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How Does Student Loan Refinancing Work?

How Does Student Loan Refinancing Work?; With refinancing, a private lender pays off your student loan or loans with one new loan. The goal is a new, lower rate that can save you money.
Anna Davies
Anna DaviesUpdated March 14, 2025
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Student loan refinancing is the process of replacing one or more existing student loans with a new loan, typically from a private lender. The goal is to secure a lower interest rate, reduce monthly payments, or adjust the loan term to better fit your financial situation.Keep reading to learn more on what student loan refinancing is, how it works, downsides to refinancing student loans, and more.

What Is Student Loan Refinancing?

Student loan refinancing is the process of taking out a new loan to pay off one or more existing student loans. This new loan typically comes with a different interest rate, repayment term, or lender, allowing borrowers to potentially save money on interest or adjust their monthly payments. Refinancing is available for both federal and private student loans, but it is offered exclusively by private lenders, such as banks, credit unions, and online financial institutions.

How Does Student Loan Refinancing Work?

When refinancing, the borrower applies for a new loan with a private lender, which then pays off the existing student loans. The borrower is then responsible for repaying the new loan under the lender’s terms. The refinancing process typically involves a credit check, proof of income, and other financial factors to determine eligibility. Lenders may offer different repayment term options, allowing borrowers to choose between lower monthly payments over a longer period or higher payments to pay off the loan faster.

Downsides to Refinancing Student Loans

When you refinance, you cancel your old student loan contract. In the case of federal loans, you will lose federal protections and programs, including:
  • Access to federal deferment and forbearance. Private lenders may have fewer deferment and forbearance options than federal student loans. When you refinance with a private lender, you lose access to all federal deferment and forbearance programs.
  • Access to potential federal student loan forgiveness. Refinancing federal student loans will remove your access to federal student loan forgiveness programs. Private education loans are not eligible for Public Service Loan Forgiveness or Teacher Loan Forgiveness. 
  • Access to income-driven repayment (IDR) plans. Some federal student loans may be eligible for an income-driven repayment plan. When you refinance federal loans with a private lender, the loan becomes private and you lose access to any potential IDR plans.
That said, sometimes private lenders offer lower interest rates than the government rates. Weighing student loan refinancing pros and cons can help you decide whether or not refinancing your loans would help or hinder your situation. 

Is It Worth It to Refinance Student Loans?

Refinancing may be right for you if you can reduce your finance charges with a lower student loan interest rate. To help decide if it’s worth it, take a look at the following factors:
  • What’s your credit score? Lowest advertised rates are generally available only to people with excellent credit scores. A solid student loan cosigner may come in handy to get a better rate than you could on your own. 
  • Compare rates. Comparing rate estimates from different refinance lenders can allow you to choose the most competitive rate. You also may have to decide on a fixed or variable rate. A fixed rate remains the same for the life of the loan. A variable rate fluctuates with the market. 
  • Do you want to shorten, keep, or extend your loan term? Choosing a short term of, say, five years may not decrease your monthly payments by much, but your interest savings could be substantial. Another option is to choose a longer loan term but pay extra when you’re able to. Refinancing to a longer term may increase your total interest costs.
  • Which loans do you want to refinance? If you have several loans, you can choose to refinance all of them or just a select few.
  • Compare any protections and fees. Besides how much you’ll pay during the life of your loan, it’s a good idea to look at the loan terms, protections and benefits, and any fees you may need to pay.

What Are the Steps in Refinancing?

Once you’ve chosen a refinance company, there are a few steps to take before the deal is done.Apply to refinance. Checking your rates is a “soft pull” on your credit. This does not affect your credit score and provides an estimated rate. If you apply to refinance, you’ll trigger a hard credit check, which may affect your credit score. The hard check, other application data (you’ll likely need proof of identity, proof of income, and your most recent student loan statement), and any cosigner’s data may lead to an “official” rate, based on new information. Accept the refinancing terms. You have to accept the terms of refinancing and sign documents for the loan to be official. Once you’ve signed, you enter into a three-day rescission period that allows you to cancel the loan refinance should you change your mind. After those three days, the lender will pay off your old loan or loans.Follow payment instructions for the new loan. You’ll never personally see the funds — the money will go directly to your original lender, and then you will begin making loan payments to the new lender. Look out for any communication from your old lender or new lender during the first few weeks of transition to make sure that your payment methods are in place (if using autopay) and that everything has transitioned smoothly. If in doubt, you can always contact your old or new lender.

The Takeaway

Student loan refinancing can be a useful tool for borrowers looking to lower their interest rates, reduce monthly payments, or simplify repayment by consolidating multiple loans. By refinancing with a private lender, borrowers may secure better terms based on their financial profile, potentially saving money over the life of the loan.However, refinancing is not the right choice for everyone, especially those with federal loans who want to keep access to loan forgiveness programs or other federal protections. Before making a decision, borrowers should carefully compare lender offers, consider their long-term financial goals, and weigh the benefits and potential drawbacks of refinancing.If you’re considering refinancing, Lantern by SoFi can help. With just a single application, you can compare lenders and rates, all with no obligation to you.

Frequently Asked Questions

Who is eligible to refinance student loans?
Can federal student loans be refinanced?
How does student loan refinancing affect my credit score?
LNTSLR-Q125-007

About the Author

Anna Davies

Anna Davies

Anna Davies specializes in writing for the fintech and startup space. In addition to her personal finance and investing articles for SoFi, she has written for such startups as WeWork, Happy Money, and Haven Life. Fortune 500 finance clients include American Express, Citi, and Chase. Davies has ghostwritten and collaborated on multiple New York Times bestsellers.
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