still adds a significant amount to the total cost of your student loan, since it accrues over a period of years.

Does it save money to consolidate student loans?

It's possible to save money by consolidating your student loans. Student loan refinancing is one type of consolidation that could help you pay less each month via a lower interest rate or pay less over the life of the loan by refinancing into a shorter loan term. Federal borrowers who use a Direct Consolidation Loan won't save money that way, but they will benefit from a simplified single monthly payment. Consolidation is an option for former students with federal loans as well as parents with Parent PLUS loans.

More from Money:

How to Refinance Student Loans

Down Payment vs. Student Loans: How to Decide Where to Put Your Money

A Guide to Credit Scores and Student Loan Refinance