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Key takeaways
- Refinancing student loans can reduce your monthly payment, giving you more room in your budget.
- The Federal Reserve cut interest rates three times in 2024, which could lead to lower refinance rates this year.
- Understand the benefits of federal student loans, and weigh the pros and cons before refinancing. You could lose federal loan benefits and protection if you replace your federal loans with private student loans.
Refinancing student loans can be a great way to lower your interest rate and monthly payment if you’re struggling to manage your current student loan balance. Combining multiple loans into a single loan also simplifies your budget.
There are some drawbacks to refinancing student loans. Since the process usually involves replacing federal loans with private loans, the lower rates you could get through refinancing may not outweigh the payment flexibility and other benefits of federal loans.
Weighing the pros and cons of student loan refinancing can help you decide if it’s the right choice for you.
The future of student loan forgiveness programs under the Trump administration
With student loan forgiveness in question, refinancing may be a good option to help borrowers manage loans and save money. If you aren’t making a payment now, or your payment is $0, contact your lender to stay up-to-date on your repayment options and responsibility. If a large payment increase is in your future, check out student loan refinancing options.
Pros of student loan refinancing
You can save money with a lower interest rate
The primary goal of most student loan refinancing is to lower your interest rate and payment. If you took out a federal student loan last year, your rate may be between 6.53 and 9.08 percent, significantly higher than rates in the 4.5 percent range offered by many private student loan lenders.
A lower rate also saves you interest over the life of the loan, which could amount to thousands of dollars of savings on a 10- or 15-year loan term. Most lenders offer prequalification, so you can review options without impacting your credit score.
You can lower your monthly payment by choosing a longer term
If you’re finding it difficult to make payments on 10- or 15-year terms, consider a longer term, such as 20 years. A longer term lowers your payment, giving you more room in your budget if you’re just getting started in the workforce at entry-level salaries.
You can always make extra payments as your income rises, since student loans don’t typically have a prepayment penalty. But, use longer terms as a last resort to saving money on the loan. The total amount you repay will increase due to the extra interest accumulated over the life of the loan.
Use a student loan calculator to see how the total interest figures change with different terms.
You could replace several payments with just one
Keeping track of multiple student loan payments can be difficult, especially if your loans are transferred to new servicers with different payment processes. Refinancing involves consolidating multiple loans into one loan with a single payment and one loan servicer, making it much easier to stay on top of your monthly payments. Having one payment also reduces the odds of accidentally missing a payment, which is more likely if you have several student loans to manage.
Learn more about the difference between private and federal student loans to make an informed decision about refinancing.
Bankrate tip
Take advantage of lender prequalification to shop and compare refinance loans without impacting your credit score. When you are ready to apply, the lender will do a hard credit check, lowering your credit score by a few points.
Cons of student loan refinancing
You could lose federal benefits and protection
Private student loans don’t carry the same benefits as federal student loans do. You won’t be eligible for features like income-driven repayment, closed school discharge, total and permanent disability discharge and borrower defense to repayment.
The U.S. Department of Education also offers hardship payment relief — temporary deferment and forbearance periods — to all federal borrowers, which can help reduce the risk of defaulting on your balance if you fall on difficult financial times. Although private lenders may offer some extended repayment and relief options, they usually aren’t as flexible as federal student loan relief.
You’ll need excellent credit for the lowest rates
The lowest student loan refinance rates go to borrowers with excellent credit. Rates may be in the double-digits if you have fair or bad credit.
Federal student loan rates are the same regardless of your credit score. If you have a credit score under 650, it may not make sense to refinance to a private student loan.
You need a steady income and a low debt ratio to qualify
Most lenders require proof of employment and steady income of around $20,000 per year. Salaried income or full-time hourly work is likely to lead to an easier approval.
You’ll also need a relatively low debt-to-income ratio (DTI), between 30 and 36 percent. You can measure this by dividing your total debt by your before-tax income. If you can’t meet these standards, you might need someone with a good credit score, solid income and low DTI to co-sign for you.
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