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Published: Feb 03, 2022 21 min read
Janice Chang for Money

In an ideal scenario, refinancing your student loans can help you secure a lower interest rate, reduce your monthly loan payments or both. However, refinancing isn’t a smart move — nor is it always possible — for every borrower. And there are several downsides to refinancing federal student loans that you should be aware of.

Still, if you refinance your student loan under the right conditions, it could save you thousands of dollars over the life of your loan.

Read on for a step-by-step guide to refinancing your student loans, FAQs and everything else you should know before refinancing.

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Refinance Your Loan

1. Decide if refinancing is right for you

Throughout the pandemic, student loan refinancing rates have been near historic lows. As a result, refinancing has received a lot of attention. But that isn’t reason enough to do it.

Your personal situation is what matters most. Here are some general scenarios where refinancing makes sense:

  • Your personal finances have improved since you took out your current loan(s). If your credit score, job situation and debt-to-income ratio is much better than when you first took out the loan, it may make sense to refinance. This also applies to the financial situation of your co-signer, if you have one.
  • You have private student loans. Only private lenders will refinance your student loans. Unfortunately, the federal government will not. You can still refinance a federal loan, but know that it then becomes a private loan and you lose all of your federal borrower protections (more on that below). On the other hand, if your current loan is a private loan, essentially all you're doing when you refinance is trading a private loan for a (hopefully better) private loan.
  • The new loan fits your needs. Ideally, your new loan will have a lower interest rate and/or monthly payment. In some cases, you might want a shorter loan length with a higher monthly payment to knock out your student debt faster. You may also be willing to lengthen the term of your loan for lower monthly payments. Whatever the case, if the new loan terms aren’t helping you, there’s no reason to refinance.
  • You’re OK with giving up federal borrower protections and programs. When you refinance a federal student loan, it becomes a private loan. Thus, you lose all eligibility for federal forbearance, forgiveness, income-based repayment and financial-hardship programs. Unfortunately, once you refinance your federal student loan into a private one, you can’t revert it.

Also weigh these pros and cons before refinancing your student loans.

Pros
  • You can take advantage of market fluctuations to lower the interest rate on your loans.
  • You can choose the length of your repayment term (usually between five and 20 years).
  • New rates or term length can lower or raise your monthly payments.
  • If your old loan had a co-signer, you'll have the option to remove that person
Cons
  • You won't be eligible for any repayment perks tied to federal positions, like military or volunteer service (if your previous loans were from the federal government).
  • You won't be eligible for federal student loan forbearance or forgiveness plans (if your previous loans were from the federal government).
  • Private lenders usually don't offer income-based repayment options.
  • If you switch your federal loans into private loans, that's irreversible.

Thinking about your long-term goals with refinancing will prepare you to better evaluate different lenders’ loan repayment options. Are you trying to pay off your student loan debt as quickly as possible or reduce your monthly payments? Or is consolidation (i.e. lumping all your private and/or federal loans into one monthly payment) your primary goal?

Once you have your goal, you can think more about the terms to look for.

2. Check your credit score

Just because you’ve decided refinancing makes sense for the type of student loans you have doesn’t mean you’ll actually get the better loan terms you want. Most lenders have strict requirements for who they’ll let into their club, though it’s easier to get approved today than it was when refinancing first came on the scene.

For starters, you’ll generally need a credit score between 650 to 680 — but that’s only to meet basic eligibility requirements. To receive the best student loan refinance rates, you should have a FICO score of about 750 or above.

To make sure you’re in that ballpark, do a credit check before proceeding. And to avoid any surprises when you're finalizing the terms of your new loan, try early on to get your FICO score, which is essentially a brand-name version of your credit score. Many lenders look at your FICO score — or they set outright FICO score requirements — when determining their loan rates.

If you get your credit score from a bank, credit-card provider or personal-finance app, double check to see if it’s your FICO score. If not, you can purchase the most accurate and up-to-date versions of your FICO score directly from FICO at myFICO.com. Alternatively, you can access a version of your FICO score for free from the credit bureau Experian.

If your score comes back lower than you anticipated, then your next step should be pulling your credit report to find out what’s affecting your score.

As a reminder, you shouldn’t pay for your credit report in almost all cases. You can access your credit reports for free through AnnualCreditReport.com. Until April 22, 2022, each of the three major credit bureaus are providing free weekly credit reports — also available on the site.

Once you have your credit reports, look through them to check for inaccuracies. One quick way to boost your score is to remove items from your credit report if they’re inaccurate. But you may need to implement some longer-term strategies to greatly improve your credit score or, in some dire cases, hire a credit repair company for help.

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3. Compare lender rates

To get a big-picture view of the various APRs you may qualify for, you can use lender marketplaces like Credible to see offers from several larger lenders at once, whereas companies like Splash Financial and LendKey can connect you with refinance offers from smaller banks and credit unions. Unfortunately, there’s no one website where you can search all the major refinance companies at once, so you may have to visit multiple marketplaces.

In all cases, you can provide some basic information — such as your credit-score range, income and/or your current loan amount — to get a pre-qualified rate offer. Browsing around and receiving pre-qualified rates won’t affect your credit. At this point, the companies are only pulling “soft inquiries” on your credit.

Keep in mind that the lowest interest rate advertised by the company is likely a variable interest rate. Variable-rate loans start with a low APR, but they can change frequently over the lifespan of your loan and will rise as benchmark interest rates rise. In some cases, the APR can balloon to as much as 25%. Such rates are typically only recommended if you’re able to pay your debt off quickly, i.e. before the rate increases.

In most cases, you’ll want to go with a fixed interest rate. It will likely be higher than the starting variable rate, but the APR on a fixed-rate loan will never change once you’ve taken it out.

Now is also a good time to weigh the different lenders to ensure you’re getting not only the lowest rates, but also the best terms and benefits for your personal situation.

The lender Earnest, for example, has a unique repayment platform where you can select a term in months instead of years. The Rhode Island Student Loan Authority (RISLA) offers struggling borrowers an income-based repayment plan. SoFi offers career coaching and a host of other “member benefits” to its borrowers, while CommonBond and Laurel Road will allow borrowers to transfer federal Parent PLUS loans into the student’s name.

4. Apply to multiple lenders

The lender information you dig up on sites like Credible or LendKey may not be the official terms of your refinanced loan. Those rates are pre-qualified offers or estimates.

Once you’ve chosen your top lenders, you’ll have to submit a full loan application to determine your new terms.

Lenders have slightly different underwriting rules, and it’s not uncommon for borrowers to be rejected by one lender and accepted by another. Applying to multiple lenders at the same time can increase your chances of being approved and also help you lock down the best rate. This is called “rate shopping.”

When you do this, the lenders are now making “hard inquiries'' on your credit as opposed to the “soft” ones from the pre-qualification stage. Hard inquiries can ding your credit score. However, FICO says that multiple hard inquiries around the same time (between 15 and 45 days, depending on the different version of your FICO Score) are treated as one hard inquiry. This allows you to shop without dinging your credit for each application.

Once you send your applications out, it may take a few business days to get a decision from the refinance company.

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5. Consider a co-signer

Not seeing terms or interest rates that you like? You could ask for a raise so that your debt-to-income ratio improves, or you could work on increasing your credit score. Both are solid long-term solutions.

Another quicker option would be to find a credit-worthy co-signer. In many cases, and especially when it comes to student loans, the co-signer is a parent. Friends, guardians and other relatives are OK too, though. But it can only be one other person, so the person with the best credit score and highest income would likely be the best choice here.

Bear in mind that asking someone to co-sign on your loan means you’re tying them to your financial outcomes with this specific debt. Also note that lenders aren’t required to grant you a co-signer release, which means your co-signer might be stuck on your loan until either the loan is paid off or you decide to refinance again without the co-signer.

If you decide having a co-signer makes the most sense, you’ll likely need to repeat steps No. 2 and No. 4 above. In other words, you’ll want to double check the co-signer’s FICO score and re-apply to the top lenders, now including the co-signer’s proof of income, debts and other applicable information.

6. Always read the fine print

Before going forward, make sure you understand the lender’s policy on forbearance or deferment periods — for example, if you lose your job, what kind of protections do you have? Any at all? You should also look for information on the co-signer release policy, if there is one.

And always confirm that there are no origination fees or prepayment penalties. (These are both uncommon for student loans. None of the major lenders have them, but it never hurts to double check.)

7. Fill out the paperwork

Once you’ve been approved, what’s left is mostly paperwork. And luckily, you can complete this process entirely online with most lenders.

Again, always review the documents you receive carefully and check the fine print before signing anything. Confirm the loan terms you were approved for match the ones you applied for. For instance, make sure the APR of your loan is the fixed or variable rate you wanted. If all looks good, sign and return the requested documents to your new lender.

After you do this, you can expect one final item: the Notice of Right to Rescind.

Thanks to the Truth in Lending Act (TILA), you will have an additional buffer of time to cancel the loan if you so choose, even after you’ve signed the dotted line on the promissory. By law, the lender is supposed to send you a separate and clearly titled Notice of Right to Rescind. This right gives you three business days to back out, and the clock starts ticking once you’ve received the notice — not once you’ve signed the loan agreements.

If the lender does not send the notice or inform you of your rights under the TILA, the company may face legal repercussions.

8. Keep making payments until the transfer is complete

When you refinance a loan, your new lender must then pay off your old lender. It may take a little while for that process to finalize, so be prepared to continue making your payments until you’ve received notice from the new lender that the debt transfer is complete.

Once the process is complete, remember to set up autopay with the new lender — this can chip a little more off your interest rate (usually about a 0.25% rate discount).

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How to refinance student loans guide

Here are some additional tips, advice and FAQs to help you with refinancing your student loans.

Can you refinance federal student loans?

The short answer is yes, you can refinance your federal student loans.

The most important thing to know about refinancing student loans is that there is currently no option to refinance them within the federal lending system. That means you will be trading in your federal student loan (or loans) for a new, private one.

When you refinance student loans, you may be able to qualify for a lower interest rate than you’re paying in the federal system, which could save you hundreds or thousands of dollars a year. But there are a lot of downsides when refinancing federal student loan debt.

All federal borrowers have access to multiple repayment options, including ones that will stretch out your repayment term to 20 years (and therefore lower your monthly payments), and ones that will set your monthly payment based on your earnings. There’s also more options for forbearance and deferment, as well as benefits that, frankly, may be hard to predict.

One current example? Most federal student loan borrowers have been in an interest-free forbearance since March 2020 as a result of the pandemic. If you had refinanced your federal loans with a private company, you would have not been able to access that.

When is the potential savings worth the risk of giving up enhanced consumer protections?

Different experts have different rules about helping borrowers decide whether refinancing their federal loans is a smart move. But in general, you want to be sure that you aren’t interested in pursuing any of the government’s forgiveness programs, including Public Service Loan Forgiveness and the forgiveness possible through income-driven repayment.

You also want to be sure that you have a secure job — again, if you lose your job or your salary gets reduced, it is much easier to lower or pause your monthly payments if you still have federal student loans.

Finally, you want to be sure you have built up a solid emergency fund. If you do refinance and then lose your job, a large pot of savings will help you continue affording loan payments until you find work again.

What credit score do you need to refinance student loans?

Generally speaking, student loan refinance companies require minimum credits scores in the mid to high 600 range.

Here are a few examples of baseline credit score requirements:

Again, these are the minimum scores required to pre-qualify for refinancing. To be eligible for the best loan terms that a refinancing company offers, you will likely need a FICO score that is much higher, possibly even 100 points or more from the minimum.

Documents needed to refinance your student loans

The documents you need to apply for student loan refinancing can vary by lender. Here are ones that are commonly required:

  • Government-issued ID
  • Proof of employment or consistent income, which may include W-2s, 1099s or your recent pay stubs
  • Proof that you're a permanent resident or U.S. citizen
  • Proof of graduation
  • Student loan statements
  • Student loan balance

If you have a co-signer, similar information will be required of them, sans proof of graduation and student-loan statements.

For the exact document list, check with the lender you intend to apply with.

Is refinancing student loans worth it?

Student loan refinancing can certainly help certain borrowers, but the benefits of refinancing are sometimes overstated. In fact, the Federal Trade Commission put student loan refinance companies on alert in 2018, warning them against making “false or unsubstantiated” claims about how much refinancing could save consumers.

So how much can you save, really? That depends on several factors: the interest rate on your existing loan, your loan amount, your debt-to-income ratio, your credit history and the length of the new loan you select.

Here’s a simplified example. Say you had $50,000 worth of debt from graduate school with an interest rate of 7%, and you’re currently on track to pay it off in 10 years, you’ll be able to save $50 monthly and more than $6,000 over the life of the loan if you can qualify for a fixed rate of 5% by refinancing into another 10-year term. If, however, you can afford to pay more each month, you may be able to qualify for a lower rate. If you paid a 4.5% rate for a 7-year term, then you’d save $11,200 over the long run. You can usually shave an additional 0.25 percentage points off your given interest rate by enrolling in autopay (aka setting up automatic payments).

Here are some real-world figures, too. A 2021 analysis of borrowers on Credible’s marketplace found that those who refinanced student loans into a shorter repayment term saved more than $17,000 on average, the result of paying off the debt quicker and reducing their interest rates by an average 2.29 percentage points. On the other hand, borrowers who refinanced into a longer term loan saved about $250 a month, by reducing their interest rate by an average of 2.05 percentage points. But they ended up paying $663 more over the life of the loan.

If you’re a federal student loan borrower considering refinancing, you’ll have some additional pondering to do. Remember, only private lenders refinance student loans. So if you refinance your federal loans, they become private loans. So in addition to the literal dollars and cents, you’ll also need to decide whether it’s worth forgoing the host of repayment, discharge and forbearance programs only available to federal loan borrowers. For example, the U.S. Department of Education, as a result of the pandemic, froze student loan payments, dropped interest rates to zero and stopped collections for all loans held by the government. These benefits have been extended until May 2022.

Private loan borrowers are unfortunately not eligible for that relief.

How to refinance student loans FAQ

When to refinance student loans?

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Refinancing your federal or private student loans may be able to save you money under the right conditions. Throughout the pandemic, refinance rates have been near historic lows, making it an attractive time to refinance for borrowers who qualify for lower interest rates and more favorable repayment terms. But those rates are expected to start rising over the course of 2022.

How to refinance private student loans?

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The process for refinancing student loans, which is laid out above step-by-step, is the same for private and federal loans alike. Refinancing private student loans actually comes with fewer downsides than federal loans. In short, you should first decide whether refinancing makes sense for you and whether you meet the minimum requirements for refinancing. If so, shop around using marketplaces like Credible or LendKey, narrow down your top lenders, apply and pick the lender with the best terms.

How often can you refinance student loans?

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You can refinance your student loans as many times as you want. There's no limit. However, refinancing only makes sense if you are able to lock in better loan terms. It may make sense to refinance again if you (or your co-signer) have improved your credit score or landed a higher-paying job since the last time you refinanced.

Why refinance student loans?

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Refinancing student loans isn't the best option for every borrower, especially ones with federal student loans. Federal loans often come with favorable terms and unique government benefits. When you refinance you lose those perks. That said, if you qualify for new loan terms that are notably better than your current ones, refinancing could save you thousands of dollars over the life of your loan.

How long does it take to refinance student loans?

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The amount of time it takes to refinance your student loan will vary by company. Generally, companies estimate that it takes three weeks or fewer from start to finish. Browsing around for loan terms and getting pre-qualified may only take a few hours. Once you find promising refinance options, the official application process shouldn't take more than a day if you have your documents ready. The loan approval process takes about three business days but may take longer if you have a co-signer. The bulk of the process is waiting for the final paperwork to clear and for your new lender to pay off your old lender. That may take a few weeks.

Kaitlin Mulhere contributed to this article.

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