If you have a high interest rate on your student loans or you're paying down multiple loans, student loan refinancing can potentially help you save money and simplify your repayment plan. But the decision to refinance student loans isn't always clear-cut, and in many cases, it can do more harm than good in the long run.

Understanding how a student loan refinance works and the different ways it can impact you is crucial to making an informed decision about your situation and financial goals. Here's everything you need to know.

Understanding student loan refinancing

Student loan refinancing involves paying off one or more existing student loans with a new one through a private lender. Depending on your situation, refinancing your student loans can help you secure a lower interest rate, reduce your monthly payment, adjust your repayment term and simplify your monthly payments.

In particular, you may benefit from a student loan refinance if you have private student loans — education loans offered by a private lender — with high interest rates and few relief options for struggling borrowers.

However, if you have federal student loans through the U.S. Department of Education, you may already have a relatively low interest rate. What's more, the federal government offers several relief programs to help you reduce your monthly payments, get a break from your obligations or even obtain forgiveness for your debt.

That's not to say federal loan borrowers should never refinance a student loan, but there are fewer situations where it might make sense compared to private loan borrowers.

Keep in mind — you'll typically need good or excellent credit to refinance a student loan and get favorable terms. If not, you may need a creditworthy co-signer to help you get approved and secure better terms than you currently have.

Is student loan refinancing the right choice for you?

There are a few different factors to consider to determine whether you should refinance student loans.

Current interest rates and loan terms

One of the primary benefits of student loan refinancing is the opportunity to get a lower interest rate than what you're currently paying. Reviewing your existing student loans and checking current student loan refinance rates can help you gauge whether it might be worth it.

Additionally, student loan refinance lenders typically offer repayment terms ranging from five to 25 years. Depending on your current repayment term, refinancing could help you pay down your debt more quickly with a shorter term or obtain a lower payment with a longer one.

Financial goals and monthly budget

Your current financial situation and goals will also tell you whether refinancing might be a good idea. For example, paying down your debt more quickly can free up some cash flow in your budget to put toward other important financial goals, and it can also reduce your debt-to-income ratio, making it easier to qualify for a mortgage and other financing options.

On the flip side, if your budget is tight, swapping out your monthly payment for a lower one could alleviate some of the financial pressure you're feeling — though a longer term translates to higher total interest charges.

Carefully consider your budgetary needs and what you want to do with your money in the long run to help evaluate your options.

Job stability and income outlook

Student loan refinancing is only available through private lenders, which typically don't offer many options for borrowers experiencing financial difficulties. While short-term forbearance might be available, most private lenders don't offer income-driven repayment plans, long-term forbearance and deferment options, or forgiveness programs.

If your job situation isn't as stable as you'd like or you're unsure about the trajectory of your career and salary, refinancing might not be the right move unless you have private student loans and you won't be giving up a lot of relief options.

Pros and cons of student loan refinancing

As with any financial decision, there are both advantages and disadvantages to consider before you refinance student loans, especially if you have federal student loans. Here are some factors to keep in mind.

Benefits of refinancing

• Lower interest rates and potential savings: If your credit is in good shape or you have a creditworthy co-signer, you may be able to secure a lower interest rate, which can help reduce your monthly payment.

• Streamlined repayment with a single monthly payment: If you're making multiple monthly payments, refinancing your balances into one loan can help simplify the payment process.

• Opportunity to change repayment plans: If you opt for a shorter repayment plan on the new loan, you can enjoy even more interest savings, though your monthly payment may increase. In contrast, selecting a longer term can reduce your monthly payment, but it'll also typically increase your total interest charges.

Drawbacks and risks of refinancing

• Loss of federal loan benefits and protections: If you have federal student loans, refinancing will cause you to lose access to a suite of benefits, including income-driven repayment plans, generous forbearance and deferment options and more.

• Variable interest rates vs. fixed interest rates: The lowest student loan refinance rates are typically variable. Variable rates may start out lower than fixed rates, but they fluctuate over time. In other words, if market rates go up, so will your interest rate and monthly payment. If you have federal student loans, your interest rate is fixed for the life of the loan.

• Impact on loan forgiveness and repayment assistance programs: The federal government offers forgiveness through a handful of programs, and many of the student loan repayment assistance programs offered by federal and state agencies may require you to have federal loans. If you refinance, you'll lose access to these valuable programs.

Exploring the refinancing process

Refinancing student loans is a straightforward process, but it's important to properly prepare to ensure that you see the best offers:

Check your credit: Student loan refinance lenders typically require a credit score in the mid-600s or higher to get approved. But if you want to get the best terms, you'll likely need to have a score in the mid-700s or higher. Check your credit score using a free credit monitoring service to get an idea of where you stand. If your score is relatively low, consider taking steps to improve it or ask a loved one to co-sign your loan.

Review your current situation and goals: Take some time to evaluate your current loan terms, budget and financial goals to get an idea of whether refinancing can help you.

Shop around: Each lender has its own criteria for determining creditworthiness, and some lenders can offer lower interest rates than others across the board. As a result, it's crucial that you get pre-qualified with several lenders and compare student loan refinance rates and other terms. Lenders typically allow you to get pre-qualified with just a soft credit check, which won't impact your credit score.

Submit an application online: Once you've determined which lender has the best offer, apply through its website. You'll typically need to provide information about yourself and your existing loans during the process. You may also be required to provide some documentation to prove your identity and income.

Review the loan terms: After the lender underwrites your application, it'll determine whether you qualify and your loan terms. Keep in mind that the final offer may or may not be the same as the initial quote. Before you accept the loan, carefully read the agreement to know exactly what you're getting, including whether the lender offers relief options for struggling borrowers. If you agree, sign the contract and accept the loan.

Set up monthly payments: The student loan refinance process can take a few weeks to complete, so it's important to continue making payments on your existing loans until their balances are zeroed out. Once you get confirmation from your new lender, log in to your new online account and set up automatic payments to avoid accidentally missing one.

When to refinance and when not to

If you're still unsure whether refinancing is the right move for you, here are some situations where it may or may not make sense. While some of these scenarios may be familiar, it's ultimately up to you to understand your situation and research your options to determine the right move.

Good reasons to refinance

• Securing a lower interest rate: If you have private student loans with a high interest rate, there won't be a lot of downside to refinancing with another lender to secure a lower rate. Even if you have federal student loans, it could make sense to refinance if you have high-interest loans and you don't anticipate needing access to federal loan benefits and relief options.

• Simplifying loan management with consolidation: If multiple monthly payments complicate your repayment process, a refinance loan can make things more streamlined. If you have federal loans, keep in mind that you can also accomplish this with the direct loan consolidation program without losing access to federal benefits.

• Improving overall loan terms and repayment plan: If your current repayment plan isn't working for you, refinancing may be a good way to get the terms you're looking for. Again, though, if you have federal student loans, consider federal programs before looking into private refinancing.

Reasons to reconsider refinancing

• Eligibility for loan forgiveness programs: If you're currently eligible for one of the student loan forgiveness or repayment assistance programs, it might make sense to keep your federal loans where they are, so you can benefit from these valuable benefits.

• Uncertain financial situation and job instability: If you're not sure what your financial situation will look like in the next several years, maintaining access to federal loan relief programs may be more valuable to you than the benefits of refinancing. If you have private student loans, however, scoring a lower interest rate or monthly payment could be beneficial.

Current trends in student loan refinance rates

After reaching an all-time low in 2021 of 2.75%, student loan refinance interest rates have doubled since that time to just under 5%, according to data from the US Department of Education.

The increases are primarily due to the Federal Reserve's monetary policy to combat inflation. The Fed's federal funds rate directly influences the prime rate, which lenders use to determine rates for short-term loans, including student loans, credit cards, personal loans and auto loans.

Until the inflation rate closes in on the Fed's target, it's unlikely that interest rates will start to come down again. It's currently unclear when that will happen.

Comparing student loans vs. refinanced student loans

Here are the primary differences between original student loans and refinanced student loans:

Timelines and considerations in the refinancing process

The process of refinancing your student loans will vary depending on which lender you choose and your situation. In general, though, it typically takes a few weeks to complete from start to finish.

One way to speed up the process is to submit any necessary documentation promptly. Some of the documents you may be asked to provide include:

• Recent pay stub or another form of proof of employment and income

• Tax returns (if self-employed)

• Government-issued photo identification

• Most recent billing statement or payoff letter for each loan

• Bank account information

Frequently asked questions

Is it hard to get student loans refinanced?

The process for refinancing student loans is pretty straightforward. However, you'll typically need stellar credit and a high income to qualify for the lowest rates refinance lenders have to offer. If you don't meet those criteria, you may need a co-signer who does to improve your odds.

What are the pros and cons of student loan refinancing?

Refinancing your student loans can potentially help you save money through a lower interest rate or shorter repayment term. You can also simplify your repayment plan with one monthly payment instead of multiple payments, and if you need it, you can get more flexibility with your repayment term.

That said, there's no guarantee that you'll get better terms than what you already have. If you have federal student loans, you'll also lose access to several benefits and protections that aren't available with private lenders.

Is student loan refinancing right for me?

If you have private student loans, there aren't many downsides to refinancing them as long as you meet the requirements to get better terms. If you have federal student loans, however, it's important to consider both the benefits of refinancing and the significant drawbacks of losing access to federal loan benefits.

If your job and income are steady, you may not need federal protections for struggling borrowers. But if you don't want to risk losing them, consider the different repayment options offered through the Department of Education.