Student loan refinancing: What it is, how it works, and how to get started

Student loan refinancing can be a smart move for borrowers seeking to reduce monthly payments or secure a lower rate. Current student loan interest rates vary, but the best student loan refinancing companies often offer competitive options for qualified applicants.

However, refinancing isn't ideal for everyone, especially those with federal student loans. Choosing to refinance could mean losing access to protections like income-driven repayment plans and federal loan forgiveness programs.

What is student loan refinancing?

Student loan refinancing is the process of reworking and replacing the terms of your loan with new terms. This may involve switching your loan servicer to lock in a better interest rate.

Borrowers refinance to lower their rate, reduce monthly payments, pay off debt faster, or combine multiple loans into a single payment.

Application and pre-approval

Be sure you fully understand all the terms of your current loans before you consider refinancing. This way, you'll be able to effectively compare your rates and term length with other options from competing lenders. Research different companies and check your personalized terms with each lender. From there, gathering all relevant documents, prepare for credit checks, and choose a lender. 

You'll complete applications with companies you're interested in and probably need to hand over documents that prove your financial situation and identity. You may be familiar with this part of the the process of how to refinance your student loans from when you first applied for a loan. 

Loan disbursement 

You'll will have a new loan servicer when you refinance your student loan, unless you choose to refinance a private loan with the same private lender, and your new lender will pay off your old loans. This new servicer will have a different portal for payments, distinctive customer service, and potentially unique perks. 

Depending on what you negotiated when you refinanced your loan, you'll also have new loan terms. This could include a different interest rate or repayment term length, or possibly lower fees. You also may switch from a fixed-rate loan to a variable-rate loan, or vice versa. Make sure you understand how your new loan works so you can stay on top of your financial obligations.

New terms take effect

After the lender you prefer gives you its final offer, you'll have to officially accept the terms and sign a binding document promising to repay the loan. Then your new lender will pay off your existing lender and your new term will begin.  

Pros and cons of refinancing student loans

Pros of refinancing student loans

• Lower interest rates. Whether you're going for a variable or fixed-rate loan, you can sometimes get a better interest rate than your current one.
• Simplified repayment. You can refinance and consolidate different federal and student loans into one payment and may get a lower rate or a different repayment term length.
• Lower monthly payments. You can pay less per month when you refinance by choosing a longer term length, but you'll pay more over the life of the loan because you'll be paying interest for longer.

Cons of refinancing student loans

• Loss of federal loan benefits. The biggest downside of refinancing a federal loan is losing the protections that accompany them, including federal student loan relief programs like Public Service Loan Forgiveness and Income-Driven Repayment plans.
• Interest rates may rise. Variable rates might seem like a more attractive option than fixed rates, as they often start lower. However, variable rate loans fluctuate based on various factors, and you may end up with a rate that's higher than the one you had with your previous loan. 
• Not for everyone. You might not be a suitable refinancing candidate if you have a shaky income or are close to forgiveness under a federal program.

Step-by-step student loan refinance process

Check your eligibility

Student loan refinance lenders have requirements for borrowers, the most important of which is your credit score. And the better your credit score, the lower the interest rate you're likely to get.

Nowadays it's easier than ever to check your credit score for free. Most credit card companies will provide your score on your monthly statement or anytime you check your account online. You can also access your credit report from major credit bureaus like Experian, Equifax, and TransUnion.

In addition to your credit score, lenders often review your debt-to-income (DTI) ratio, which measures how much of your monthly income goes toward debt payments. Generally, lenders prefer a DTI ratio below 50%, though some may require an even lower ratio for the best rates. Other factors like steady employment, income level, and your history of on-time payments may also affect your eligibility.

Compare lenders

With all of your existing loan details and your credit score in hand, check out the various APRs you may qualify for to refinance by getting prequalified. Evaluate lenders individually or use a student loan marketplace like Credible student loans to see offers from several all at once.

Check your terms with each lender and see which one offers the best rate and term length for you. When you look at your rates, lenders will typically perform what's known as a soft credit pull, which doesn't affect your credit score.

Complete the application

Once you've found a lender you like, complete its entire application. You'll be asked to provide documents that verify your finances and identity, similarly to when you initially applied for a loan. After the lender sends you its final offer, you'll need to sign on the dotted line and accept the terms. Then, your new lender will pay off your existing lender, and you'll begin making payments on the on the refinancing loan.

The rates quoted when you prequalify may not necessarily be the ones you ultimately receive after the full application process. So you may want to apply with multiple lenders. But remember that they'll each do what's known as a hard credit inquiry after the pre-qualification process, which can lower your credit score for a short period.

Cost of student loan refinancing

Refinancing a student loan is usually free. Unlike mortgage refinancing, which can involve expensive closing costs, reputable banks, credit unions, and online lenders typically don't charge application or origination fees for student loan refinancing.

Most lenders also don't penalize you for early loan payments, though you could face late fees if you miss one. Refinancing federal loans through the government is also free, but doesn't lower the interest rate on your student loans.

Student loan refinancing can be worth it if you qualify for a lower interest rate or want to simplify multiple loans into a single monthly payment. If you think you might need access to federal protections, forgiveness programs, or flexible repayment options in the future, refinancing might not be the best choice for you.

Refinancing your student loans can offer significant benefits, but it's not the right move for everyone. Weigh the pros and cons carefully, consider your individual situation, and don't hesitate to seek professional guidance before making a decision.

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