App version: 0.1.0

Should I Refinance My Student Loans?

Should I Refinance My Student Loans?
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated August 9, 2023
Share this article:
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 in some cases may improve your debt-to-income ratio, but refinancing can also potentially bring more harm than good upon you. Whether student loan refinancing is right for you depends upon your personal circumstances and the nature of your student debt burden.Qualifying for student loan refinancing doesn’t necessarily mean you’ll benefit from it. Refinancing may not be advisable for you if it raises your interest rate or causes you to lose exclusive benefits that you count on.Refinancing might be suitable for you if it provides you with a lower interest rate and better financial outlook over the life of your loan. After a three-year payment pause, the Covid-19 forbearance is set to end on Aug. 30, 2023. As a result, interest accrual on federal student loans will resume on Sept. 1, and payments will be due starting in October 2023.There are pros and cons to refinancing federal student loans with a private lender. Below we highlight circumstances where student loan refinancing may work in your favor.

How Much Does Refinancing Save You?

There’s no guarantee that refinancing will save you anything. Refinancing may lower your monthly payment, but refinancing for a longer term may increase your total interest costs.Refinancing your student loans with a more expensive loan product may not benefit you in the long run. In other cases, however, refinancing may work in your favor. Whether or not refinancing saves you money depends upon the terms and conditions of your loan agreement.Refinancing for a longer repayment term and lower monthly payment may cause you to pay more interest charges over the life of your loan. Refinancing for a shorter repayment term and lower interest rate, by contrast, can save you money over the life of your loan.Some borrowers may never finish repaying a student loan during their lifetime. What happens to student loans when you die is the debt might be discharged, although some private lenders may demand repayment from your estate.Recommended: How Long Does It Take To Pay Off Student Loans?

Types of Student Loans to Refinance

Education loans can be federal or private, and borrowers may refinance both. The difference between private vs. federal student loans is the U.S. Department of Education provides or guarantees federal student loans, whereas banks, credit unions, online lenders, and state-based organizations may offer private education loans not guaranteed by the government.How student loan refinancing works is that borrowers submit an application with a private lender requesting a private education loan for refinancing student debt.Private lenders can set their own underwriting standards, but some may require applicants to have steady income and good credit. For subprime borrowers, it might be difficult to refinance student loans with bad credit.Reviewing the pros and cons of student loan refinancing can help you decide whether refinancing is right for you. Refinancing may lower your interest rate. (Refinancing for a longer term may increase your total interest costs.) 

Federal Student Loans

Borrowers may refinance federal student loans with a private lender. Refinancing federal student loans, however, means you’ll lose access to federal income-driven repayment plans and programs that can lead to loan forgiveness.Private student loan borrowers may have fewer options for student loan forgiveness than federal student loan borrowers. Refinancing federal student loans may not be right for you if you’re eligible for the Public Service Loan Forgiveness (PSLF) program.PSLF can forgive the remaining balance on your federal student loans after you’ve made 120 qualifying monthly repayments as a public employee.Public employees with federal student loans, including members of the U.S. armed forces, may be eligible for PSLF. Refinancing may not be right for you if you’re eligible for military student loan forgiveness.

Private Student Loans

Refinancing private student loans is when borrowers replace their existing private loans with the terms and conditions of a new private loan agreement. Refinancing private student loans does not necessarily entitle you to any student loan forgiveness relief.You may ask your private lender for relief if you’ve refinanced your student loans and find yourself unable to repay the debt. Private lenders in some cases may reach a debt settlement agreement with borrowers struggling with delinquency.Debt settlement agreements may include partial debt forgiveness, which may qualify as taxable income. The average private student loan debt across the United States is $54,921 per borrower, according to the Education Data Initiative.

When to Refinance Student Loans

Below we highlight cases when student loan refinancing may work in your favor:

Lower Monthly Payment

Refinancing may work in your favor if you need a lower monthly payment to better manage your personal budget and finances. Refinancing your existing student loans into a single loan with a longer repayment period can give you a lower monthly payment. (Refinancing for a longer term can also increase your total interest costs.)

Lower Interest Rate

Refinancing may work in your favor if you can lock in a lower interest rate that saves you money over the life of your loan. You can also minimize your interest charges by paying off your student loans sooner rather than later. There’s no penalty if you make more than the minimum payment when paying off student loans.

Better Debt-to-Income Ratio

Refinancing may work in your favor if it can improve your debt-to-income ratio in a meaningful way. Your debt-to-income ratio, also known as DTI, measures your ability to afford new debt without defaulting on your existing obligations. Most lenders like to see a DTI below 36%. Refinancing a student loan for a lower monthly payment would improve your DTI if your gross monthly income remains equal.

Simplifying Debt Burden

Refinancing may work in your favor if it simplifies your debt burden in a way that works better for you. If you have federal and private student loans, you can refinance and replace all of those loans with one private loan agreement.

Qualifying for Better Terms

Refinancing may work in your favor if you can qualify for better terms than what you already have. You’ll lose access to federal IDR plans and PSLF if you refinance your federal student loans. Refinancing may still work in your favor, however, if you’re not a public employee.Recommended: Choosing a Student Loan Repayment Plan

Pros of Refinancing Student Loans

Here are some of the pros of refinancing student loans:
  • You may get a lower monthly payment 
  • You may get a lower interest rate
  • You may emerge with a more simplified debt burden

Cons of Refinancing Student Loans

Here are some of the cons of refinancing student loans:
  • You may lose access to federal repayment and loan forgiveness programs
  • You may pay more interest charges over the life of the refinanced loan
  • Your private lender may be unwilling to forgive your refinanced debt

The Takeaway

Borrowing money to go to college can be expensive. Postsecondary education programs can cost tens of thousands of dollars and may leave you burdened with student debt. Some borrowers may find relief with student loan refinancing. If you want to refinance student loans, Lantern by SoFi can help. Just fill out a form and compare your student loan refinance options. Refinancing may be right for you if you can lock in a lower interest rate. (Refinancing for a longer term may increase your total interest costs.)Lantern can help you compare student loan refinance rates and find the best one for you.

Frequently Asked Questions

Is refinancing a student loan worth it?
What is not a good reason to refinance student loans?
Can refinanced student loans be forgiven?
Photo credit: iStock/urbazon

About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
Share this article: