Is Refinancing Student Loans Worth It?

What Is Student Loan Refinancing?

Applying for Student Loan Refinancing

Benefits of Student Loan Refinancing

• Spending less on interest. A borrower who secures a lower student loan interest rate can save money on the loan in certain cases. Refinancing for a lower interest rate and shorter term length can reduce your total borrowing costs.
• Picking a new term. When borrowers refinance student loans, they can generally choose their new repayment term. Some may prefer a shorter term, of, say, five years, and others may want 15 or 20 years to repay the loan. A longer repayment term will typically lower the monthly payment but equate to paying more in interest over the life of the loan. A shorter term may not lower a monthly payment by much, but the interest savings can be substantial. (You could also choose a longer loan term but pay extra when you’re able to.) 
• Streamlined payments. Say goodbye to making multiple student loan payments each month to different lenders. Refinancing means one loan and one monthly payment. 
• Having a cosigner. If a borrower is struggling to qualify for refinancing because of a poor credit score or high debt-to-income ratio, refinancing student loans with a cosigner can make it easier to get approved and get a better rate.

Is There a Downside to Refinancing Student Loans?

• Not all borrowers are eligible for refinancing. A debt-to-income ratio under 50% and a credit score of 650 or higher are typically needed to qualify for refinancing. (The debt-to-income ratio is derived from dividing your total monthly debt payments by your gross monthly income.) Again, a cosigner may help.
• No guarantee on savings. Depending on the loan terms and rates, refinancing may or may not lead to savings. A student loan refinancing calculator can be helpful. 
• Loss of access to federal repayment programs. When borrowers refinance federal student loans with a private lender, they lose access to federal income-driven repayment plans.
• Loss of federal protections. Federal forbearance and deferment — postponement of federal student loan payments when the borrower can’t afford them — do not apply to refinanced loans. Some but not all private lenders have hardship programs in place. 

How Much Can Refinancing Student Loans Save?

To Refi or Not to Refi, That Is the Question

• If you can save money on interest
• If you have multiple student loans and want one easy monthly payment
• If you want to extend your repayment term and, ideally, can secure a lower rate
• If you’re a working graduate and have high-interest Direct Unsubsidized Loans, Graduate PLUS loans, or private loans

• If your new rate will be higher than your original rate
• If the lender has standards you don’t meet and you have no cosigner
• If you have federal student loans and don’t want to lose the benefits and protections they come with
• If you’re concerned about how the hard inquiry may affect your credit score

The Takeaway