Refinancing student loans can save you money under the right circumstances. It can help to score a lower interest rate, change a variable interest rate to a fixed rate, consolidate your debt into a single monthly payment, or release a co-signer.
At the same time, you may lose the protection and benefits from your original student loan. Before you refinance, make sure you understand your options, including any trade-offs.
In 2021, student loan refinancing interest rates were at their lowest. But actions by the Federal Reserve in 2022 to fight inflation have pushed refinancing rates higher, reducing or eliminating potential savings altogether.
Learn more about the student loan refinancing environment so you can make the best decision.
Student loan refinancing interest rates in 2023
In 2022, the Federal Reserve raised its federal funds rate seven times in an effort to combat 40-year high inflation rates, and more increases are likely in 2023. That rate affects short-term interest rates on consumer loans, and as a result, student loan refinance rates have nearly doubled since their record lows in 2021, according to online marketplace Credible.
“There are many good reasons that people may refinance their federal student loans, but in each case it is important that the result is a new loan with a lower interest rate,” says Bruce McCleary, senior vice president of communications for National.
Federal student loan refinancing
Many federal student loan borrowers have halted refinancing due to the freeze on payments, interest and collections on most federal loans granted by the Coronavirus Aid, Relief and Economic Security Act. In August 2022, the Biden administration also announced plans to forgive up to $20,000 in federal debt.
Shortly after the plan was announced, it became embroiled in a legal battle. By the end of February 2023, the US Supreme Court will consider at least two challenges. The federal student loan repayment pause was set to end at the end of 2022 but now continues until 60 days after the forgiveness program goes into effect or until the cases are resolved, or 60 days after June 30, 2023, if they are not.
With high interest rates, the uncertainty of debt cancellation and still no monthly payments to make, it may be wise for many federal borrowers to sit tight in 2023.
“If the Biden administration forgives student loans, borrowers can refinance with a private lender and have the chance to wipe that amount of debt off their balance sheet,” says Jamie Hopkins, managing partner of wealth solutions at Carson Wealth.
“If you’re struggling to repay your federal student loans and refinancing isn’t an option, consider applying for one of the affordable repayment programs available through the Department of Education,” says McClary.
Private student loan refinancing
Unlike federal student loan borrowers, private loan borrowers have not enjoyed a break in monthly payments in recent years, and they also are not eligible for the Biden administration’s forgiveness program.
While rising refinance rates can be a deterrent for some, borrowers who have higher rates on their current loans can still enjoy some savings with a new lender. And if you’re waiting for rates to go down again to maximize savings, keep in mind that there’s no limit to how many times you can refinance your student loans, and lenders typically don’t charge fees.
Types of Student Loans You Can Refinance
First, know that federal student loans cannot be refinanced through the US government, only consolidated. You cannot switch your federal student loan for another federal loan with a lower interest rate or your private student loan for a federal loan. In fact, consolidating federal student loans through the Department of Education will result in a slightly higher interest rate.
In contrast, private student loan refinancing allows you to refinance private or federal student loans — or both together — into a new private loan. But refinancing may not make sense for many federal student loan borrowers.
By doing so, you will lose eligibility for government assistance programs. This includes, in particular, the ability to enroll in an income-driven repayment plan. All plans reduce your payments to a portion of your discretionary income and forgive any outstanding loan balance if you haven’t paid off your federal loans in full by the end of the repayment period.
Similarly, teachers and some public service employees who are working for loan forgiveness under one of the programs offered by the government will not be eligible for the 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, the terms may not be as generous as with federal student loans.
When it makes sense to refinance student loans
Is refinancing your student loans the right option for you now? Consider it seriously if:
Your credit score is strong enough to qualify for a lower interest rate than your current one. You may qualify for a student loan refinance with a FICO score of around 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 to pay off more expensive debt, it’s worth considering,” says Hopkins.
Your private student loan has a variable interest rate, and you want to refinance to a fixed-rate loan. With variable-rate loans, at some point you may see your interest rate rise as market rates change. If that happens, the new fixed rate loan may 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 high interest rates may find a savings opportunity with a rate drop,” says McClary.
You want to reduce the number of monthly payments. If you have multiple private student loans, you may want to refinance them into a single loan so you can make one monthly payment. If you want to reduce the number of federal loan payments but not change to private, the process is called debt consolidation, not refinancing. The weighted average interest rate on your new federal direct consolidation loan, or the interest rate that is the weighted average of your current loan, is rounded up to the nearest one-eighth of 1%.
You want to issue a co-signer. If you can refinance a private student loan in your name alone, you can release a co-signer from liability for your loan. However, some lenders offer a co-signer release only after four years of continuous on-time payments. After you have made the required number of payments you also need to meet certain credit criteria.
You are willing to give up federal benefits. If your financial situation is in good shape and the benefits of refinancing outweigh the costs of eliminating your federal loans, this may be the best way forward for you.
How much will refinancing my student loans save me?
If you can secure a lower interest rate on a refinance loan, it could ultimately save you hundreds or 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 average interest rate of 6%. Your monthly payment will be $333, and you will pay $9,967 in total interest over the life of your loan.
Now, let’s say you refinanced into a new loan right out of college with a 4% interest rate and the same repayment plan. Your new monthly payment will be $304, which doesn’t seem like a big difference. But over 10 years, that lower payment will save you $3,519 in interest.
Reasons not to refinance your student loans
When the benefits of refinancing are unclear, don’t do it. There’s no hard and fast rule about how much you need to save to make refinancing worthwhile, but it should be worth the hassle and any potential costs.
If you’re struggling to make payments or need a lower monthly payment, staying in a federal program with multiple payments and emergency options is a better option than refinancing.
About 45% of federal direct loans were paid off in income-driven repayment plans in 2017, according to the Congressional Budget Office’s 2020 report. If you’re one of those people or you’re working toward debt forgiveness, refinancing may not make sense.
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 may also be wondering if it’s worth tapping your home equity through a home equity loan or cash-out refinance. Mortgage loans this way to refinance your debt. 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. Also, under the Biden administration plan, parents who take out federal loans to help their children pay for college are also eligible for up to $20,000 in loan forgiveness.
How to Prepare for Refinancing Your Student Loans
The decision to refinance should not be taken lightly. “Once you commit to refinancing, you can’t go back once the loan is finalized,” says McClary. “It is important to clearly understand the pros and cons before making an irreversible decision.”
But if you’ve weighed the pros and cons of refinancing and decided to go ahead, you may be ready to take advantage of a lower interest rate when it’s available. Here are some steps you can take:
- Know what type of loan you have and who your services are. You can find this information for your federal loan in the National Student Loan Data System database. For private loans, you need to contact each lender for information.
- Know the interest rate on your loan.
- Learn the benefits of each of your loans, including the income-based repayment plans available to you.
- Avoid forbearance if possible, as interest will accrue.
- Check your credit score to see where you stand and improve if necessary. You can also check your credit reports to see issues you can address.
- Get pre-qualified with multiple lenders before you apply. This process only requires a soft credit check, which won’t affect your credit score, and allows you to compare rate offers to ensure you get the best deal.
- Run the numbers to determine how much money you can afford or save on your new monthly payment.