Should I Refinance My Student Loans? | Find the Best Loan for You

Refinancing student loans could benefit you in numerous ways: You could score a lower interest rate, simplify your debt repayment or help release a co-signer.

Refinancing could also eliminate protections and benefits from your original student loan, particularly if you convert a federal student loan into a private one. Plus, current interest rates are significantly higher going into 2024 than they were a few years ago, minimizing the potential for big savings.

Before you refinance, make sure you understand your options. Learn more about the student loan refinance environment so you can make the best decision for your education debt.

Since March of 2022, the Federal Reserve has hiked the federal funds rate 11 times in an attempt to fight 40-year-high inflation rates. That rate influences short-term interest rates on consumer loans and, as a result, student loan refinance rates have nearly doubled since their record lows in 2021.

“Borrowers should not refinance … if this will cause their interest rates to increase,” says financial aid expert Mark Kantrowitz. “If a borrower has a much higher interest rate from several years ago on their federal loans, refinancing to obtain a lower interest rate may save some money.”

Kantrowitz suggests that the Federal Reserve Board may be nearing the end of interest rate hikes, but rates will likely remain high for at least the near future.

However, it may still be possible to qualify for a lower rate than you currently have . According to analysis from U.S. News, the current average student loan refinancing rates for a fixed-rate loan range from 4.80% to 9.95% and from 5.08% to 10.51% for a variable-rate loan.

Is refinancing your student loans the right choice for you now? You should consider it seriously if:

You may qualify for student loan refinancing with a FICO score of about 650, but a higher score can get you a better rate and possibly more cash flow.

“If refinancing an existing loan allows the borrower to have more access to money for their current lifestyle, future retirement or pay down more expensive debt, it’s worth considering,” says Jamie Hopkins, senior vice president of Private Wealth Management at Bryn Mawr Trust.

With a variable-rate loan, at some point you could see your interest rate go up as market rates change. If that happens, a new fixed-rate loan might be cheaper. The same goes if you have a private loan with a high interest rate.

“Borrowers who have older private student loans with high balances and higher interest rates may find an opportunity for savings with a drop in the rate,” says Bruce McClary, senior vice president of communications for the National Foundation for Credit Counseling and former U.S. News contributor.

If you have multiple private student loans, you might want to refinance them into a single loan so you can make one monthly payment. If you want to reduce your number of federal loan payments but not change to private, you would have to go through a loan consolidation, not a refinance.

If you can refinance a private student loan in your name alone, you could free a co-signer from responsibility for your debt. To use this option, you’ll need to meet a lender’s requirements for credit and income on your own.

Note that refinancing isn’t the only way to remove your co-signer from a loan, as some lenders offer co-signer release after a certain number of consecutive on-time payments.

Both private and federal student loans are eligible for refinancing through a private lender, but there are different considerations for each type of loan.

The federal student loan emergency forbearance recently came to an end, and borrowers are once again on the hook for repayment. Interest began accruing again in September 2023, and payments restarted in October.

If you’re dealing with high interest rates on your federal student loans, refinancing is one strategy that could help. Borrowers with strong credit scores may be able to snag a better rate through refinancing.

However, federal borrowers should proceed with caution, as refinancing federal student loans with a private lender means forfeiting access to federal repayment plans, forgiveness programs and other protections.

“Borrowers who refinance federal loans into private loans will lose the superior benefits of federal loans,” says Kantrowitz.

If your financial situation is in good shape and the benefits of refinancing outweigh the costs of ditching your federal loans, it might be the best path forward for you. However, if you’re relying on any federal protections, using an income-driven repayment plan, or working toward a program like Public Service Loan Forgiveness, refinancing your federal student loans with a private lender would probably be a bad idea.

This includes income-driven repayment plans like the government’s new Savings on a Valuable Education Plan. All plans adjust your payment to a percentage of your discretionary income and forgive any remaining loan balance if you haven’t fully repaid your federal loans at the end of the repayment period.

Likewise, teachers and certain public service employees working toward loan forgiveness under one of the programs offered by the government would no longer qualify for that benefit if they refinanced.

Finally, while many private lenders offer the ability to temporarily reduce or stop payments and avoid default through deferment or forbearance, terms may not be as generous compared with federal student loans.

If you want to retain access to perks such SAVE or PSLF, avoid turning your federal student loans into a private one through refinancing. If reducing your interest rate and paying off your student loans as quickly as possible is more in line with your goal, however, refinancing could be worth exploring.

Unlike federal student loan borrowers, private loan borrowers did not get much of a break on their loan payments throughout the COVID-19 pandemic. Plus, they don’t have to worry about losing federal protections, since their private student loans already aren’t eligible for federal programs.

If you’re struggling with high interest rates on your private student loans, refinancing may be a way to lower them. If you’re waiting for rates to go down again to maximize savings, keep in mind that there’s no limit to how often you can refinance your student loans, and lenders typically don’t charge fees.

If you can secure a lower interest rate on a refinance loan, it could ultimately save you hundreds or even thousands of dollars.

As an example, let’s say you have $30,000 in student loan debt with a 10-year repayment plan and an interest rate of 10%. Your monthly payment would be $396, and you’d end up paying $17,574 in total interest over the life of your loan.

Now, let’s say you were to refinance the loans into a new one with a 7% interest rate and the same repayment plan. Your new monthly payment would be $348, which doesn’t sound like a huge difference. But over 10 years, that reduced payment would save you $5,775 in interest.

When the benefits of refinancing are unclear, don’t do it. There is no hard and fast rule about how much you need to save to make a refinance worthwhile, but it should be worth the hassle and any potential costs. Here are a few instances when it might not make sense to refinance your student loans:

If you’re a parent who took out one or more federal or private loans to pay for your child to go to school, you might also be wondering if it’s worth it to tap your home equity through a home equity loan or cash-out refinance mortgage loan to refinance your loans that way. However, these loans typically have high upfront costs, and they use your home as collateral. If you default, you could lose your home, which is a significant risk.

The decision to refinance is not one to be taken lightly. “Once you commit to refinance, you can’t turn back after the loan is finalized,” says McClary. “It’s important to clearly understand the pros and cons before making a decision that cannot be reversed.”

But if you’ve weighed the advantages and disadvantages of refinancing and decided to proceed, you can prepare now to take advantage of a lower interest rate when it becomes available. Here are some steps you can take: