The Ultimate Guide to Student Loan Refinancing

By Anik KhanUpdated May 28, 2018


About $300B of outstanding student loans (or roughly 25% of all outstanding student loans in repayment) are estimated to qualify for refinancing at lower interest rates. Yet, only 2-3% of that balance was actually refinanced last year. Given that refinancing is the only way to reduce interest rates, why is it that so few people actually go through with it? There are many reasons, but the principal culprits are a lack of knowledge and abundance of fake news. In this guide, we demystify the process and give you the information and resources you need to see not only if refinancing is objectively a great option for you, but exactly how you can make it happen.

Table of Contents

What Is Student Loan Refinancing and Why Does It Work?

Student loan refinancing is the process of getting a new loan, generally with a lower interest rate, to pay off an existing loan or set of loans. Student loan refinancing helps certain borrowers reduce their interest rate because of three main reasons:

  1. Most student loans were originated without underwriting (i.e. risk assessment)
  2. A borrowers’ risk of default can be assessed without requiring an extensive credit history
  3. Base interest rates are very low

No Original Underwriting

The vast majority of student loans in the United States are issued by the federal government without any underwriting, which is the process of assessing a borrower’s risk. This means that everyone, regardless of their ability to repay their loans, gets the same interest rate and terms. This makes student loans accessible to nearly everyone, but it also means that some people have too high of an interest rate (and others, too low) relative to their ability to repay. This naturally creates an opportunity for a lender to offer a lower interest rate to the most credit-worthy borrowers while still making a profit.

Borrowers Can Be Assessed Without A Long Credit History

Historically, most lenders have relied on a long credit history to make a lending decision. Since fresh graduates rarely have this, banks have traditionally shied away from student loan refinancing, believing it to be too risky. However, in 2011, several students from the Stanford Graduate School of Business realized that the classic FICO credit score wasn’t the only factor relevant to assessing someone’s ability to repay their student loans and that other factors, such as their education and salary, could reliably predict their likelihood of repayment. In retrospect, this is quite obvious–it’s no surprise that Stanford MBA graduates who earn on average a quarter million dollars annually just a few years after graduation have extremely low default rates. But at the time, this was a revolutionary concept. The company they founded, called SoFi (formerly known as Social Finance), originally refinanced the high-interest loans of predominantly elite MBA graduates (they’re cool with everyone now) and started the current boom in student loan refinancing. Now, most student loan refinance lenders, including traditional banks, use a variety of data points, such as degree, study concentration, and income, to make lending decisions–without an requesting an extensive credit history.

Low Cost of Capital

Finally, what makes student loan refinancing truly beneficial to many borrowers is the current environment of low interest rates. Many student loans have interest rates over 7%, and the best available interest rates through refinancing are now under 3%! This creates the potential for big savings. Most borrowers who refinance are expected to save between $10K to $40K in interest over the life of their loans by doing so. Of course, low interest rates will not last forever, so we strongly recommend you act soon (why not today?) to check if refinancing is a smart move for you to make (see Best Time to Refinance).

Student Loan Refinancing vs. Consolidation

“Student loan refinancing” and “student loan consolidation” are two terms that are commonly confused. In the broader personal finance world, consolidation refers to taking out a new loan to pay off existing loans and can also be seen as refinancing multiple loans. However, in the context of student loans, consolidation almost always refers to taking out a new Direct Consolidation Loan that pays off one or more federal loans. To make this distinction absolutely clear, refinancing is taking out a completely new private loan, while consolidation is taking out a new government loan. Like all other government loans, there is no underwriting in consolidation and the interest rate of the new consolidated loan is based on the interest rate of your existing loans. Therefore, you cannot get a lower effective interest rate by consolidating, and depending on your numbers, it may even increase. Our Student Loan Repayment Calculator lets you model both consolidating and refinancing, so you can objectively see how you’d potentially benefit from refinancing and/or consolidation.

An Overview of Consolidation and Refinancing

RefinancingConsolidation
Eligible Loans
  • Federal Loans AND Private Loans
  • ONLY Federal Loans
Borrower Eligibility
  • Job or Job Offer
  • Good Credit (650+)
  • Income Sufficient to Cover Student Loan Payments After Refinancing
  • Not In Default
Interest Rate
  • Based on Credit Risk
  • Weighted Average of Existing Loans Rounded to the Nearest 1/8 Percent
Grace Period
  • Generally preserved–depends on lender
  • Not preserved–payments are due immediately
Key Benefits
  • Simplified loan management
  • Usually lower interest rate
  • Usually lower total cost or monthly payment
  • Higher quality customer service
  • Simplified loan management
  • Potential access to additional repayment plans
  • Potential access to certain loan forgiveness programs

The Pros and Cons of Refinancing

Refinancing Federal Loans

The biggest benefit of refinancing is getting a lower interest rate, which can either reduce your total cost (if you maintain or shorten your loan term) or your monthly payment (if you increase your term), but understand that when refinancing federal loans, you will forfeit any associated federal benefits. If you’re liking what you’re reading thus far, go ahead and get started by checking out “Next Steps: How To Take Action.”

ProsCons
  • Lower interest rate
    Most borrowers who refinance will have an interest rate that’s lower than the weighted average interest rate of their refinanced loans. It’s not uncommon for borrowers to cut their rates by a third or even a half.
  • Lowering total cost or monthly payment
    A lower interest rate generally reduces overall costs. The average borrower that refinances saves between $15K to $25K, depending on the lender. Many borrowers also refinance to lower their monthly payment, typically by $50 or more.
  • Simplified payments
    Borrowers who refinance loans from different lenders will have to make just one monthly payment, which can help make the process of managing loans significantly easier.
  • Better customer service
    Most refinance lenders provide better customer service and use more efficient technology than federal loan service providers. This can be quite meaningful if you’ve had a bad experience with your current loan service provider.
  • Unique benefits
    To differentiate themselves further, many lenders are now providing unique benefits like job assistance and networking opportunities.
  • Loss of income-driven repayment plans
    Income-driven repayment plans are particularly helpful for borrowers with high debt relative to income. Since payments vary according to income, IDRPs can also be a good option for people who expect a significant disruption in their income.
  • Ineligibility for any federal loan forgiveness program
    Loan forgiveness programs can reduce or eliminate outstanding debt after a certain number of qualifying payments. While only a minority of borrowers will receive any type of loan forgiveness, it is an important consideration for current and aspiring teachers and other public service workers.
  • Loss of access to federal deferment or forbearance
    Deferment and forbearance programs allow borrowers to pause repayment. While many private lenders are now offering their own version of deferment and forbearance, the government versions typically have more favorable terms.
  • Short-term impact on credit score
    While checking rates does not afflict your credit score, accepting a loan will have a small and temporary negative impact on your score.

Refinancing Private Loans

The pros of refinancing private loans are the same as refinancing federal loans. However, there are far fewer cons associated with refinancing private loans. If switching lenders, note that your original lender may offer benefits not provided by your new one. Furthermore, you may see a short-term hit on your credit score, but that’s about it. If you can get a lower interest rate by refinancing your private student loans, 99 times out of 100, you should.

Who Can and Who Should (And Shouldn’t) Refinance

Eligibility

While refinancing can be a great option for many people, only about a fifth to a quarter of all student loan borrowers are expected to qualify. In general, you’ll likely be in good shape to refinance if you:

  1. Graduated from an accredited four-year university
  2. Are employed or have a job offer
  3. Make enough or will make enough income in the near future to comfortably support your monthly expenses, including your expected student loan payments after refinancing
  4. Have credit in good standing (usually a score of 650 or above)
  5. Have at least $5,000 in student loans

But of course, just because you qualify doesn’t mean refinancing is the best fit for you. While we strongly recommend that you objectively assess if it makes sense for you (See “Next Steps: How To Take Action“), you can use the guidelines below to get a better idea as to whether that’s the case.

Guidelines for Who Should and Shouldn’t Refinance

Who Should Generally RefinanceWho Should Generally NOT Refinance
  • Borrowers with high interest-rate loans
    Those with loans that have over a 6% interest-rate can likely refinance to obtain a lower rate. They can choose to reduce their loan duration, thereby getting on an accelerated path to loan repayment, or maintain/extend their loan duration to get a lower monthly payment.
  • Borrowers who have annual incomes greater than their debt
    Borrowers with annual incomes that exceed their debt generally do not benefit from federal repayment plans. For these borrowers, the real value of a lower interest rate often trumps the potential benefits of federal loans.
  • Borrowers who do not qualify for a loan forgiveness program
    Loan forgiveness is one of the best potential benefits of federal loans. Yet, few people qualify. For the majority of borrowers who do not qualify, refinancing is generally a good option to consider.
  • Borrowers with loans under multiple providers
    For borrowers who have loans taken out through more than one provider, refinancing reduces the number of lenders from many to one. This can help to simplify loan management.
  • Federal loan borrowers who work in public service
    Borrowers who qualify for Public Service Loan Forgiveness (PSLF) will have their outstanding loan balance after 10 years of repayment forgiven. Unlike other types of loan forgiveness, the amount forgiven is not taxable. An income-driven repayment plan + PSLF is generally the best option for borrowers who qualify for PSLF.
  • Borrowers with mostly subsidized loans
    Federal subsidized loans generally get preferential treatment. For example, under Deferment, subsidized loans do not accrue interest. Under certain income-driven repayment plans, the government pays the interest on subsidized loans when the minimum payment does not cover interest. Because of these benefits, borrowers should generally not refinance their subsidized loans. However, borrowers can selectively refinance just their unsubsidized loans.
  • Borrowers who plan to go back to school full-time
    While many private lenders offer a form of deferment, the benefit is generally limited to one-year. For borrowers who plan to go back to school full-time, they may want to pause their payments for multiple years, which is only possible without penalty through the federal deferment and forbearance programs. However, it is important to note that even in these programs, interest accrues on unsubsidized loans (and on subsidized loans under forbearance), so pausing payments may not actually be the best decision.
  • Borrowers with minimal savings who expect to see significant disruptions in income in the near future
    Borrowers who expect to have a volatile income stream may benefit from being able to access an income-driven repayment plan or forbearance and deferment. For these borrowers, refinancing may be riskier than it’s worth.

The Best Time to Refinance

There are two ways to look at the best time to refinance:

  1. When it’s a good time to refinance from a macro perspective
  2. When it’s a good time to refinance based on individual life events

When to Refinance–Macro Perspective

Since the Great Recession, the Federal Reserve has kept base interest rates at historic lows. However, these interest rates have been rising and are expected to rise, and hence interest rates for student loans will eventually increase. From a macro perspective, you should refinance as soon as possible, since if you switch to a fixed interest rate, you will lock in the savings from low interest rates at the time during which you refinance, even if rates go up. And if rates go down, you can generally refinance again to an even lower rate.

When to Refinance–Individual Perspective

Generally, you should consider refinancing when you have a job or job offer with a salary that can sufficiently cover your expenses. For some borrowers, this is right after graduation. While many people wait to make payments until their grace period is over, we strongly recommend against this if you’re able to repay during your grace period. Interest accrues during your grace period, so you’ll end up paying more unnecessarily. If the grace period is important for you, certain refinance lenders will honor the remainder of your grace period.

Important Considerations for Refinancing

There are four main decisions you need to consider when refinancing:

  1. Lender
  2. Cosigner
  3. Loan term
  4. Fixed vs. variable-interest rate

Lender

The average borrower takes 19 years to pay off their student loans, so for many, the relationship with their student loan lender is quite long (sometimes longer than their relationship with their spouse!) That said, you want to make sure you choose a lender with which you’ll continuously want to do business. Typically, refinance lenders have much higher customer satisfaction scores than federal student loan service providers, but to see for yourself, take a look at our recommended Student Loan Refinance Platforms and Lenders below.

Cosigner

A cosigner is someone who “guarantees” your loan. This person generally has a higher credit score or income and is seen by the lender as a “safe bet.” Although you are primarily responsible for paying your loan, if you’re unable to do so, your cosigner is obligated to continue to make payments.

Having a cosigner can help you get a better rate or even approved if you would otherwise not qualify. If all goes well, and you are able to pay off your loans, then both you and your cosigner will benefit with a boost in credit score. But be forewarned that you and your cosigner are also both subject to any resulting credit penalties, if you miss or make any late payments.

Of note, certain lenders will allow you to “release” your cosigner after a certain period of time. Should you take this course of action, your loan terms will not change, and your cosigner will be off the hook for the loan.

If you are very confident in your ability to repay your loans and do not have a high credit score, you should consider asking a very close relative or friend to be a cosigner. Because of the risk inherent in being a cosigner, you should pick someone who is well-established financially. Any cosigner is doing a HUGE favor in being a cosigner, so please do your absolute best to ensure they never need to make payments on YOUR loans. If cosigner release is an option, we strongly recommend releasing your cosigner whenever you the option becomes available to you.

Loan Term

Loan term options vary widely, ranging from 5 to 30 years. Generally, the shorter the term, the lower the interest rate, but also the higher the minimum monthly payment. To keep things simple, go with the shortest term you can comfortably afford. Remember, you can pay more than the minimum, but if you’re short on the money, you’ll end up paying steep fees that will destroy any benefit you receive from a slightly lower interest rate.

Fixed vs. Variable-Interest Rate

Interest rates can either be fixed or vary over the life of a loan. The difference between the fixed and variable interest for the same borrower and the same duration can be significant. For example, as of this writing, the fixed interest rate is 27% higher than the variable interest rate on a 5-year refinance loan from SoFi. So, is it a no-brainer to go with the lower interest rate? Not necessarily. It truly depends on what the Federal Reserve decides, and, of course, no one–including the Feds–knows what they’ll do. But fortunately, they offer give guidance. Based on current projections from the Federal Reserve and our original financial analysis, we believe that most people will benefit from sticking to a fixed-interest rate plan. If you plan on pursuing a highly aggressive repayment plan (e.g. paying your loans off within 2 to 3 years), then a variable-interest rate will likely be better.

How To Refinance And What To Expect

Step 0: Prepare What You Need

To get started, you’ll need to provide the following:

  • Government-issued identification (e.g. Driver’s License)
  • Cosigner information (if refinancing with a cosigner)
  • Loan information
  • Employment details, annual income, and proof of income (recent pay stubs or job offer for a job starting within the next 3 months)
  • Tax returns (depending on the lender)
  • Bank account information

Step 1: Check Your Rates

  • See list of top refinancing platforms and lenders below.
  • Get as many offers as you can–spending a few minutes to complete a form could you save thousands.
  • Note: Your credit score is not affected when you’re only check interest rates.

Step 2: Compare and Sign

  • Compare offers from multiple lenders and against federal repayment plans (we recommend using our Student Loan Repayment Calculator).
  • It’s easy to compare multiple lender offers, but it may be harder to determine if refinancing to a lower interest rate is worth “losing” federal benefits. Due to loss aversion bias, you will likely overweigh the value of federal benefits. To correct this, ask yourself, “How much am I willing to pay for federal benefits?” If this exceeds your savings from a lower interest rate, you’re probably better off NOT refinancing. However, if your savings from refinancing are greater than how much you would pay for federal loan benefits, then refinancing is objectively more valuable to you and you should refinance.
  • Most offers expire within 15 days, so don’t ponder too long. We recommend spending one session (e.g. one afternoon, evening) to thoroughly evaluate your options and another session to make a decision and execute.

Step 3: Verify and Set-Up Autopay

  • It can take several weeks for your existing loans to be paid off and for your new loan to be issued, so until your loans are explicitly indicated as being paid off, continue to make regular payments.
  • When your new loan is ready, remember to set it on autopay–most lenders provide an interest rate discount when you do this. We also recommend signing up for our Smart Autopay app.
  • That’s it! You’re likely going to save a whole bunch of money, so remember to spend it responsibly (for instance, by paying off your student loans faster).

Top Student Loan Refinance Platforms and Lenders

Student loan refinancing options have changed drastically over the last decade. Technology start-ups like SoFi have significantly redefined the process of refinancing student loans, and traditional banks have expanded their student loan refinancing divisions. With the introduction of more options, new start-ups, like Credible and Lendkey, emerged to make it easier to compare quotes from multiple institutions. There are many choices, but we’ve identified the top two platforms and the top two independent lenders.

The Best Refinance Platforms

Refinance platforms let you input your information once to get quotes from multiple lenders.

Credible

Check rates

This will not impact your credit score

LendKey

Check rates

This will not impact your credit score

OverviewThe best platform to get quotes from multiple large lendersThe best platform to get quotes from multiple community banks and credit unions 
Credible lets you request and compare quotes from up to 11 major lenders using one form. When you’re ready to accept a loan offer, you’ll work directly with the lender (and not through Credible), and you’ll use the lender’s platform to service your loans.On LendKey, you complete just one application to request offers from hundreds of non-profit credit unions and banks. LendKey will automatically show you the best offer for each loan option. When you are ready to accept an offer, it will be done through LendKey, which you’ll also use to service your new loan.
Lenders Included11 major lenders including Citizens Bank, Earnest, and College AveHundreds of non-profit credit unions and banks
Rates and Terms
Lowest Fixed Rates3.15%3.15%
Lowest Variable Rates2.57%2.58%
Loan Terms5 – 20 Years5 – 20 Years
Loan Details
Minimum Lending Amount$5,000$5,000
Maximum Lending AmountNo Maximum$300,000
Auto-Pay Benefit0.25% for Most Lenders0.25%
Benefits
Grace Period PolicyVaries based on lenderHonors remainder of your 6-month grace period after graduation
DefermentVaries based on lenderOn a case-by-case basis
OtherVaries based on lenderN/A
Fees
Origination FeesNoneNone
Service FeesNoneNone
Prepayment FeesNoneNone
Reviews
TrustPilot Rating★★★★★

9.5/10 (Excellent)

1,200+ Reviews

Not Rated

The Best Independent Lenders

ELFI

Check rates

This will not impact your credit score

SoFi

Check rates

This will not impact your credit score

OverviewBest bank-affiliated lenderBest non-bank lender
ELFI is the student loan refinancing division of SouthEast Bank. As the subsidiary of a bank, ELFI has a very low cost of capital and hence offers the lowest fixed-rate interest rate that we currently see today for student loan refinancing.SoFi is the market leader in student loan refinancing and actually jumpstarted the industry in 2011. SoFi offers unique benefits like Career Coaching and Job Networking.
Rates and Terms
Lowest Fixed Rates3.09%3.25%
Lowest Variable Rates2.69%2.63%
Loan Terms5 – 20 Years5 – 20 Years
Loan Details
Minimum Lending Amount$15,000$5,000
Maximum Lending AmountNo MaximumNo Maximum
Auto-Pay BenefitNone0.25%
Benefits
Grace Period PolicyNo grace periodHonors remainder of your 6-month grace period after graduation
DefermentOn a case-by-case BasisYes
OtherN/A
  • Career coaching
  • Community events (e.g. workshops, networking)
  • Entrepreneurship assistance
Fees
Origination FeesNoneNone
Service FeesNoneNone
Prepayment FeesNoneNone
Reviews
TrustPilot Rating★★★★★

9.1/10 (Excellent)

100+ Reviews

★★ ★★

8.9/10 (Great)

1,500+ Reviews

Next Step: Checking If Refinancing Is Right For You

The goal of this guide was to elucidate student loan refinancing. By this point, you probably have a rough idea of whether refinancing is the best next step to take on your student loan repayment journey, but to get to a more objective decision, we strongly recommend you check your numbers using the Student Loan Repayment Calculator. When using the calculator, ask yourself:

  • Which repayment plan best helps me accomplish my goal (lowest cost vs. affordable monthly payment)?

If refinancing seems like a good option, consider:

  • How much will I save if I refinance?
  • How much would I pay to have federal student loan benefits?

If you save more than you would pay, go ahead and refinance. If the latter, maybe hold off and check again in the future. Refinancing will likely still be an option, even if rates go up. If you need help, feel free to contact us, as we’re always here to help.

Frequently Asked Questions

  1. Will checking my rates hurt my credit score?
    No, checking your rates will not hurt your credit score. Most lenders and all the lenders we recommend perform a “soft” credit inquiry to offer you personalized rates. Soft inquiries do not impact your credit. However, when you accept a loan offer, a “hard” inquiry is made, and this will impact your credit score, albeit marginally and temporarily.
  2. What is averaged weighted interest rate?
    Your average weighted interest rate is the average interest rate of your loans weighted by their outstanding balance. For example, let’s say you have a $10,000 loan with an 8% interest rate and a $3,000 loan with 5% interest rate. Your weighted average interest would be 7.3% ([10,000 × .08 + 3,000 × .05] / [10,000 + 3,000]). You can get your weighted average interest rate from our Student Loan Repayment Calculator.
  3. Can I refinance loans that were previously refinanced?
    Yes, and sometimes even with the same lender.
  4. What is an AutoPay discount?
    Certain lenders will give you a discount for setting your payments on AutoPay. Generally, this is not a discount on your monthly payment, but an amount that’s automatically applied to your principal to reduce your debt.
  5. I am not a U.S. citizen. Can I refinance my loans?
    Most lenders will typically just refinance student loans of U.S. citizens and permanent residents (e.g. green card holders). Fortunately, there are certain companies, like Stilt, that offer student loan refinancing to holders of temporary visas (e.g. F-1, OPT, H1-B). Unfortunately, interest rates will be significantly higher. As always, we recommend evaluating your options objectively using our Student Loan Repayment Calculator.
  6. Can I refinance both private and federal loans at the same time?
    Yes, both private and federal loans can be refinanced into one loan.
  7. Can I refinance Direct PLUS Loans for Parents?
    Most lenders allow you to refinance Direct PLUS Loans for Parents. Note that while Direct Loans and Direct PLUS Loans for Parents can be refinanced together, they cannot be consolidated together through the federal consolidation process.
  8. What is the difference between APR and interest rate?
    Short answer: APR captures all of your expected costs and is a better way to compare lenders.
    Longer answer: The interest rate indicates the amount of interest you will be charged. However, what you actually pay in interest, or your nominal annual percentage rate (APR) will vary based on the frequency of compounding. For example, if interest is compounded annually, an 8% interest will imply you’ll pay $80 in interest on a $1000 loan. The APR, in this case, will also be 8%. However, if interest is compounded daily, you’ll end up paying about $83.28 in interest ($1000 × [0.08/365]365). In this case, the APR will be 8.328%. Sometimes, you are charged non-interest fees, like a monthly service fee. This is factored into the effective APR (generally just called APR), which is the nominal APR + any expected non-interest fees.
  9. If I refinance my student loans, can they be discharged in bankruptcy?
    Student loans are notoriously difficult to discharge. Refinancing won’t make this any easier, as refinanced student loans are still treated as “education loans” under the law and get the same legal treatment as any other federal educational loan. If you are unable to make your payments, we encourage you to use our Student Loan Repayment Calculator to compare income-driven repayment (IDR) plans. Under certain IDR plans, your payments can be $0, and you may benefit from getting unpaid interest subsidized.

Free Personalized Advice

We know for many, refinancing–and more broadly, selecting a repayment plan–can be a scary decision. Sometimes, you just want help from an expert. We’re here for you, so please reach out if you need assistance. It’s completely free. If you find our advice and this guide helpful, it would mean everything to us if you took a few seconds to share this guide and our website on social media.

Disclaimers:

  • We are not financial advisors and cannot provide tax, legal, accounting, or financial planning advice
  • We will make our best effort to provide objective recommendations based on the information we receive from you
  • We earn commissions from certain refinance partners, but we will never knowingly recommend an option against your interest
  • You are free to implement or disregard our recommendations, and we cannot be held liable for any negative outcomes that may come from our recommendations
  • We will never sell your personal information, but in the interest of helping others, we may repost your scenario and question (we will, of course, remove any personally identifiable information)
  • There are no fees or conditions associated with requesting advice; however, we will only answer questions relevant to student loans, and we reserve the right to not answer a question for any reason

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