How to refinance your student loans

Struggling with expensive monthly payments? Learn how to refinance your student loans – it could be the solution you need.

Why It Matters: Currently, 43.5 million borrowers have student loan debt, amounting to $1.75 trillion. The average loan debt balance is $37,574, which can take the average borrower years (or even decades) to pay off.

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Interest rates are particularly high right now—and they might inch up again as The Fed makes additional moves to tame inflation. If you took out variable-rate loans for your college education, that could mean you’re paying more than ever.

Thankfully, you have options. Refinancing your student loans might just be the solution you need.

What is student loan refinancing?

Student loan refinancing is when you source a new lender and that lender pays off your student loan debt on your behalf. In turn, you start paying off that amount with them instead. If they offer you lower interest rates, it can be a winning scenario for everyone involved. Your new refinancing lender might be a credit union, a bank, or a lender specializing in student loans.

Why should you refinance your student loans?

There are several reasons why it might make sense to refinance your student loans:

• Maybe you’ve had issues in the past so you’re not crazy about your lender’s track history or reputation.
• You might have had a cosigner on your original loans and now you’d like them all to be under your own name.
• You have variable-rate loans and interest rates have increased significantly. Higher interest means you’ll pay a lot more money—it might even take a lot longer to pay them off.
• You can no longer afford your monthly payments.
• You won’t be paying off your student debt any time soon, so it’s worth your while to reduce these expenses.
• You have multiple, small private loans and you’d like to consolidate them into one simple loan with a decent interest rate.
• You make or have a lot more money now and you’re eager to reach your loan payoff date. You want to refinance for a higher monthly payment and less interest to pay them off faster, for less.

How to figure out your refinancing options

Like any other major financial decision, the right research can save you a lot of money and time. Start by assessing your current financial situation and determining your needs.

Find out the following:

• How much debt do you have left?
• If you kept paying your current student loans just as they are, how long would it take you to pay them off completely and how much more interest would you have to pay between now and that payoff period?
• What are your current interest rates?
• What is your current monthly bill?
• Can you afford to pay more money per month to pay your debt off faster, are you having a hard time keeping up with payments or do you hope to secure similar monthly payments while paying less interest?
• What’s an ideal interest rate you’d like to secure?
• What is your credit score? Many loans require a minimum score of 650 (a “fair” rating). But if you have a good or excellent credit score, your options will be that much more favorable.
• Are you willing to have a cosigner to improve your odds of approval or to secure a better deal? Who might that person be?
• How does your credit utilization ratio look these days? This will also affect your ability to be approved and at which interest rates.
• How many student loan servicers do you have and what are those companies?*

Reach out to potential lenders

Once you know where you stand and you’re determined to refinance your private student loans, it’s time to shop around:

1. Do some digging to make a shortlist of potential lenders.
2. Make sure you have a clear understanding of their loan terms and research thoroughly to uncover any hidden fees.
3. Prioritize fixed-rate loans. You might be able to get a great variable interest rate, but the tides can turn in the opposite direction. At least with a fixed-interest rate loan, you’ll know exactly how much you’ll need to pay every month for the rest of its duration. If you’re on a fixed income, this will become even more important over time.
4. Check out their eligibility criteria to make sure you’d have a great chance of being approved.
5. Find out if you can get prequalified (a soft credit inquiry) before you apply which requires a hard inquiry that impacts your credit score. In the same vein, apply to one lender at a time. You might get approved for the first one you apply to without adding multiple hard inquiries to your credit report.

Pro Tip: You might be eligible for special refinancing opportunities designed for specific groups or circumstances, such as international students, veterans, and people working in specific fields.

No luck? If no one offers you a rate that makes sense, take the time to improve your financial situation, then try again at a later date. Remember, your goal here is to pay better interest rates than you’re paying now.

If you secure a good deal, congrats! Just be sure to keep making payments until your balance shows $0. You don’t want to default accidentally while transitioning to a new lender.

Hopefully, the process seems a lot less daunting now that you’ve learned how to refinance your student loans. Now you can gather your financial information, dive into the research and determine your next steps. A college education is expensive enough—make it as affordable as you possibly can.

*If you have federal student loans, you might want to reconsider the financing route. Federal student loans offer special protections that you’ll lose forever if someone else takes over your debt. For example, you would miss out on income-based repayment and other flexible payment plans, student loan forgiveness and even payment pauses, such as the current pause that started in March 2020.