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What Is Refinancing Student Loans, Really?
Refinancing is a way to decrease the amount of interest you pay on your student loans.
Cecilia Clark Lead Writer/Spokesperson | Education financing products, Veteran's benefits, Student and graduate finances
Cecilia Clark is a writer and spokesperson on the education team. She covers student loan refinance and manages product reviews and roundups. Previously, she worked as a freelance writer and developed communications strategies for cybersecurity firms. Cecilia has also worked in post-secondary education, elevator operations management and sales and military nuclear command control, maintenance management and public affairs.
Kirsten VerHaar is an editor for personal finance, with an English literature degree from the University of Colorado Boulder. In her previous roles, she was a lead editor with eBay, where she managed a team of writers who produced coverage for the site's global content team. She has also written for Yahoo. Since joining NerdWallet in 2015, she has covered topics as wide-ranging as vacuums (yes, really), budgeting and Black Friday.
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In a nutshell, student loan refinancing is when a private lender pays off your existing loans and gives you a new loan with new terms. It usually costs nothing to refinance student loans, and you can save a lot over time by lowering your interest rate.
Get accurate refinance options in just 2 minutes with Credible
Compare pre-qualified rates from multiple lenders with no impact to your credit score.
Let’s say you have $40,000 in private student loans with an 8% interest rate. That means you’re paying $485.31 every month for the next decade.
After applying with a private lender that offers student loan refinancing, you're approved for a lower interest rate — say 5%. That would reduce the monthly payments on your $40,000 loan to $424.26.
This would ultimately save you a total of $7,326 in interest.
Estimate your potential savings with our student loan refinance calculator
Note: This calculator assumes that after you refinance, you’ll make minimum monthly payments.
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Not everyone can refinance student loans — and many borrowers shouldn't. Refinance companies use certain criteria to evaluate your eligibility. Generally, you need good credit (in the high 600s or above) and a stable income. If you’re lacking either, you’ll need a co-signer who qualifies.
And think of the length of your loan term when considering refinance. If you’re already halfway into paying off a 10-year loan and refinancing would only add more time to your loan term, it may not benefit you in the long run even if your monthly payment is lower.
It can make sense to refinance as soon as you're eligible. That will maximize your potential savings. If you’ve started working and have built up your credit, see what kind of rate you can qualify for.
If you previously refinanced your loans, you can refinance again to lock down an even lower rate.
Here are a few more things to keep in mind before you apply:
There are a few caveats if you refinance federal (versus private) loans. Payments on federally held student loans are paused interest-free through Aug. 31, 2022, as part of relief efforts due to the coronavirus. You will give up this benefit by refinancing your federal loans.
Compare offers from multiple lenders. Get interest rates from different companies to identify the lowest one. Generally speaking, the better your credit score, the better the rate will be.
There’s no catch. Refinancing isn't a scam. We’ve even compiled the best student loan refinance companies across multiple categories, along with the pros and cons.