Student loan refinancing is a way to simplify your payments, save money and pay off your debt faster. When you refinance, you work with a lender to take out a new loan to replace your existing loans, and you could qualify for a lower rate or different repayment term. However, only some qualify for refinancing, and it’s not always a good idea.
Should I refinance my student loans? It’s a common question, but whether it makes sense to refinance depends on the type of loans you have, your current interest rates and your financial goals.
Refinancing Creates Breathing Room for Your Budget
Student loan debt is a growing problem, and many people are struggling to get a handle on their debt.
As of 2023, the average student loan balance per borrower was $38,290. But in some professions, higher levels of debt are common because of the amount of education they require. For example, law school students take on substantially more debt than other borrowers. According to the American Bar Association, law school graduates had an average balance of $130,000 per borrower.
How much you can save through refinancing depends on your existing balance, your rates and what loan options you can qualify for when you apply. However, at ELFI, our customers reported saving an average of $278 every month or seeing an average of $20,777 in total savings after refinancing their student loans with Education Loan Finance.
When Is the Right Time to Refinance My Student Loans?
Refinancing is a smart way to manage your debt in the following scenarios:
- You have high-interest loans: Depending on the type of loans you have, when you took them out, and your credit at the time of origination, you could have loans with high interest rates. If current rates are lower than you have on your existing loans, you could save a substantial amount of money by refinancing.
- You have better credit than you had when you took out the loan: If you had poor to fair credit when you took out the original student loan, you may have gotten a higher interest rate. If your credit has improved since then, you could qualify for lower rates and more favorable terms through student loan refinancing.
- You want to remove a co-signer: If you had a relative or friend co-sign a student loan — that’s likely since 90% of undergraduate private student loans are co-signed — refinancing allows you to take out a loan solely in your own name and remove the co-signers responsibility for the debt.
- You want to streamline and reduce your payments: You likely had to take out several student loans throughout your college career, so you may have several accounts and payment due dates to manage after graduation. Refinancing allows you to combine your loans into one, with one easy monthly payment.
Learn more: How Soon Can You Refinance a Student Loan?
When Not To Refinance Student Loans
Although refinancing can be beneficial for some borrowers, it’s not a good idea for everyone. If you are in the following scenarios, think twice about refinancing your debt:
- You work for a non-profit organization or government agency: If you have federal student loans and work for a non-profit organization or government agency, you could qualify for loan forgiveness through Public Service Loan Forgiveness (PSLF). But if you refinance your loans, your loans will no longer be eligible for PSLF.
- Your field is volatile: Federal loan borrowers can use programs like income-driven repayment plans if they can’t afford their payments or forbearance if they need to postpone their payments. But once you refinance, your federal loans are transferred to private lenders, and you’ll no longer qualify.
- You have low-interest loans: Interest rates reached record lows in 2020 and 2021. If you have low-interest loans — rates on some federal loans were as low as 2.75% in 2021 — you’re unlikely to qualify for a lower rate than you have now, so refinancing may not help you save money.
Who Qualifies for Student Loan Refinancing
Although borrower requirements vary by lender, you generally need to meet the following criteria to qualify for student loan refinancing:
- Good to excellent credit (If you don’t have good credit, you may need a co-signer to refinance your loans.)
- A stable source of income
- A degree from an accredited college or university
- An established credit history
- At least $10,000 in outstanding student loans
Risks of Student Loan Refinancing
Before refinancing your loans, make sure you fully understand the risks:
- You may not qualify for a lower rate: Not everyone will qualify for a lower rate through refinancing; you generally need very good to excellent credit to qualify for the lowest advertised rates.
- You may have a higher overall repayment cost: When you refinance, you can choose a longer loan term to reduce your monthly payment. But extending your term means your loans will be in repayment longer, and more interest charges will accrue. Over time, the longer term can cause you to pay substantially more.
- Refinancing can affect your credit: When you apply for a loan, you have to consent to a hard credit check. Every hard credit inquiry can cause your credit score to drop.
- You’ll lose federal loan protections: If you have federal loans and refinance your debt, you’ll no longer be eligible for federal income-driven repayment, forbearance, and loan forgiveness programs.
Student Loan Alternatives To Refinancing
Although refinancing is one way to manage your debt, other strategies may be a better fit for you:
- Debt consolidation: Federal loan borrowers can use a Direct Consolidation Loan to combine their loans into one. You won’t qualify or a lower rate, but you can extend your repayment term and simplify your payments through consolidation.
- Income-driven repayment: If you can’t afford your current payments on your federal loans, an income-driven repayment plan can significantly reduce your payments since it bases your payment amount on your discretionary income.
- Employer repayment: Some employers will help you repay your loans, which can help you get out of debt faster and save money.
- Loan forgiveness programs: There are many loan forgiveness programs besides PSLF; depending on your employment type and location, you could qualify for full or partial loan forgiveness.
Still have questions about if refinancing is right for you? ELFI’s personal Student Loan Advisors are ready to help answer them!
