Should I Refinance My Student Loans?

You can save thousands when you refinance student loans, but it isn't for everyone. We weigh all the pros and cons of student loan refinancing here!

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It’s no secret that student loan debt is on the rise. Americans now owe nearly $1.7 trillion in student loan debt – and, yes, that is trillion with a “T.” Ouch.

If you’re one of the 44 million Americans with student loan debt hanging around your neck, you may be wondering if there is a way to save on your student loan payments? Of course there is! Refinancing your student loans might be an excellent way to save thousands. Unfortunately, many graduates don’t realize this option even exists.

Don’t worry, y’all. We’ve got your back. Whether you have private student loans or federally funded loans, we’re here to tackle student loan refinancing head-on. Let’s cut through the noise and learn whether refinancing your student loan debt is the right money move for you!

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What is Student Loan Refinancing?

Refinancing your student loans could be a great way to save thousands over the life of your loan. Consolidating and refinancing are two ways to achieve this, although they’re not exactly the same thing.

Consolidating generally refers to combining all (or some) of your federal student loans through a federal student loan consolidation program. So, if you have a $10,000 federal loan and a $5,000 federal loan, both would be combined into a single new loan totaling $15,000. This is called a Federal Direct Consolidation Loan.

Using a Federal Direct Consolidation Loan will also change your interest rate…sorta. Your new interest rate becomes the weighted average of the interest rates from your original loans. For example, if the $10,000 loan has an interest rate of 6.80% and the $5,000 loan is at 4.66%, the total $15,000 consolidated loan would have an interest rate of 6.125%. Capiche?

Refinancing student loans is similar to consolidating in that your loans are combined into one new payment. Rather than using a weighted average of your old loans’ rates, the new (private) lender determines your interest rate based on your creditworthiness. So, if you have excellent credit, you might qualify for an interest rate that is much lower than what you had on your original loans. That rate is then applied to the entire loan.

Using the same example as above, you may be able to refinance the entire $15,000 for much less than the 6.125% offered through a federal consolidation loan. For example, many private lenders are currently offering fixed rates starting below 3%.

Why Should I Refinance My Student Loans?

If you have student loan debt, refinancing is an option you should at least consider. Here are a few excellent reasons to refinance student loans:

  • Ease of Payment – Refinancing student loans makes paying them back a lot easier. Rather than writing checks for a dozen different loans, you can refinance the whole shebang into one easy payment – which is very attractive.
  • Save Money on Interest – If you’re able to refinance your student loans into a lower interest rate, this could be a great move! Refinancing to a lower rate could save you thousands over the life of your loan.
  • Lower Monthly Payments – If you’re strapped for cash, refinancing your student loans could potentially lower your monthly payments. By changing the terms of your loans – either the length, the interest rate, or both – you could easily give your monthly budget a little more wiggle room.
  • Shorten or Lengthen Your Term – As previously suggested, you can refinance student loans in a way that changes the length of your loan. Generally, if you lengthen the terms, you’ll pay a higher interest rate but your monthly payment may decrease. If you shorten the terms of your loan, you may be able to save by decreasing your interest rate while increasing your monthly payment amount.
  • Change the Type of Interest Rate – Refinancing your student loans can help you move from a variable interest rate to a fixed rate, or vice versa. Keep in mind that variable rates will likely be lower than fixed rates, but you’re betting that you’ll pay it off before the rate rises. Fixed rates are generally higher, but they give you the security of knowing that your rate will never rise above the current rate.

Reasons Not to Refinance Student Loans

Although refinancing your student loans could potentially save you thousands, it may not be the right decision for everybody. Here are some things you must consider before deciding to refinance.

Federal Loan Considerations

Before refinancing your student loans through a private lender, you must consider whether you’ll lose certain federal protections and repayment options. Federal loans provide some borrowers with “loan forgiveness” options and are typically handled by a servicing company called – appropriately – FedLoan. Because of this, teachers and certain public servants should be particularly cautious that refinancing makes sense for them.

Federal loans may also allow income-based repayment options for low-income borrowers. Additionally, federal loans allow borrowers to defer their payments should they experience financial hardships. Through most private student loan refinancing companies, these protections and options are lost.

Credit Score Problems

If your credit score has decreased significantly since the time you originally applied for your loans, refinancing may not be a good option. Since most private lenders determine your interest rate based on your creditworthiness, a significant reduction in your credit score makes it difficult to qualify for interest rates better than those you already have. Rather than refinancing your student loans, you may want to consider a direct loan consolidation instead.

See Also: How to Get a Free Credit Score

Temporary Federal Forbearance

In response to the coronavirus pandemic, interest payments on federal student loans have been waived through September 30, 2021.

It’s important to understand that this applies to federally held student loans only and may not apply to your private student loans. So, while it might make sense to do nothing with your federal loans at the moment, refinancing any private loans should definitely be considered – especially considering the current low rates.

Also, keep in mind this is a temporary suspension on payments, not forgiveness of your loans. You still owe the amount you owe. Borrowers may also continue to make payments on your loans if you wish. Check with your student loan provider for more information.

Will I Save Money?

Rates for student loan refinancing are currently at record lows. This can potentially save you money, but that isn’t always the case. If you’ve already locked in at low rates or your credit has gotten significantly worse, you might not save money at all.

Keeping in mind that you may lose the special privileges mentioned above, some private lenders offer rates significantly lower than what you may already have. Over the life of your loan, that could mean saving thousands of dollars in interest. Be sure to calculate your savings prior to making any decisions on whether or not to refinance your student loans.

Where to Refinance Student Loans

With so many student loan companies to choose from, where do you even start? The sheer number of companies offering refinancing can seem downright overwhelming.

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Credible helps ease the burden. Here, you can compare rates from multiple lenders all at once. Checking your rates is fast, free, and easy. It won’t hurt your credit score either. Plus, they are so confident you’ll find the lowest rate that they offer a $200 “Best Rate Guarantee” (terms apply).

Compare rates with Credible | Read our Credible review

The Bottom Line

You can save thousands of dollars when you refinance student loans, but it isn't for everyone. We weigh the pros and cons of student loan refinancing here!

Refinancing your student loans can be a great way to save a lot of money. Keep in mind, however, that a private refinance isn’t right for everybody. Before refinancing, be sure to weigh any savings with the potential loss of special privileges offered through federal loans. By refinancing your student loans the right way, you may be able to save yourself thousands!

Compare Student Loan Refinancing Rates for Free – In less than two minutes, you can compare rates from multiple lenders at Credible. It’s fast, easy, and free. See if Credible can help you save here!

Read Next >> Comparing the Best Student Loan Refinancing Rates This Month

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  1. Great review! We have student loan debt, but we are in turbo mode on our repayment right now. We decided not to worry about refinancing since we are on track to have the debt gone by next summer. Our interest rates are low anyway. But I can see how refinancing could make sense for some people if you have a high interest rate and a lot of debt.

    1. If you are going to pay them off within a year, most people probably don’t need to refi. Unfortunately, that doesn’t happen for the vast majority of borrowers. So, then you have to carefully weight your options to make sure that a refinance actually makes financial sense.

  2. Great review of student loan refinancing!

    I am a huge fan of refinancing student loans….if certain conditions apply.
    1. You are a victim of that ridiculous 6.8% interest rate on unsubsidized loans (or worse, the over 8% on grad plus loans that were offered in 2008!)
    2. You know you will pay that sucker off. Every month. Without missing a payment.
    3. The financing company will allow you to prepay your principle without penalty.

    I would not have qualified for loan forgiveness under the current federal plan, in spite of working in health care- and I don’t qualify for any tax benefits for paying student loan interest- if you fall under one of those categories, you may have more reasons to stay in your original payment plan….

    1. Thanks Mrs. C! Personally, I’ll never sign a loan that charges me a penalty for prepaying. That is just ridonkulous!

  3. This is a little random, but if you have private student loans, are they bankruptable?

    1. Keep in mind that I’m not an attorney, but here’s the deal to the best of my knowledge. Both private and federal student loans are treated equally when it comes to bankruptcy. However, it is a bit of a myth that student loans can not be discharged through bankruptcy. They can be. It is just extremely difficult to discharge them because they must meet a higher standard of need than other debts. You have to prove that paying them would cause you “undue hardship” – which is extremely tough to prove.

  4. I love how carefully you outline both sides of this. I think people hear about refinancing and sometimes make quick decisions. Having a resource like this that goes more in-depth is great!

    1. Thanks Penny! I think it is super important that people know what they could potentially be giving up. On one hand, refinancing makes a lot of sense for many people. On the other, it could potentially cost you a lot of money if you qualify for some of the federal benefits.

  5. I consolidated mine after I finished grad school. It seemed like people were always calling back then to get you to consolidate with them.

    1. I did a federal direct consolidation. If I recall, the interest rates on the student loans were much better than those being offered by the banks at the time. Now, you might be able to find a better deal through a private refinance.

  6. Great post on the pros and cons. If I wasn’t planning to apply for PSLF I would refinance.

  7. What an informative review for people to understand consolidating their student debt.
    Student loans can be so draining, paying them monthly and not feeling like you are getting anywhere is so discouraging. This is a great review to read before making a decision to refinance. Thank you for this post!

  8. After reading your post, I think refinancing student loans is beneficial considering all those pros you detailed above. And, I just wish I had known this earlier I would have done it, but I just finished paying my student loan two years ago.

  9. I think for anyone with over $30,000 in student loan debt that they always need to contemplate the pros and cons of refinancing. Just like it doesn’t always make sense for your home, it may not always make sense for your student loans, but it doesn’t mean you shouldn’t go through the process of analyzing and figuring out if it’s right for you.

  10. I never thought about refinancing my loans before since the interest is pretty low. I’m also concerned about my credit if I refinance since I’m still building it up. But if my payments ever become to much or I see room for savings, it’s nice to know that I can consider consolidating my Federal loans since they all have various different interest rates.

    1. Right on. If you want to get a lower rate, you’ll pretty much need to do a refi rather than a consolidation, though. The federal consolidations basically just lump all of your loans into one loan at a weighted interest rate. Presuming you’re paying them all off at the same time, you basically will be paying the same rate. A refi will still consolidate those loans, but you may also be able to actually lower your rate. Of course, you’ll probably lose the protections and benefits granted that we mentioned in the piece.

  11. Excellent overview, Greg! We have a post planned like this in December, but it’s going to be hard to even compare to a great overview like this.

    I’ve been looking really closely at SoFi and have emailed a bit with some of their staff. We have loans in the 4-8% range from undergrad and a few new ones from grad school. Instead of paying down our loans we’ve been putting any extra money towards our retirement funds and a little towards individual stocks. We are both thinking this could have a lot more upside than the psychological benefits of clearing out our student loans. If we can refinance everything at a rate like 4% (fixed) it will solidify our commitment to throwing money into retirement accounts instead of aggressively paying down debt. It will end up falling in the same class as our current mortgage, which is at 3.5% – why would I pay that down any faster than I have to?

  12. This is a great find for me. I have a ton of student loan debt and I didn’t know if I had any options when it comes time to pay it off. Thanks for clarifying everything!

  13. I consolidated my loans a few years back and didn’t realize I was giving up the federal benefits. I was so excited when they suspended the payments and interest last year due to Covid because I was in a position where I could continue to make my payments and I thought I could knock them out so much quicker but alas, I discovered my loans didn’t qualify. My son graduated college in the middle of the pandemic though so it’s still been a good lesson for us to not jump into refinancing his loans too quickly.

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