Is Refinancing Student Loans Worth It?

Jacqueline DeMarcoUpdated June 29, 2021

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

Student loan refinancing can help borrowers save money on interest but cause them to lose access to federal programs for federal student loans. So is refinancing worth it? In three words: For some, yes. Let’s put student loan refinancing under the microscope.

What Is Student Loan Refinancing?

When borrowers refinance one or more student loans with a private lender, they get a new loan with a new (lower is the goal) interest rate and, if desired, repayment term. If they are used to making multiple loan payments a month, they will likely appreciate the convenience that comes with making just one payment.It is possible to come across a lender that will only refinance private student loans, so borrowers will want to do their research to make sure they find the right lender to meet their needs.

Applying for Student Loan Refinancing

Lenders size up an applicant's (and, if applicable, co-signer’s) credit profile, other information, and sometimes loan terms selected when determining an interest rate. The better your credit score and financial health are, the more likely you are to be approved and secure a better interest rate than you currently have, which can help you save money over the life of your loan.

Benefits of Student Loan Refinancing

There are some major advantages of refinancing student loans under the right circumstances. Those who refinance can enjoy:

Spending less on interest. A borrower who secures a lower interest rate can often save money on the loan.
Picking a new term. When borrowers refinance, 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 co-signer. If a borrower is struggling to qualify for refinancing because of a poor credit score or high debt-to-income ratio, a solid co-signer can make it easier to get approved and get a better rate.

Is There a Downside to Refinancing Student Loans?

While refinancing student loans has its perks, there are some downsides worth keeping in mind.

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 co-signer 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 student loan forbearance programs.
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?

How much someone can save by refinancing their student loans depends on the interest rate they’re offered and the loan term they choose.That’s why it’s a good idea to shop around with different lenders to see the offers. Refinancing lenders typically charge no origination fee, and by law they cannot charge a prepayment penalty. Some may charge late-payment fees.

To Refi or Not to Refi, That Is the Question

No one borrower has the same loan needs as another. It might be a good move to refinance:

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 are a working graduate and have high-interest Direct Unsubsidized Loans, Graduate PLUS loans, or private loans

It might not make sense to refinance:

If your new rate will be higher than your original rate
If the lender has standards you don’t meet and you have no co-signer
If you have federal student loans and don’t want to lose the benefits and protections they come with

When researching lenders, it might be useful to compare the payment protections each one offers during hardship scenarios like loss of a job.

The Takeaway

Is refinancing student loans worth it? If you have federal loans and think you might need to tap federal protections and repayment programs, refinancing may not be the best course of action. If you can get a lower rate, refinancing may allow you to save a little or a substantial amount. Intrigued by the refi possibilities? Lantern by SoFi makes it easy to find and compare student loan refinancing options.

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About the Author

Jacqueline DeMarco

Jacqueline DeMarco is a personal finance writer and editor based in Southern California. While she spends the bulk of her time writing about complex financial issues, she also tackles a variety of subjects ranging from food to fashion to travel. Her work can be found across dozens of publications such as Credit Karma, LendingTree, Northwestern Mutual, The Everygirl, and Apartment Therapy.

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