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How Refinancing Student Loans Affects Your Taxes

How Refinancing Student Loans Affects Your Taxes
Jennifer Calonia
Jennifer CaloniaUpdated December 1, 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.
Refinancing is just one of many approaches to paying off student loans. For some student loan borrowers, a student loan refinance offers certain advantages. But before moving forward, it’s important to know how refinancing affects your holistic financial situation, including how refinancing affects taxes. Fortunately, there is no direct impact when it comes to student loan refinancing and taxes. Here’s a look at why that is — and what steps to take if you decide to move forward with student loan refinancing.If you haven’t heard about refinancing as a repayment strategy, read our article all about how student loan refinancing works.

Does Refinancing Affect Taxes?

A student loan refinance, in and of itself, has little to no impact on your taxes. Borrowers might be worried about the tax implications of refinancing student loans as it relates to the IRS’ student loan interest deduction. The deduction allows taxpayers who have paid required or voluntary student loan interest to deduct the lesser of either the interest paid or $2,500 from their taxable income. The student loan interest deduction is an above-the-line deduction that certain borrowers can claim on their federal tax return. Deductions lower your taxable income, but they don’t offer a dollar-for-dollar reduction of how much you owe Uncle Sam.Let’s say you’ve claimed this deduction in the previous years, but refinanced your loans at a lower rate. If you paid $600 or more toward student loan interest in the tax year, you'll see your total on your Student Loan Interest Statement (IRS Form 1098-E). Since paying a lower interest rate means you’ll have paid less interest toward your refinanced loan, the interest amount you’re allowed to deduct from your taxable income will be lower than in prior years. 

Why Refinancing Student Loans Likely Won’t Affect Your Taxes

Despite the mild tax implications of refinancing student loans, it might not be relevant to all borrowers anyway. This is because of the limitations under the student loan interest deduction, and the nature of refinancing. Some reasons a refinance might not affect your taxes are due to:
  • Deduction income limits. Income restrictions might make you ineligible for the deduction anyway, making this particular tax implication moot.Only taxpayers with a certain modified adjusted gross income (MAGI) can claim the deduction. For 2022, taxpayers with a MAGI between $70,000 and $85,000 ($145,000 and $175,000 for those filing jointly), the deduction is “phased out,” which means it’s gradually reduced. Those with a MAGI of $85,000 or higher ($175,000 or higher for joint filers) are ineligible.
  • Greater overall savings through refinancing. Even if you qualify for the student loan interest deduction on your tax return, the lifetime savings you might receive through refinancing might outweigh any effects when it comes to a lower deduction claim.
Recommended: Do Student Loans Count As Income?

Refinancing Your Student Loans

If refinancing your student loans still seems like the right path for you, despite the aforementioned refinance tax implications, it’s important to find a refinance loan that meets your needs. Here’s how to go about doing so.

1. Finding a Lender

There are countless private lenders that offer a student loan refinancing option. These lenders often include big banks, local banks, credit unions, and online financial institutions.To receive a quote, you typically need to have your basic information ready. Prepare your personal information, like your name, address, school, degree, income, and household expenses. You’ll also need the details of the student loans you’d like to include in the refinance. For example, you’ll want to have on hand the name of your current lender and the total outstanding amount for each loan account. A soft credit check is typically performed to receive a quote, which doesn’t affect your credit score. 

2. Choosing Loan Rate and Terms

The next step toward refinancing your student loans is comparing the offers you’re eligible for. This includes identifying the most competitive interest rates, based on your qualifications. Also, look at each lender’s repayment term options, benefits, and other incentives, like interest rate discounts when enrolling in auto-pay. Determine what your repayment goal is. Do you want to pay off your student debt ASAP? Do you need to lower your monthly payment amount and stretch your repayment over a longer period? Answering these questions can help you identify a reasonable offer that aligns with your budget and goals.Another factor to research is whether the lender receives positive reviews from its existing borrowers. Start your search online through resources like the Better Business Bureau, and see if complaints have been filed through the Consumer Financial Protection Bureau complaint database.

3. Completing Your Application

To move forward with a particular refinance student loan offer, inform the lender that you’d like to proceed. How you must complete this step might vary between lenders, but generally, you can initiate a formal application online or by contacting the lender directly. This is also when the lender will request a hard credit check from the credit bureaus. A hard inquiry might drop your score for the short-term, but its impact generally lasts only a few months.You might have to supply the lender with additional documentation to prove certain details in your application, like your citizenship or resident status and income. 

4. Signing Final Documents

If your loan application is approved, read and sign the final documents in a timely manner to avoid delays. If your lender offers a rate discount for automatic payments, this is a good point to add your bank information to your online refinance account.

5. Waiting for Loan Payoff

Continue making payments through your original lender or loan servicer. After your refinance lender confirms that it has paid off your old lenders, you can begin making payments toward your new refinanced student loan.

Refinance Student Loans With Lantern

Student loan refinancing can be a useful step toward managing your student debt. However, carefully weigh the pros and cons of refinancing your student loans, especially if you’re thinking about refinancing federal student loans. A student loan refinance of federal loans converts that debt into a private loan. This means that you can no longer access the government-offered benefits that you once enjoyed as a federal student loan borrower. You’ll forfeit access to valuable income-driven repayment options, student loan forgiveness programs, and more.Using a refinance student loan marketplace like Lantern can help you find multiple refinancing options in one sitting. You can easily compare refinance loan rates, terms, and other details at a glance to find the right fit for you.Compare refinance student loan rates on Lantern today!

Frequently Asked Questions

What are the requirements to refinance a student loan?
Does refinancing give you a tax break?
Are student loans affecting my taxes?
Photo credit: iStock/Vladimir Vladimirov

About the Author

Jennifer Calonia

Jennifer Calonia

Jennifer Calonia is a Los Angeles-based finance writer who has covered the gamut, including student loans, credit card rewards, consumer loans, and debt. Her work has been featured in outlets like Bankrate, NerdWallet, Business Insider, Yahoo Finance, and U.S. News.
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