What refinancing means and whether it's an option for you
Refinancing means taking out a new loan to pay off your existing student loans. A private lender gives you the new loan, you use it to settle what you owe, and then you repay the new lender instead of the original one. The main reason people refinance is to get a lower interest rate, which reduces how much you pay over time.
Whether you can refinance depends on what kind of loans you have. Federal student loans can be refinanced only through the federal Direct Consolidation Loan program, which is a specific tool with its own rules. Private student loans can be refinanced through private lenders — banks, credit unions, and online lenders all offer this. You can also refinance federal loans into a private loan, but doing so means you lose federal protections.
Lenders look at your credit score, income, and debt-to-income ratio to decide whether to refinance your loans and what interest rate to offer. If your credit has improved since you took out your original loans, or if your income has risen, you may may have access to for a better rate than you have now.
Key Takeaways
- Federal loans can be consolidated through the Direct Consolidation Loan program, which combines multiple loans into one but does not always lower your interest rate.
- Private student loans can be refinanced through banks, credit unions, and online lenders, and refinancing typically requires a credit check and proof of income.
- Refinancing federal loans into a private loan means losing income-driven repayment plans, loan forgiveness programs, and deferment options.
- A lower interest rate saves you money only if you keep the loan long enough to recoup the fees and closing costs involved in refinancing.
- Your credit score and current income are the biggest factors lenders use to decide your new interest rate.
Federal loans: consolidation instead of refinancing
The federal government does not refinance federal loans in the traditional sense. Instead, it offers the Direct Consolidation Loan, which combines multiple federal loans into a single loan with a single monthly payment. The new interest rate is the weighted average of your old rates, rounded up to the nearest one-eighth of a percent — so consolidation usually does not lower your rate.
Consolidation is useful if you have many loans and want one payment, or if you need to move into an income-driven repayment plan that requires consolidation. It does not require a credit check or proof of income. You can consolidate through StudentAid.gov, the official federal student aid website.
The main trade-off is time: consolidating resets your loan age, which matters if you are on track for Public Service Loan Forgiveness or income-driven repayment forgiveness. Any payments you made toward forgiveness before consolidation still count, but your new loan starts fresh in terms of how long you have been paying.
Private loans and refinancing through a lender
If you have private student loans, you can refinance them with a private lender. Banks, credit unions, and online lenders all offer student loan refinancing. The process is similar to explore for any other loan: you submit an process, the lender pulls your credit report, verifies your income, and makes an offer.
Lenders typically want a credit score of 650 or higher, though some will work with lower scores if you have a co-signer. They also look at your debt-to-income ratio — how much you owe each month compared to how much you earn. If your ratio is too high, a lender may decline you or offer a higher rate.
The new loan comes with a new interest rate, new repayment term (usually 5 to 20 years), and possibly new fees. Some lenders charge origination fees or prepayment penalties; others do not. Compare offers from multiple lenders before choosing one, because rates and terms vary widely.
Refinancing federal loans into a private loan
You can refinance federal loans by taking out a private loan and using it to pay off the federal debt. This is sometimes called "going private." The advantage is that you may get a lower interest rate if your credit has improved. The disadvantage is that you lose all federal protections and repayment options.
Federal loans come with income-driven repayment plans, which cap your monthly payment at a percentage of your discretionary income. They also include deferment and forbearance options if you lose your job or face hardship. Federal loans are also may be able to access for Public Service Loan Forgiveness if you work in government or nonprofit jobs. Private loans have none of these features.
Once you refinance federal loans into a private loan, you cannot convert them back. Think carefully about whether a lower interest rate is worth losing these safety nets. If you are not sure you can afford your current payment, or if you work in public service, refinancing federal loans into private ones is usually not the right choice.
When refinancing saves you money
Refinancing saves you money only if the interest rate on the new loan is lower than the rate on your old loan, and only if you keep the new loan long enough to make up for any fees you pay upfront. If a lender charges a 1 percent origination fee on a $50,000 loan, that is $500 out of pocket. You need the lower interest rate to save you more than $500 over the life of the loan for refinancing to be worth it.
Use a refinancing calculator to compare your current loan with the new offer. Enter your current balance, interest rate, and remaining term, then enter the new rate and term the lender is offering. The calculator will show you how much you save or lose. Many lenders have calculators on their websites.
Refinancing also makes sense if you want to shorten your repayment term. If you have 10 years left on your loan and you refinance into a 5-year term at a similar or lower rate, you pay off the debt faster and pay less interest overall — but your monthly payment will be higher.
How your credit score affects your refinancing offer
Your credit score is one of the biggest factors a lender looks at. A higher score usually means a lower interest rate. If your score has risen since you took out your original loans, refinancing may get you a significantly better rate.
Lenders pull a hard inquiry on your credit report when you explore, which temporarily lowers your score by a few points. If you are shopping around with multiple lenders, try to submit all applications within two weeks — credit scoring models treat multiple inquiries in a short window as a single inquiry, so the damage is less.
If your credit score is low, you may not be able to refinance at all, or you may only may have access to for a rate that is not much better than what you have. In that case, focus on paying down other debts or building your credit before you refinance.
What happens to your old loan when you refinance
When you refinance, the new lender pays off your old loan in full. Your old lender closes the account, and you no longer owe them anything. Your credit report will show the old loan as paid off, which is good for your credit history.
The old loan disappears from your monthly obligations. You now owe only the new lender. Make sure the new lender actually pays off the old loan before you stop making payments to the old lender — do not assume the transfer is automatic. Check your old lender's website or call to confirm the account is closed and paid in full.
If the old loan was a federal loan and you refinanced it into a private loan, you lose access to any federal repayment plans or forgiveness programs tied to that loan. This is permanent, so be certain before you proceed.
Frequently Asked Questions
Does refinancing hurt my credit score?
Refinancing temporarily lowers your score because the lender pulls a hard inquiry. The drop is usually small — 5 to 10 points — and your score bounces back within a few months as long as you make on-time payments on the new loan. If you are planning to explore for a mortgage or car loan soon, wait a few months after refinancing before you explore.
Can I refinance my loans if I am in default?
Most lenders will not refinance a loan in default. You will need to bring the loan current first — either by making a lump-sum payment or by working out a payment plan with your lender. Once the loan is no longer in default, you can refinance.
What if I have both federal and private loans?
You can refinance them separately or together. If you refinance federal loans, you lose federal protections, so many people choose to refinance only their private loans and keep their federal loans on a federal repayment plan. Some lenders will refinance both types together into a single private loan.
Can I refinance if I have a co-signer on my original loan?
Yes, but the co-signer is typically released from the original loan once the new loan is funded. If you want the co-signer to stay on the new loan, ask the new lender whether they allow co-signers. Some do, and some do not.
What is the difference between refinancing and consolidation?
Consolidation combines multiple loans into one and is a federal program that does not change your interest rate. Refinancing replaces your loan with a new one from a private lender, usually to get a lower rate. Consolidation is for federal loans; refinancing is for private loans or federal loans you want to move to a private lender.