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Published: Jul 28, 2023 16 min read
Illustration of a college graduate wearing a cap and gown where her stole is a long receipt connected to a calculator
Chris Gash for Money

With federal student loans payments soon restarting after a pause of more than three years, some borrowers may be newly interested in refinancing their loans to get better terms.

Refinancing your student loans can be a useful strategy to manage your student debt, but know that refinancing isn’t a panacea. In fact, there are some situations where refinancing could actually be financially harmful.

Before you refinance, it’s extremely important to understand whether refinancing will indeed improve your financial situation and what alternatives are available.

Note: For borrowers with federal loans, refinancing turns the loans into private student loans, which are not eligible for any federal loan benefits, including any future federal forgiveness programs.

Find out when you should — and shouldn’t — refinance student loans below.

Table of contents:

When is student loan refinance a good idea?

In an ideal scenario, refinancing student loans will help you get a lower interest rate, a lower monthly payment or both. In some cases, refinancing can help you save money to the tune of thousands of dollars over the life of your loan. Here we’ll cover some scenarios when it makes sense to refi.

When you can obtain a lower interest rate

One of the main reasons people refinance their existing loans is because they can find a lower interest rate through a new lender.

For much of 2020, refinancing rates were near historic lows. As a result, student loan refinancing ballooned in popularity. Now, interest rates have bounced back up across the board due to broader economic conditions. In other words, it might be more difficult to find lower rates compared to the past few years.

However, if your financial situation has considerably improved since you took out your student loans, you still may be able to find a better interest rate than what you currently have.

As you shop around for lenders, pay attention to the type of interest rates. Variable interest rates, for instance, might be the lowest rate a lender advertises, but as the name suggests, the rate changes over time. So while it might start at, say, 5%, it could rise or fall during your loan term based on unpredictable market conditions. A fixed rate stays the same.

On the flip side, if you have a variable rate loan and the interest rate keeps rising, it may make sense to refinance to a fixed rate loan that is comparable just to avoid a higher interest rate in the future.

When you have a healthy credit score and history

If you took out your student loans when you were young or didn’t have a lot of work experience, chances are your credit score and credit history weren’t all that great at the time.

Your credit score is a major qualifying factor in determining your interest rate when refinancing. If your score is much higher now than when you took out your loans, it’s more likely you’ll find a lower interest rate by refinancing.

Most lenders have fairly strict credit score requirements to refinance. Just to qualify, you’ll generally need a credit score between 650 to 680. To receive the best student loan refinance rates, you should have a FICO score of about 750 or above.

This advice also applies to co-signers. If your original loans had a co-signer and that person’s credit score has increased since the debt was taken out, you may be able to find a better rate. Similarly, adding a co-signer with a high credit score during the refi process may also help you improve your loan terms.

When you want to reduce your monthly payments

Refinancing could make sense if you’re looking to free up some cash in your monthly budget.

Lenders usually allow you to choose the length of your repayment, typically between five and 20 years. Generally speaking, the longer the term, the lower you pay each month.

Keep in mind that this strategy could cause you to pay more over the life of your loan, but it can be a savvy move if you’re trying to improve your debt-to-income ratio. For example, having more cash freed up in your monthly budget may make it easier to finance a large purchase like a house or car. (Keep in mind that if you have federal loans and your only goal is to lower your monthly payment, you have options to extend your repayment term in the federal loan system, so you may not need to refinance.)

When you’ve become financially stable

Many folks go to college to land a good job and live a comfortable, successful life. Once you’ve graduated and landed that higher-paying job, it may be a good time to revisit the terms of your student loans.

A good credit score is one qualifier for a favorable refinance rate, but that’s not the whole picture. Lenders look at a broad range of financial factors when determining your interest rate, including your debt-to-income ratio and your annual earnings.

If all three of those financial factors have improved since you’ve taken out your student loans, you should consider shopping around for better terms.

When you want to have only one loan payment

Your student loan debt might be an unruly mix of several loans with different payment dates. In this scenario, it can be difficult to manage your debt. Refinancing can also double as a form of debt consolidation and allow you to combine those different loans. That means you’ll only have to deal with one due date each month.

Note: Federal student loan borrowers have the benefit of consolidating their federal loans at no cost through the Education Department. (More on that below.)

When you want to release a co-signer

The vast majority of private student loans often have co-signers when they’re first taken out. Co-signers are usually friends or family members of the student, and they share legal liability for the loan.

While a co-signer may have been necessary to initially qualify for your loan, you may now be in a financial position to handle the debt totally on your own. You might even have a higher income or credit score than the co-signer at this point. In such cases, you can refinance your student loan to release the co-signer and free them from liability for your debt.

Some lenders allow you to complete a “co-signer release” without refinancing, though there are fairly strict requirements to do so. If you can find a lower interest rate, it may make sense to refinance instead.

When is student loan refinance inadvisable?

As mentioned above, refinancing your student loans isn’t always a good idea. Here are several scenarios where you should not refinance.

When your income isn’t secure

During the process of refinancing, the lender is going to ask you to provide proof of income. If you are recently unemployed, expect to be switching jobs or don’t have consistent earnings, you will want to wait until your situation stabilizes before applying.

Even if you do still qualify, you may be missing out on more favorable loan terms if a better job or promotion is in your near future.

When your credit score is weak

An excellent credit score is needed to qualify for a lender’s best rates. You should have a score in the ballpark of at least 650 for basic eligibility and 750 or more to get the most attractive repayment terms.

For instance, even though a 700 credit score may qualify you for refinancing, the interest rate that the lender offers you could be much higher than the rate for applicants with a 750 credit score.

Luckily, there are several ways to increase your credit score if it is outside that range, such as adjusting your credit utilization ratio or by participating in credit-building programs through the major credit bureaus. Once your score improves, then you can reconsider refinancing your student loans.

When you can’t get a lower interest rate

Sometimes the interest rates that lenders offer simply won’t be lower than your current loan due to external market conditions.

The Federal Reserve, aka the U.S. central banking system, is still hiking the federal funds rate to tamp down inflation. When the Fed does this, it affects the interest rates that lenders offer consumers in a variety of industries, not just in the student loan space. The Fed’s actions also impact rates for mortgages, auto loans, credit cards and more.

In other words, even if you landed a six-figure job and built a credit score of 800 since you took out your student loans, there’s no guarantee that you will find a lower rate when you go to refinance. And if you simply can’t find a better rate, then there’s no pressure to refinance now.

When you are on an income-driven repayment plan

Income-based repayment plans are one of the many perks available to federal student loan borrowers. In theory, these plans allow you to pay only what you can afford each month as the amount you pay is pegged to your income and family size.

Under these plans, your remaining loan balance can be forgiven after a certain period of time, usually 20 years or more of successful payments.

If you are currently in one of these federal repayment plans and you refinance, your loan becomes a private loan and you lose all the perks of the government program.

When you are working toward student loan forgiveness

In addition to the loan forgiveness associated with income-driven repayment plans, the federal government offers other types of loan forgiveness programs, including Public Service Loan Forgiveness, which is for public-sector workers, as well as a separate program just for teachers.

Of course, President Biden’s initial plan to forgive up to $20,000 per borrower was blocked by the Supreme Court, but Biden has said that his administration will try to another legal route to forgive a broad swath of federal student loan debt. This new legal pathway is expected to take time, and it’s not clear how much debt he will be able to cancel through this new plan.

If you expect to benefit from any of these federal programs, you won’t want to refinance. Doing so will bar you from getting your federal loans forgiven.

Alternatives to student loan refinance

Refinancing your student loans doesn’t always make financial sense. You also may not qualify. In either case, you should look into other repayment options, especially if you have federal student loans.

Student loan consolidation

Many student loan borrowers confuse consolidation with refinancing, and it can have some major financial consequences.

Refinancing allows you to change a lender, get a new interest rate and combine multiple types of loans into one new loan. Refinanced loans are always private loans and aren’t eligible for government perks tied to federal loans. Some people refinance several different loans into one to simplify payments, but this is only advisable if you have private loans.

Consolidation is a perk available to federal student loan borrowers. If you have several different types of federal student loans, you can consolidate them through the Education Department to simplify payments, for free and with no credit check. Consolidation does not allow you to get a lower interest rate, and if your previous loans had several different interest rates, the rate on your consolidated loan will be a weighted average of all your previous rates.

Income-driven repayment plan

Income-driven repayment plans, or IDRs, are yet another example of a helpful benefit available to federal student loan borrowers.

The Department of Education offers several different types of IDRs, and all borrowers with federal loans are eligible for at least one. These plans are designed to keep your monthly student loan payments affordable by using your family size and income to calculate what you pay each month.

For federal student loans, an income-driven plan could be a better option than refinancing if you’re having trouble affording your loan payments.

Deferment or forbearance

Since March 2020, almost all federal student loans have been under automatic pandemic-related forbearance. The program temporarily paused payments, interest accrual and collections efforts. However, the relief is officially coming to an end soon: Interest will start accruing on Sept. 1, and payments will start again beginning in October. The Biden administration is providing a 12-month "on ramp" to help borrowers ease into repayments. Through September 2024, missed student loan payments will not affect your credit score, and the Education Department will not pursue any debt collection.

Aside from this pandemic-era relief, the Education Department offers separate forbearance and deferment programs for federal borrowers, allowing them to temporarily pause or reduce payments, usually for reasons related to financial hardship. These should be used for more short-term issues with managing your payments. If you have a long-term affordability issue, an income-driven plan will likely serve you better.

Those with private loans — or anyone with federal loans who refinanced — aren’t eligible for these federal protections.

Some private lenders also offer forbearance assistance, but they are more limited than the federal options.

Sometimes, the programs aren’t widely advertised and may only be granted on a case-by-case basis. If you have private student loans and are experiencing financial trouble, reach out to your lender or loan servicer as soon as you can to discuss your options.

Bottom line: Should I refinance my student loans?

Refinancing your student loans makes sense only if it puts you in a better financial position or helps you reach your debt payoff goals.

If your (or your co-signer’s) earnings, credit score or debt-to-income ratio have drastically improved since you first took out your student loans, you may be able to find more attractive loan terms when refinancing.

When deciding if refinancing makes sense for you, keep in mind the key differences between private and federal student loan debt. There are few downsides to refinancing private student loans. But if you have federal student debt, know that by refinancing, you will forfeit all of the benefits available to federal borrowers, including loan forgiveness, forbearance and deferment programs.

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