How to Refinance a Student Loan [Ultimate Guide]

If you have student loans, you might wonder if you can save money on them or pay them off faster. It may be possible when you know how to refinance a student loan.

This process works best with private student loans but can work on federal loans, too, in some cases.

Here’s everything you need to know.

What Is Student Loan Refinancing and How Does It Work?

Student loan refinancing means you borrow a new loan to pay off existing student loans. Typically, borrowers do this to save money, such as by getting a lower student loan rate or more attractive terms.

When you refinance student loans, you take out a new loan. You can borrow money from a new lender or can use the original lender if they have a loan with more attractive terms than you currently have.

Why Consider Student Loan Refinancing

Refinancing student loans is a big decision, especially if you have federal and private student loans. Most people refinance loans for lower interest rates or better terms. Some also do it to consolidate multiple student loans into one single loan.

When to Consider Student Loan Refinancing

There are many reasons to consider a student loan refinance, including the following:

• Releasing a co-signer
• You have higher credit scores, income, or fewer debts that allow you to qualify for better terms
• You want all your student loans in one loan with one payment
• You have the opportunity to get a lower interest rate

Learn How to Refinance a Student Loan

Before applying to refinance student loans, learn the steps to make the process less overwhelming and enable you to make more informed choices.

First, decide if an education loan refinance makes sense for you. Next, take inventory of your interest rates and time left on each loan. Then, determine what types of student loans you have.

For example, you may not want to refinance federal student loans. If you do, you’ll lose federal protections, such as income-driven repayment plans or loan forgiveness options.

Determine if you’ll save money or if you’re refinancing just for the sake of refinancing. Even if you can get a lower interest rate, look at the loan’s total cost. Are you extending the loan terms so that it takes longer to pay the loan in full? If you do, you could end up paying more money in the long run.

1. Check Your Credit Score

If you decide refinancing student loans makes sense, check your credit score. Lenders use your score to determine the rate and terms you can get. The better your credit score, the more attractive the interest rate and terms you may get.

Don’t forget credit scores change monthly, so if your score isn’t great now, consider fixing the issues to see if you can increase your credit score.

Related Article: Credit Repair: Complete Guide to Fix Your Credit Score

2. Research Different Lenders

When refinancing student loans, you can use any refinance lender; you aren’t stuck with your current lender.

We recommend getting at least three quotes for student loan refinancing. This allows you to compare your student loan refinance options and see which offers the best deal. Remember, the loan with the lowest interest rate isn’t always the best. Look at the big picture and determine the loan’s total cost before deciding.

3. Shop Around for Student Loan Refinance Rates

As you shop around with different lenders, consider the student loan refinance rates they charge. Of course, each lender will charge a different rate and fees. Plus, you might find that some lenders charge fixed interest rates, and others charge variable rates.

A Fixed vs. a Variable Interest Rate

A fixed interest rate doesn’t change the same for the entire loan term. As a result, your payment never changes, so it’s more predictable and easy to budget. A variable rate can often change, making it harder to budget for your payments. However, variable rates are often low initially, which may save you more money.

4. Become Pre-qualified to Refinance Student Loans

When you’ve decided you want to refinance your student loans, consider getting pre-qualified. You can use a marketplace to do this and get offers from multiple lenders or apply to each lender individually.

When you get pre-qualified, the lender does a soft credit check. This doesn’t hurt your credit score but helps lenders determine what you qualify for so they can provide you with an offer.

5. Choose the Best Student Loan Refinance Offer and Terms

Compare the offers provided to you by comparing not only the interest rate but also the terms. Try comparing loans apples to apples.

For example, if you receive a quote for a repayment period of 5 years and another for ten years, there’s a big difference. The 10-year loan will have a much lower monthly payment, but you’ll pay much more interest over the life of the loan. Conversely, the 5-year term will look more expensive but will likely cost less in the long run.

Work the monthly payments into your budget to see which works best.

6. Complete an Application to Refinance Your Student Loan

Once you’ve chosen the best offer, complete an application to refinance your student loans. The loan application will ask for information such as:

• Name and address
• Social security number
• Income
• Assets
• Debts

7. Collect and Submit Appropriate Documentation 

In addition to the loan application, you must also provide documentation to prove the information you provided on the application.

This may include:

• Driver’s license or state ID
• Proof of employment
• Proof of assets
• Current student loan statements
• W-2s and tax returns
• Proof of degree

8. Sign the Final Paperwork and Begin Paying

After the lender processes your loan, your final step is to sign the paperwork and close your loan. The lender will take the proceeds from your loan and pay off your existing student loans. You’ll then make monthly student loan payments to your new lender.

Qualifying for Refinancing Your Student Loans

Qualifying to refinance student loans differs from when you applied for federal student loans. Everyone can get federal student loans up to the limit allowed annually. In addition, you don’t have to qualify based on your credit score or income.

Refinancing your student loan requires you to prove you qualify for the loan, aka can afford it. In addition, you must prove the following factors to qualify for the best student loan refinance rates.

Employment Requirements

Lenders need to know you have stable employment. You can prove this with your income documentation or by providing information to call your employer to verify your employment. Some lenders approve borrowers with an employment contract if they are due to start working in the near future.

Credit Score Requirements

You’ll need great credit to refinance student loans. The better your credit score, the better rates and terms you’ll get. On average, you should have a 700+ credit score. Some lenders may allow lower credit scores, but you may not get competitive terms.

Recurring Income Requirements

Lenders must have proof you have regular income from employment. You can prove this with your W-2s or tax returns. They like to see you have a consistent and stable income so you can afford the loan payments.

(DTI) Debt to Income Ratio Requirements

Your DTI, or debt-to-income ratio, compares your monthly income to your monthly debts. The more debts you have, the higher your debt-to-income ratio is, and the harder it is to qualify to refinance student loans. Typically, lenders want a debt-to-income ratio of 43% or less.

Things You Can Do if You Do Not Qualify

If you don’t qualify to refinance your student loans, you can do a few things to increase your chances when you apply again.

Pay Down Additional Debt

If your debt-to-income ratio isn’t low enough to qualify to refinance student debt, consider paying your debt down faster. The less debt you have, the more room you have in your income to qualify for a student loan refinance.

Consolidate Additionally Debt

Consider a consolidation loan if you can’t afford to pay your debt off. For example, if you have a few credit cards, consolidate them into one credit card. You might qualify for a 0% APR balance transfer card if you have a great credit history. This allows you to have one monthly payment and no interest while you pay the debt down.

Find a Trusted Co-Signer

A co-signer with great credit history and low DTI can help you qualify for a student loan refinance. Keep in mind that adding someone to your loan makes them responsible for it if you stop paying. Choose your co-signer wisely and make sure you can afford the monthly payments.

Raise Your Income to Lower DTI

If you can increase your income, it will naturally lower your DTI, making it easier to qualify. You can ask for a raise, start a side hustle, or work a part-time job to increase your income.

Use a Student Loan Calculator to Help You Plan

If you aren’t sure if you should refinance private or federal student loans, use a student loan refinancing calculator to compare your options. You can see the loans’ total costs and compare them to determine if refinancing makes sense.

Related Article: How a Student Loan Consolidation Calculator Can Save You Money

Benefits of Refinancing Student Loans

As you can imagine, there are many benefits of refinancing student loans, including the following:

• Save money on interest – If you can get a lower interest rate or shorten your loan’s term, you’ll pay less overall interest, potentially saving you thousands of dollars.
• You may pay the debt faster – If you can get a loan with a shorter term, you can pay the loan down faster and be out of student loan debt.
• A new lender may have better terms – No two lenders have the same terms, so switching things up may provide you with more benefits, such as deferment options or other arrangements if you have financial issues.
• You may get a lower payment – If you can secure a lower interest rate or find a loan with other attractive terms, you may have a lower monthly payment, saving you money immediately.

Drawbacks of Refinancing Student Loans

Like any loan, there are some downsides of refinancing student loans you should consider:

• Your payment might increase – If you take a loan with a shorter term, your monthly payments will increase, which can be harder to budget for and/or afford.
• You could lose federal protections – If you have federal loans, you may lose certain protections the Department of Education offers, such as income-driven repayment plans or loan forgiveness. Many federal loans also offer deferment or forbearance options during times of need, which you would lose.
• You can’t refinance back into federal loans – If you want federal protections, you can’t refinance your loans back into a federal student loan.

Top Student Loan Refinance Companies

Every borrower has different needs and will find benefits with different companies, but here are the top student loan refinance lenders to get you started:

• LendKey – You’ll need great credit to qualify and can get loan terms of 5, 7, 10, 15, or 20 years with forbearance options as needed.
• SoFi – Borrowers need only average credit scores, but SoFi doesn’t offer a co-signer release. Loan amounts start at $5,000, and loan terms include 5, 7, 10, 15, and 20-year terms.
• College Ave – Borrowers can choose their own loan term between 5 and 15 years. Average credit is allowed by this lender, but you must have a degree to refinance student loans with them.

FAQs

What Is a Student Loan Payoff, and Why Is It Important?

Your student loan payoff is the full amount you owe to pay your loan balance in full. It includes accrued interest. A student loan payoff is only good through a specific date as interest accrues daily.

Is a Good Credit Score Required to Refinance Student Loans?

Most lenders prefer an excellent credit score, but many lenders have options for borrowers with average credit scores, usually in the mid-600s.

Will Refinancing Student Loans Hurt My Credit Score?

Any new loan can cause your credit score to decrease temporarily. This is because the new debt decreases your credit age, bringing your credit score down, as can the new inquiry on your credit report. However, your score should increase quickly if you make your monthly payments on time.

How Long Will It Take To Refinance Student Loan Debt?

You can usually refinance student loans quickly. Depending on the lender and how quickly you provide the necessary information, you can refinance in as little as a few days or a few weeks.

Can You Refinance Private and Federal Student Loans?

You can refinance private and federal loans but use caution before you refinance federal loans. You’ll lose certain protections the loans offer. So be sure you won’t need the protections before including them in your student loan refinance.

Can Student Loan Refinancing Be Done in Someone Else’s Name?

The only way to refinance student loans in someone else’s name is to do a private student loan refinance, and even then, most lenders will only refinance a loan from a parent to a student.

Do I Need a Co-signer to Refinance School Loans?

If you don’t have great credit or your DTI is high, you may need a co-signer to qualify for a student loan refinance. While they aren’t required, they can help you qualify for a student loan.

Should You Apply to Multiple Lenders When Refinancing Student Loans?

It’s always a good idea to apply to multiple lenders to determine who has the best offer. Don’t settle for the first offer you get, assuming it’s the best. Instead, compare the student loan refinancing rates and terms offered by several lenders to see who has the best loan.

Should I Keep Paying My Student Loans While I Wait for the Refinance to Be Complete?

Yes, you should always make your monthly payments on time while refinancing. This ensures your credit score doesn’t fall, or you don’t owe more than you thought when your new lender pays your current loans.

What Is the Difference Between Student Loan Refinancing and Consolidation?

Student loan refinancing involves paying off your old student loan debt with new loans. Consolidation works only on federal loans and combines the debts into one loan, but not as a refinance. Your interest rate is the weighted average of all the loans you consolidate.

How to Refinance My Student Loans- The Bottom Line

Knowing how to refinance a student loan and what to look for is important. You can determine if you should refinance private loans and find the best way to refinance student loans.

Refinancing student loans doesn’t make sense for everyone, so weigh the pros and cons and consider the total costs to ensure it’s right for you.