How Does Student Loan Refinancing Work?

Anna DaviesUpdated August 16, 2022

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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 sound complex, but it’s really quite simple. A private lender pays off your loan debt and creates a new loan. The goal is a lower interest rate, which can potentially save you a lot of money over time.If you refinance multiple student loans, rather than having to keep track of different interest rates and payment dates, you have just one monthly loan payment. Refinancing can also allow borrowers to adjust the length of a loan (shortening a loan term of 10 years to five, for example) and/or loan payment amount.Student loan refinancing can be an option for some, or all, of your student loans. But there are pros and cons to student loan refinancing to weigh. Here’s what to know when you consider refinancing:

What Is the Downside to Refinancing Student Loans?

Refinancing isn’t the right choice for everyone or all loans. When you refinance, you cancel your old student loan contract. In the case of federal loans, you will lose federal protections and programs, like these:

Access to federal deferment and forbearance. Private education loans, including refinance student loans, may have fewer deferment and forbearance options than federal student loans. 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.
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. Most federal student loans are eligible for at least one of the four income-driven student loan repayment plans, which set a monthly payment according to income and family size. All IDR plans can end with a borrower’s outstanding balance being forgiven at the end of the repayment period. Private lenders do not offer these programs.

That said, sometimes private lenders offer lower interest rates than the government rates, and weighing the pros and cons of whether to refinance federal student loans depends on the unique financial circumstances and goals of the borrower.

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. But as you think about whether to refinance your student loans, consider these things:

What’s your credit score? Lowest advertised rates are generally available only to people with excellent credit scores. A solid loan cosigner may come in handy to not only qualify for refinancing but get a better rate than you could on your own. Lenders will collect information from you and your cosigner.
Compare rates. Comparing rate estimates from different refi 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 won’t change for the life of the loan. Once you accept the loan terms, the only way to change the interest rate on a student loan is to refinance. A variable rate fluctuates with the market. Considerations are the loan length, your financial picture, and your comfort level with variability.
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 for a longer term may increase your total interest costs.)
Which loans do you want to refinance? If you have several loans, you may not want to refinance all of them.
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. Does the lender offer student loan forbearance for borrowers undergoing economic hardship? Are there any late fees?

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, such as W2s, 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 right of rescission period, a three-day grace 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

How does refinancing work for student loans? One new private loan, preferably with a lower interest rate, replaces the previous student loan or consolidates multiple student loans into one loan.Comparing rates and lifetime loan payments can help you assess whether refinancing your student loans makes sense for you.Lantern by SoFi makes it easy to find lenders and compare student loan refinance options.

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About the Author

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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