How to Refinance Student Loans: Steps, Secrets, Pros and Cons

Refinancing your student loans is the process of taking out one bigger loan to pay off your smaller student loans. For some people, it’s a good decision that can save money and improve their financial situations. For others, this may be the wrong step. What does it mean to refinance student loans? What are the pros and cons of this process? Read our article to learn how does refinancing student loans work, decide if it’s worth doing and the steps you need to take to start.

Table of Contents:

1. What is student loan refinancing?
2. What types of loans are eligible to be refinanced?
3. What do I need to qualify for student loan refinancing?
4. How to refince my student loans in 11 steps: ultimate guide
5. The pros and cons of refinancing student loans
6. How to choose the best lender to refinance with?
7. What’s the difference between student loan refinancing and student loan consolidation?
8. Top 3 alternatives to a student loan refinance
9. Should I refinance student loans?
10. Frequently asked questions
11. Summary of our guide on how to refinance student loans

What is student loan refinancing?

Student loan refinancing is when you apply for a new loan to pay off your current student loans, usually to lower your interest rate or extend your payoff timeline. A new lender pays off your existing loans and gives you a new one with new terms. Then, you’ll payments to your new provider until loan is repaid in full.

Interest rates have decreased in recent years, though they’re beginning to grow again for new federal loans. While these loans are now deferred due to pandemic relief, payments are now scheduled to restart on Jan. 1, 2023. Refinancing for a lower interest rate could save you a lot of money in the long run once the payment pause expires, and potentially you will even pay less each month.

Student loan refinancing is not the same as student loan consolidation. A direct consolidation loan is a type of federal loan that combines two or more federal education loans into a single loan. The new fixed rate is based on the average rate of the loans being consolidated. You may be eligible for lower monthly payments because the repayment term is extended. Keep in mind that consolidating could increase your interest rate – if you extend the loan term, you could pay a lot more in interest over time. ·

What types of loans are eligible to be refinanced?

There are multiple types of student loans that can be refinanced, including options for undergraduate, graduate, and professional studies. These are:

• Federal student loans are offered by the U.S. Department of Education that is used to pay for higher education costs. They also come with various benefits and protections, such as access to federal deferment and forbearance, student debt relief, and income-driven repayment plans. The interest rate is fixed and is often lower than private loans. No credit check or cosigner needed to borrow money for college this way.·
• Private student loans are are typically issued by a bank or financial institution, (as opposed to federal student loans, which are offered by the government). They typically come from banks, credit unions and online lenders. Interest rates vary based on eligibility, market conditions and the lender you work with. They offer no federal protections but do offer benefits like higher loan amounts and the ability to apply for student loans any time during the year, which is helpful if you experience unforeseen costs or hardships in the middle of the semester – there is no deadline.
• Medical school loans are designed to help students cover their medical school’s cost of attendance. They are available from the federal government and private lenders. The best medical school loans keep fees low and offer repayment flexibility. Doctors may earn medical school loan forgiveness by working in the public sector or an underserved area. Some providers also allow students to defer payments until after residency.
• MBA loans can help you pay for the cost of your Master of Business Administration (MBA). You have the option of both federal and private MBA loans. These are most likely to be offered to those with a good credit rating. MBA loans typically have higher interest rates.
• Law school loans can help students complete a law school. It is a type of graduate student loan designed for students pursuing a JD. Private law school loans are available through a bank or credit union. These products are credit-based. If eligible, you can cover up to 100% of your school-certified costs.

Both federal and private student loans can be refinanceed, but you will lose federal benefits and protections. You’ll also no longer qualify for the payment and interest suspension under the CARES Act.

What do I need to qualify for student loan refinancing?

Your own refinance eligibility will depend on the type of loan you have and the lender you work with. Below are a few common requirements you’ll likely need to meet:

1. Proof of income: Many lenders require proof of employment and income to qualify. Some providers often require borrowers to make a minimum amount of income to be eligible.
2. Good credit: You’ll likely need good to excellent credit (credit score of 700 or above) to qualify. But some companies offer refinancing with bad credit, but these options generally have higher interest rates.
3. Low debt-to-income ratio: Your debt-to-income (DTI) compares how much you owe each month to how much you earn. It is the percentage of your gross monthly income that goes to paying your monthly debt payments. Most lenders typically require borrowers to have a DTI ratio of 50% or below — though some companies might have a lower ratio requirement.
4. Loan information: The provider will need details regarding each of the student loans you’d like to refinance, such as debt balances, the lenders you work with, and what colleges you attended.

If you have difficulty qualifying for refinancing on your own, consider applying with a cosigner to boost your odds. It is a person who is legally responsible for the debt if the primary borrower defaults. A cosigner might be a family member, friend or someone else who has good credit and solid income.

Even if you qualify for refinancing without a cosigner, having one could help you get access to more favorable terms than you’d get on your own.

How to refince my student loans in 11 steps: ultimate guide

There are eleven steps to take if you want to refinance your student loan:

Step 1: Decide if refinancing is right for you

It’ may be worth refinancing your debt if it it will help you save you money, but not every person should do this. You’ll need good credit and income to be eligible for the lowest refinance student loans rates and comply with eligibility criteria set by the lender.

If you refinance federal student loans, you will lose access to government programs like income-driven repayment and student loan forgiveness programs due to the COVID pandemic. Don’t resort to this process unless you’re sure your income is stable and you won’t need these benefits and protections.

And yet, this process has minimal disadvantages. Loans from private lenders do not come with those federal programs and protections.

Step 2: Check your credit score

When you consider student loan refinancing, one of the first things a lender will do is checking your credit history and credit score. For this reason, you should get your credit reports from the three major credit bureaus: Equifax, TransUnion and Experian regularly to make sure there are no mistakes or errors. If you discover mistakes or inaccuracies on a credit report, you should start by disputing that information with the credit reporting company. This right is given to you by the Fair Credit Reporting Act (FCRA) gives you the right to dispute those items with the appropriate credit-reporting agency.

It’s also useful to get an understanding of what our credit looks like prior to starting the application process. If you find that your credit is far-from-perfect, you can work to boost your credit before you resort to refinancing.

You can get a free annual credit report from each of the three credit reporting agencies at AnnualCreditReport.com.

Step 3: Research lenders

Most student loan refinance lenders may look very similar. But seek certain features depending on your unique needs.

For example: Want to transfer parent PLUS loans to your child? Search for a lender that allows it. Didn’t graduate? Look for a company that doesn’t have a college degree requirement.

Consider some of the best options for refinancing student loans:

• Best Overall: RISLA
• Best Refinancing Marketplace: Credible
• Best Rates: Splash Financial
• Best for No Fees: Discover Student Loans Refinance
• Best for Student Who Didn’t Graduate: Citizens Bank Refinance Student Loans, PNC Student Loans Refinance
• Best Benefits: SoFi Refinance Student Loans
• Best for Parent Loans: Laurel Road
• Best for Spousal Loans: PenFed Credit Union

Step 4: Search for the best rate

Shopping for student loan refinancing rates and comparing lenders to find the lowest rate is a fundamental element of the successful refinancing process. In general, you should do rate shopping anytime you’re getting a new loan or credit card.

Today, you can search compare lenders’ rates and fees online. Some companies offer prequalification, which only involves a soft credit check. Getting prequalified can help you find out approximate rates and terms you might be eligible for if you decide to refinance your debt.

Step 5: Ensure that you have all the required documents

Each lender has its own requirements related to documents and information you need to provide when applying for student loan refinancing. Here are ones that are typically required:

• Government-issued ID.
• Proof that you’re a permanent resident or U.S. citizen.
• Proof of employment or consistent income (W-2s, 1099s or your recent pay stubs).
• Proof of graduation.
• Student loan balance.
• Student loan statements.

If you apply with a co-signer, the lender may require similar information and documents from that person. For the exact document list, contact the lender you select to apply with.

Step 6: Consider using a co-signer

Are you not satisfied with terms or interest rates you qualify for? You could ask for promotion at work so that your debt-to-income ratio gets better, or you could work on increasing your credit score. Both options are great long-term solutions.

A faster and simplier option could be to find a reliable co-signer with good credit and solid income.

Often, the co-signer is a parent, friends, guardians and other family members. But you can only add one person, so try to select the person with the best credit history and highest income.

Keep in mind that asking someone to be your co-signer means you’re asking to accept legal responsibility for the money you’re borrowing, and that includes paying it back if you don’t. Also remember that some lenders do not offer a co-signer release option, which means your co-signer might bear responsibility for your debt until either it is paid back in full or you decide to do refinancing again without using a co-signer.

If you decide adding a co-signer is the right option in your situation, we recommend that you repeat steps 2 and 4 given above. In a short, you’ll want to check the co-signer’s credit score and re-apply to the best lenders, now including the other person’s proof of income.

Step 7: Choose a loan offer

Once you’ve compared (and possibly prequalified for) multiple options, you’ll be better select the most suitable offer for your needs. The company you choose to apply with may allow you to select the desired repayment terms as well.

A shorter loan term (for example, three years) might help you get access to a lower interest rate and repay your debt quicker. However, you will likely to pay more each month. If you extend the term, you could pay less each month and make managing your budget easier, but you will pay more interest over the life of the loan and more time will pass before you get rid of the debt.

Step 8: Read the terms carefully

Before you proceed, make sure you understand the lender’s terms and conditions, especially pay attention to the policy on forbearance or deferment. Ask yourself important a question: if you lose your job, will you be able to repay the debt? You should also carefully read the information on the co-signer release policy, if applicable.

And always make sure that there are no origination fees or prepayment penalties. (These charges are both uncommon for student loans, but you’d better check twice.)

Step 9: Fill out an application

Once you’ve selected the most suitable lender and loan offer, you’ll need to complete an application. Even if you have been prequalified, you will need to take this step before you get approved.

Right at this time, the lender will likely perform a hard credit check. The provider will also ask you to provide additional details that you didn’t mention on your prequalification form. If you’re adding a co-signer, the lender will ask you to provide their information as well.

Step 10: Sign your loan documents

Once you’re accepted for your loan, you’ll need to sign the agreement. Modern technology has made this process much easier. Earlier people had to sign papers in person or fax/mail them in, but today most lenders offer 100% online process for students’ convenience.

Step 11: Keep making payments until the loan is repaid in full

When you refinance your loan, your new lender must then repay your old lender. Finalizing may take some time, so you should continue making your payments until your lender has informed you that the debt transfer is over.

Once you’ve completed the process, do not forget to opt for autopay with the new provider — this can help you get a small rate discount (usually 0.25%).

The pros and cons of refinancing student loans

Pros

Refinancing can provide a number of benefits, among them:

• Reduce your interest rate: One of the best reasons to refinance is to lower the interest rate on your existing loan. This could save you money on interest charges and might even help you pay back your debt faster.
• Reduce your monthly payment: Lowering your monthly payment by refinancing to a lower rate or extending your loan term can make it easier to pay your loan on time every month.
• Simplify managing your student loans: Consolidating multiple debts means you will have a single payment monthly to worry about.
• Release a cosigner: When you refinance student loans into a new loan, your cosigner will be released when your old loans are paid off.

Cons

While refinancing could be the right decision in some cases, there are also some potential disadvantages to keep in mind:

• Limited student loans refinance options for bad credit: If you have fair or bad credit, it could be challenging for you to get accepted for refinancing. Moreover, you might not be eligible for the lowest interest rates if you have poor credit.
• Loss of federal benefits and protections: If you refinance federal student loans into a single loan, you’ll lose federal benefits and protections — such as student loan forgiveness programs and forbearance options. But refinancing private student loans do not offer these benefits initially so you won’t have to worry about this downside.
• Limited repayment options: Private student loan repayment options are typically much more limited. For instance, private refinanced loans usually don’t offer income-driven repayment plans.

How to choose the best lender to refinance with?

To choose where to refinance student loans, you should always shop for rates and terms from several lenders. You should compare interest rates, repayment periods, fees, potencial penalties and any special benefits each company might offer (like deferment). This way, you’ll understand which lender is best for your unique needs.

These are best places to refinance student loans in 2022:

• Advantage Education Loans
• Brazos
• Citizens
• College Ave
• EDvestinU
• ELFI
• INvestEd
• ISL Education Lending
• MEFA
• RISLA

What’s the difference between student loan refinancing and student loan consolidation?

Consolidating and refinancing are two ways to manage payments if you have multiple loans. But they mean something different for private and federal student loans. Here are the key differences:

• Federal student loan consolidation: You can consolidate your federal student loans into a federal direct consolidation loan. The interest rate is the weighted average of the interest rates for all loans being consolidated, rounded to the next higher one-eighth of one percent. You also have the opportunity to extend your repayment period up to 30 years.
• Private student loan refinancing: Private student loan refinancing and consolidation are considered the same process — getting a new private loan to repay your old loans. With refinancing, you might be able to reduce interest rate or reduce your monthly payment by extending your term.

Keep in mind that you can consolidate both private and federal student loans, but if you do, you will lose federal benefits and protections.

Top 3 alternatives to a student loan refinance

Refinancing isn’t the only way to reduce your student loan debt. The alternatives include:

• Consolidation. Direct consolidation loans allow you to combine several federal loans into one loan with a single monthly payment, but won’t give you a lower interest rate.
• Forgiveness. Under Public Service Loan Forgiveness (PSLF), some federal loan borrowers can have their loans forgiven after 120 monthly loan payments.
• Career change. There are companies that offer to pay a portion of their employees’ student debt. If your employer doesn’t offer this, you can try to find a company that offers these benefits.

Should I refinance student loans?

Refinancing your student loans is an important decision and you should choose the right time to do it. If you do it wisely, you can access a lower interest rate.

Refinancing may be the smart solutation for you if:

• You have a good or excellent credit score and you can reduce interest rate.
• You want to remove a cosigner and become the only person who is responsible for the debt.
• You want to add a reliable cosigner who would help you qualify for better terms and rates.
• You have a steady income, you are sure you won’t lose your job or another source of income, and you are sure you won’t need federal protections from the government.
• You are not eligible for a loan forgiveness program.

Student loan refinancing most likely does not make sense if:

• You are not able to refinance your loans without a cosigner, and you don’t have a reliable cosigner.
• You have federal student loans and you don’t want to lose federal benefits and protections.
• Refinancing would reduce your loan term but you cannot afford making higher payments each month, even if it would save you money in the long run.
• You’re already having difficulty making your payments and you are in need of forbearance — a temporary postponement of payments — until you improve your financial health.

Frequently asked questions

What is refinance student loans?

Student loan refinancing is when you apply for a new loan to pay back your current student loans, usually to lower your interest rate or extend your repayment period. When it comes to a federal student loan, you must apply for refinancing with a private lender.

What do I need to be approved to refinance my student loan?

Typically, you’ll need to have a minimum credit score of 650, a debt-to-income ratio of below 50% and a source of stable income in order to be eligible, but eligibility criteria vary by lender.

Getting prequalified is a wise move to understand if you qualify for this process. While prequalification cannot guarantee that you’ll be accepted, it can help you find out if you meet the minimum requirements set by lenders.

When to refinance student loans?

Here are a few situations where refinancing your student loans could be the right decision:

• You can be eligible for a lower interest rate, which will save you money.
• You can no longer afford your monthly payment and you need to lower it.
• You have several student loans and want to combine them into one to make your repayment easier.
• Your student loans are private, so won’t lose any federal benefits and protections.

In general, you’ll have to decide whether this move is smart depending on your individual circumstances, needs and budget.

How to refinance private student loans?

The process, which is described above step-by-step, does not differ for private and federal loans. Refinancing private students loans typically has fewer cons than federal loans. In a word, you should first decide whether this process makes sense for your unique circumstances and whether you comply with the minimum eligibility criteria for refinancing. If YES, compare lenders, find the best rates, apply and sign the agreement.

Can you refinance only some of your student loans?

Yes. You can choose which students loans you’d like to refinance. For example, if you have both federal and private loans, you could refinance just the private ones. This way, you could lower your interest rate while keeping the federal benefits and protections.

How long does it take to refinance a student loan?

Once you complete an application and submit the necessary documents, your request could be approved within a couple of days or a couple of weeks.

Can you refinance federal student loans?

Yes. Although you will need to find a private lender for this. This means that you’ll lose federal benefits and protections like income-driven repayment plans, deferment and forbearance.

Can you put student loans in someone else’s name?

Some lenders allow you to transfer student loans to someone else’s name. For example, Parent PLUS Loans can be transferred to a child through student loan refinancing. Just stay informed that the loan will come with new terms and rates, which are based on the new borrower’s credit.

What credit score do you need to refinance student loans?

Various lenders have different borrower requirements for refinancing education debt. Often, you will need a credit score of at least 650 to be eligible with most credible providers. A score of at least 700 would further help you get the lowest rates. If your credit score is fair or poor, you could add a cosigner who will help you access better rates.

Can you refinance student loans with bad credit?

There are many lenders that allow student loan refinancing for borrowers with bad credit, although if a lender does accept a poor credit score, they will probably offer higher rates. You can often apply for refinancing with a reliable co-signer, which could help you become eligible if you have bad credit.

Does refinancing student loans hurt your credit score?

When you submit an application, this results in a hard credit check, which can lower your credit score for a while. But, the impact is usually insignificant and temporary. Refinancing could increase your credit score in the long run if you make payments on time and in full.

Can I refinance both federal and private student loans?

Yes, you can refinance both types of loans. If you have federal student loans, we recommend weight pros and cons more carefully as you will lose your federal protections and benefits.

What is the downside of refinancing student loans?

This process is free and relatively easy to manage, but there are potential downsides, particularly if your income is not stable. Refinancing federal loans, for example, might save you money and make monthly payments more comfortable, but it would deprive you of federal benefits and protections, such as income-driven repayment plans and forgiveness programs. Take some time to think it over and make the right decision before applying, as all refinancing decisions are irreversible.

How often can you refinance student loans?

Many people wonder “how many times can you refinance student loans”? The truth is that there is no limit – you can refinance your student loans as many times as you wish. However, this only makes sense if you are able to access better terms and rates. It is worth refinancing again if you have worked on your credit score or found a higher-paying job since the last time you refinanced.

Summary of our guide on how to refinance student loans

• First, decide if refinancing is a good financial move. It’s not a smart move for every person, especially those who have federal loans with competitive interest rates.
• Next, you’ll need to check your credit score before comparing offers. Typically, you’ll need a score of 650 or higher, but higher scores will help you get the lowest rate.
• The best way to refinance your student loans is to find a private lender that offers affordable interest rates, fees, and benefits.
• If your credit score is not high enough to qualify for the terms you want, consider adding a co-signer who has a good credit score.
• Apply to several of the best lenders. It can boost your odds of getting approved and help you access the lowest rate for your circumstances.
• Finally, you need to provide the required documents to get a new loan with better terms. Even after you sign the contract, continue to make payments with your old provider until you get a notification that the debt is transferred successfully.