What is student loan refinancing and how does it work?

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Student loan refinancing means taking out a new loan to pay off one or more current student loans.
It can provide a lower interest rate, extend your repayment timeline or make your monthly payment more affordable.
Refinancing is only available through private lenders, and you lose key benefits when you refinance federal student loans.
Student loan refinancing is when you apply for a new loan to pay off your current student loans. Low student loan refinance rates and the potential for smaller payments can make it an attractive option.
Refinancing isn't always the best move – and if you have federal student loans, it means giving up valuable benefits. Understand the process and potential risks before making a decision.
Use Bankrate's student loan refinance calculator to see what your new monthly payment could be and determine if refinancing is the best option for your budget and goals.
Crunch the numbers
Refinancing isn't always the best option. While you can refinance federal student loans, you'll be consolidating them into a private loan and to go through the process of getting a new loan. For Bankrate Senior Editor Courtney Mihocik, refinancing her federal loans wasn't a good option.
Mihocik was also hoping for another benefit that was, at that time, seemingly possible with federal loans — mass forgiveness. Of course, we're seeing now that forgiveness is unlikely under the Trump administration, but it was something Mihocik considered when deciding what loans to refinance.
Learn more: Student loan forgiveness is not over
Does refinancing help you meet your goal of lowering your monthly payment, extending your term or better managing your student loan debt?
Do you meet the eligibility requirements for student loan refinancing, including a strong credit score, stable income and minimum required loan amount?
Would using a cosigner help you qualify for the loan or get a lower rate or better terms?
If you're refinancing federal student loans, are you comfortable losing such benefits as income-driven repayment plans and potential loan forgiveness?
Are there alternative options that may work better in your situation?
Student loan refinancing consolidates multiple student loans into a new private loan with one interest rate and monthly payment. That means you'll need to go through the application and approval process like you did for your current student loans.
If you're refinancing federal student loans, the process will be different since you'll be applying for a private loan this time around. You won't need to fill out the FAFSA, and your credit profile will be taken into consideration for your new loan.
Once you decide that refinancing is the best option, follow these steps to refinance your loans:
: You'll want to compare lenders since will have different offers. Prequalify with a few different lenders to get the rates and terms based on your specific credit score and loan.
Submit an application: Fill out an application online or in person, depending on the lender you choose. You'll need information about your finances and your current loans, as well as your personal contact information. Mihocik recommends having your account numbers from your original lender handy. You may also be asked to provide certain documents, like your license, bank statements and W2s.
Transfer payments to your new lender: Your new loan will pay off the balances of the old loans you consolidated under the refinance. Make sure that you get confirmation from your previous lenders that the account was paid and closed.
Begin repayment on your new refinance loan: Once you're approved for the loan, and it pays off your existing student loans, you'll begin paying off your new refinanced loan.
Mihocik didn't experience any drawbacks to refinancing her student loans: 'I refer to it as the best decision of my early twenties,' she says.
But for some borrowers, student loan refinancing isn't a one-size-fits-all solution, and it may not even be the best option. It's important to realize when it would help reach your debt-payoff goals and when it could hinder them.
Borrowers with high interest rates on private loans are the best refinance candidates because they have the potential to save the most money. Even without a better rate, refinancing to a shorter term can also help you save overall — even though you'll have a higher monthly payment.
Here's an example of how your savings would break down if you refinanced to a lower rate or kept the same rate but refinanced to a shorter term.
Key points
Original loan
Refinanced to lower rate
Refinanced to shorter term
Amount
$50,000
$50,000
$50,000
Interest rate
12%
6%
12%
Term
10 years
10 years
5 years
Total interest paid over loan term
$36,082.57
$16,612.30
$16,733.34
Other situations where refinancing student loans may be a good idea:
You have trouble managing multiple loans and want to combine them into one.
You're having trouble affording your large monthly payments and can extend your payment term.
You want to release your cosigner from an existing loan.
You have a higher income or better credit score than when you took out your original loans.
By refinancing with Earnest, Mihocik was able to choose her term based on how much she wanted to pay each month and refinanced into a repayment term that allowed her to pay off her loans five years earlier than her original payoff date. She was also able to set up biweekly payments, which allowed her to squeeze in an extra full payment each year, cutting her payoff time even further.
Borrowers with federal student loans, in particular, should think carefully about the drawbacks because they could lose such benefits as loan forgiveness, income-driven repayment options and forbearance.
Reasons to think twice about refinancing:
You're offered a higher interest rate than what you're currently paying.
You're offered a longer repayment term than your current loan term and can afford your current monthly payments.
You're near the end of your loan term and the loan will soon be paid off.
Refinancing student loans can have a positive impact on your credit score or a negative one, depending on how you manage your loan. Here are the factors that affect your credit score:
Payment history
Credit utilization
Length of credit history
New credit
The two biggest factors are payment history and credit utilization. Consistent, on-time payments for at least the minimum required payment show that you're a responsible borrower while a low utilization ratio shows you're successfully managing the debt you have.
Other factors that affect your credit score are length of credit history and new credit. An established credit history shows you have experience with borrowing and managing debt while new inquiries may signal you're in need of credit and may pose a risk to lenders.
Refinancing your student loans gives you the opportunity to increase your score by building a strong payment history and lowering your credit utilization.
It's easier to manage one loan payment than several, helping you make payments on time.
You may be able to lower your monthly payment, making it easier to meet the required payment each month.
It may pay your loan down faster, which might help lower your credit utilization ratio.
Refinancing will temporarily lower your score, but if you do the right things, it can recover relatively quickly. On the other hand, if you mismanage your new loan, you can hurt your credit score.
A hard credit check is required to qualify you for the loan, which can cause a temporary dip in your score.
You'll be replacing older debts with a new loan and closing those older accounts, reducing the average age of your credit.
If you miss any payments on your new loan, your score could drop significantly.
If you believe refinancing is right for you, compare rates, terms and fees from as many lenders as possible. Student loan refinancing can help some borrowers save money by allowing them to swap out their existing loans with a lower rate on a new private loan.
That said, it's not the right choice for everyone. If you have federal student loans, consider that refinancing means giving up access to benefits like federal forbearance and student loan forgiveness programs.
How often can you refinance student loans?
There's no set limit to how often you can refinance your student loans, but if you refinance too often, it can hurt your credit score. When you apply for a private student loan, a lender usually performs a hard credit check to assess your credit health, which results in a temporary ding to your credit score.
When is the best time to refinance student loans?
The best time to refinance depends on several factors, such as your credit score and income. Refinancing could be a good idea if you have a steady income and your credit has improved since taking out your original loan. It can also be a good idea when student loan interest rates are lower than your current loans' rates.
How is student loan refinancing different from student loan consolidation?
Student loan refinancing and consolidation may sound similar, but they are different processes. Refinancing a student loan involves taking out a new loan from a private lender to pay off one or more of your current loans. Both private student loans and federal student loans are eligible for refinancing.
Student loan consolidation is only available to federal student loan borrowers via the Direct Loan Consolidation program provided by the Department of Education. You replace one or more existing federal loans with a single federal loan.