How To Refinance Student Loans

To refinance student loans, you typically need steady income, good to excellent credit—or a co-signer with good credit—and a willingness to compare offers from different lenders. That will help you get the lowest interest rate you qualify for, which is often a borrowers’ main goal when refinancing.

The student loan refinancing application process can be relatively quick. Once you have the documents you need ready, many lenders say their applications can be completed in about 15 minutes.

Here are the steps to refinance student loans and secure a competitive interest rate.

Related: Best Student Loan Refinance Lenders

1. Make Sure You’re Eligible for Student Loan Refinancing

Not everyone will qualify to refinance student loans. When you refinance, you consolidate some or all of your existing student loans by taking out a new loan in the total amount you want to refinance from a private lender or bank.

The refinanced loan will have different features than your previous student loans, including a new monthly payment, interest rate and repayment term. Refinancing is especially useful for borrowers with strong credit histories: If you have a high credit score, you can refinance your loans and qualify for a new loan with a lower interest rate, helping you save money over time.

Even if you’re eligible to refinance, it’s important to consider whether it’s the right decision for your situation. When you refinance federal student loans, they become private loans. That means you’ll lose out on certain benefits and protections, like access to income-driven repayment plans and Public Service Loan Forgiveness.

In response to the economic effects of the coronavirus, the government suspended federal student loan payments from March 13 through Sept. 30, 2020 and set interest rates at 0%. If you refinance federal loans now, you’ll lose out on that relief.

Related: Compare Student Loan Refinancing Rates For 2024

2. Get Your Credit in Shape

Each private refinancing lender has its own requirements, and the criteria for borrowing can vary from lender to lender. But following these four steps will help you improve your odds of qualifying for a loan:

1. Review Your Credit Report

As part of the application process, refinancing lenders will review your credit report and score to gain an understanding of your debt obligations and payment history. The information in your credit report determines your credit score.

Before you apply for a loan, check your credit report closely to make sure all of the information inside is accurate and up-to-date. There’s no need to pay to review your credit report. You can get a copy from each of the three major credit bureaus—Equifax, Experian and TransUnion—once per year for free at AnnualCreditReport.com.

If you find inaccurate information, such as accounts that don’t belong to you or payments reported late that were made on time, file a dispute online directly with the credit bureaus:

• Equifax
• Experian
• TransUnion

2. Pay All Your Bills On Time

Another important strategy for strengthening credit is to make all your minimum monthly payments—on credit cards, loans and utility bills, for instance—on time.

Payment history is the most important factor in your FICO score, the credit score most commonly used by lenders when approving or denying credit applications. Especially when you’re about to apply for a new line of credit, avoiding late or missed payments is crucial.

3. Improve Your Debt-To-Income Ratio

In general, lenders look for a low debt-to-income ratio (DTI) to confirm that you can afford a new monthly debt payment—and the lower the DTI, the better. To calculate your DTI, divide your monthly debt payments by your gross monthly income. For example, let’s say your gross monthly income is $3,000, and you have the following monthly debt obligations:

• $1,000 mortgage payment
• $150 car payment
• $300 student loan payment

Your total monthly debts come to $1,450. When you divide that amount by your gross monthly income, your DTI is 48%.

To improve your DTI, work on paying down existing debt or increasing your income. For instance, if you can use a tax refund or work bonus to make a dent in your car loan, that will lower your DTI, making you a more attractive refinancing candidate.

4. Consider Adding a Co-Signer to Your Application

If you’re a recent college graduate, you may not have an established credit history or substantial income yet. If you don’t meet refinancing lenders’ criteria on your own, you may able to qualify for a loan by adding a co-signer to your application.

A co-signer is a person, usually a parent or relative, with good credit and stable income who applies for the loan with you. The co-signer shares responsibility for the loan. If you can’t make payments, the co-signer is obligated to do so instead.

Because having a co-signer on your loan application reduces the lender’s risk, the lender will be more likely to approve you for a loan. Adding a co-signer can also increase your odds of qualifying for a lower interest rate.

3. Decide Which Student Loans To Refinance

A major perk of student loan refinancing is combining your previous loans into one, which leaves you with a single payment to manage. But there are some circumstances when refinancing all of your loans isn’t the best move.

Many borrowers, for instance, would benefit from refinancing only their private student loans and keeping their federal loans intact. When you refinance federal loans, you’ll lose several benefits and protections, including:

• Access to income-driven repayment plans: If you can’t afford your federal loan payments, applying for an income-driven repayment plan is an option. Under this program, monthly payments range from 10% to 20% of discretionary income, depending on the plan. If you have no income, you can qualify for $0 payments.
• Eligibility for loan forgiveness: Federal loans are eligible for programs like Public Service Loan Forgiveness and Teacher Loan Forgiveness, which cancel remaining debt after a period of time in an eligible profession. Income-driven repayment plans also lead to forgiveness after 20 or 25 years of payments.
• Ability to place your loans into federal forbearance or deferment: If you’re facing financial hardship, you may be eligible for federal forbearance or deferment, which let you temporarily postpone payments. In certain circumstances, you can pause payments for up to 12 months at a time, up to a cumulative limit of three years. That’s far more generous than the forbearance options many private lenders offer.

If you think you may take advantage of any of these benefits in the future, don’t refinance your federal student loans. But you can choose to refinance a portion of your debt, such as high-interest private loans. That lets you take advantage of a potentially lower interest rate on certain loans while maintaining access to federal benefits on others.

4. Compare Student Loan Refinancing Offers From Lenders

Before refinancing your loans, it’s wise to gather offers from multiple lenders. Several student loan refinancing companies offer online prequalification tools that can speed up the process.

When you prequalify for a loan, you enter basic information about yourself and undergo a soft credit inquiry, which doesn’t appear on your credit report and has no impact on your credit score. Based on that information, the lender will confirm whether or not you’re likely to be approved and, if you’re a good candidate, provide an estimate of what rates and terms to expect.

When evaluating offers, consider the following factors:

• Interest rates: Your interest rate will affect how much money you pay over the length of your loan. Since paying less on interest is the reason many borrowers turn to refinancing, prioritize lenders that offer the lowest rates.
• Interest rate types: Refinancing lenders generally offer fixed and variable interest rates. Fixed rates stay the same for the duration of your loan, while variable rates can fluctuate with market conditions. While variable rates may seem low now, they can increase. Generally, only choose them if you’re confident you can pay off your loan quickly.
• Loan terms: Lenders offer a range of repayment periods. Depending on the lender, you can typically choose terms between five and 20 years. While a shorter loan term may not lead to the lowest monthly payment, you’ll save more in interest if you choose the shortest term you can afford.
• Forbearance options: Forbearance policies can vary widely among lenders, and private lenders aren’t required to offer the generous payment-reduction options federal loans provide. If your income varies month to month or you foresee a need to reduce or stop payments for a period of time, check each lender’s payment plan and forbearance offerings before choosing one.
• Co-signer release policies: Some lenders let borrowers release the co-signer from the loan after a certain number of on-time payments. Consider going with a lender that offers this option if you use a co-signer, and make sure you understand the co-signer release requirements so you can plan to meet them.

5. Make Payments On Your New Loan

When you’re approved to refinance student loans, your new lender will pay off the debt you’ve chosen to refinance to your current creditors.

To do so, the lender will ask you for the name of your current loan servicer, your current loan balance or payoff amount and your account numbers. They may also require you to submit a copy of your most recent loan statement or a payoff letter.

Until you receive confirmation that the loan has been disbursed and your previous loans have been paid off, keep making payments on your existing loans. The process can take a few weeks to complete. If you don’t make your payments in the meantime, you risk becoming delinquent, which will damage your credit.

Once the old loans are paid off and the new loan is in place, set up automatic payments. Not only will that prevent you from missing payments, but you may also qualify for an interest rate discount. Many lenders reduce your rate by 0.25% when you choose autopay.

Private student loan refinancing isn’t for everyone, but for some borrowers, it can help lower interest rates and save a significant amount of money. Before moving forward with your refinancing application, weigh the pros and cons, and compare offers from multiple lenders to find the best deal.

Related: Compare Student Loan Refinancing Rates

Should I Refinance My Student Loans?

Whether it makes sense to refinance your loans depends on several factors, including:

• The type of loan. Typically, federal student loans have lower rates and more generous repayment options than private loans. And refinancing federal loans causes you to lose out on their borrower protections.
• Your current rate. If you have a high interest rate or a variable-rate loan, refinancing can help you qualify for a lower rate or convert your debt to a fixed-rate loan.
• Your monthly payments. If you cannot afford your payments, refinancing into a loan with a lower rate or longer repayment term can make them more manageable.

Can You Refinance a Federal Student Loan?

Although you can refinance federal student loans, it’s not always a good idea. Refinancing federal loans transfers the debt to private lenders. Afterward, the loans are private, so you’re ineligible for federal benefits and protections like income-driven repayment (IDR), Public Service Loan Forgiveness (PSLF) or federal forbearance or deferments.

Frequently Asked Questions (FAQs)