Student Loan Refinancing: How Does It Work?

7 min read

Posted on March 28, 2022

how does student loan refinance work

Post-graduation, there’s just so much to stay on top of financially: a home payment or monthly rent, utilities, credit card(s), groceries, car payments… There’s no doubt that it can be incredibly stressful trying to keep track of your student loan payments in addition to all this. Not to mention, it can be just as stressful trying to pay your student debt back.

Thankfully, there are many options for student loans on the market — no matter if you have private loans, federal loans or a combination of the two.

Student loan refinancing may be a great way to manage your student loan debt. It can lead to lower interest rates, lower monthly payments and/or a lower total cost of your loan.

But how does refinancing student loans work? We’ll provide an overview of what exactly student loan refinancing is, how to refinance student loans and how refinancing can help simplify your personal finances.

Student Loan Refinancing: How The Process Works

Before getting into the potential benefits of refinancing student loans, it’s worth providing a brief overview of the student loan refinance process.

Simply put, refinancing your education loans is the process of applying for and receiving a new loan that pays off and replaces one or more existing student loans with a new loan, potentially with a new interest rate and new loan terms.

Additionally, refinancing private student loans is only available through private lenders. You can consolidate federal government loans through a direct consolidation loan – but that will not address private student loans.

You can, however, refinance federal student loans through a private lender.

Refinancing can potentially allow borrowers to save money on their monthly payments and lower the amount of accrued interest over the life of the loan. However, the refinancing process looks a little bit different for each borrower — it all depends on what type of loans you have (federal vs. private). Let’s discuss some of the key differences in the refinancing process.

Refinancing Federal Student Loans

Consolidating federal student loans through the government is a little different than using private lenders for refinancing. Federal student loan borrowers do have options, though.

To save on federal loans, your current loans received from the federal government can be consolidated to their average interest rate through a direct consolidation loan.

This will combine all of your existing federal loans into one loan. However, the federal government has limited flexibility, as these loans will be combined into one with a fixed interest rate based on the weighted average interest rate of your federal loans being consolidated.

Alternatively you can refinance your federal student loans through a private lender.

But keep in mind that once you refinance your federal loans with a private lender, you will no longer qualify for any federal repayment plans or the Public Service Loan Forgiveness Program.

Instead of refinancing federal student loans, you could consider pursuing any one of the many federal loan protections such as income-driven repayment, forbearance, deferments or qualified loan forgiveness.

Refinancing Private Student Loans

The refinancing process for private student loans can be straightforward. This is because the original loans from private lenders that you secured for college may have higher interest rates and very few benefits.

Benefits of Student Loan Refinancing

Student loan refinancing has positive benefits for borrowers that could potentially save them money in the long run. With all those aforementioned financial responsibilities above, the opportunity to save a little bit through refinancing could be worth exploring.

The perks of refinancing your student loans could include:

  • New Repayment Terms: When you refinance your loans, you may have the option to set new repayment terms. That could help you with debt management and your personal financial goals. You may have the option to shorten or lengthen the loan terms based on what’s offered by your chosen lender.
  • Better Interest Rates: You may also secure better interest rates on your loans through refinancing. Since you may be in a better financial situation a few years out of college, you may qualify for lower rates. This can help lower the total interest you will accrue throughout the life of your loans.
  • Lower Monthly Payments: Many people choose to refinance their loans to lower their monthly student loan payments. This can help free up room in your budget every month for other expenses.
  • Autopay Discounts: Many private lenders will offer discounts if you sign up for automatic payments. If you qualify for refinancing, you may be able to get a 0.25 percent discount on your interest rate.

On the other hand, while student loan refinancing does have a lot of benefits and perks, it also has some important drawbacks to keep in mind. Let’s discuss below.

Potential Drawbacks

As mentioned above, there are potential benefits to refinancing your loans, but there are also a few drawbacks that need to be mentioned. In some instances, these drawbacks could even do your finances more harm than good.

These drawbacks of student loan refinancing include:

  • No Longer Qualify for Federal Loan Programs: If you have federal loans, the Department of Education offers many programs to assist with loan repayment, including income-driven repayment plans and student loan forgiveness programs. If you refinance your loans through a private lender, you may no longer qualify for these programs.
  • Face Potential Fees: If you refinance your loans, there could be some fees associated. Some lenders will include prepayment penalties and loan origination fees on refinancing terms.

These drawbacks may be a dealbreaker for some people considering student loan refinance, as they may sometimes outweigh the benefits. Before hopping directly into loan applications, you should carefully consider what options are best for you and your financial situation.

Eligibility Requirements for Student Loan Refinancing

While student loan refinancing does have a lot of enticing benefits, there are some eligibility requirements that you should consider before applying. The last thing you want to do is spend the time and energy applying, only to discover that your application is rejected simply based on the eligibility requirements.

Some of the qualifying eligibility requirements include:

  • A good debt to income ratio: When it comes to refinancing student loans, many lenders will not approve a private student loan if your debt-to-income ratio for all debt payments is over 50%, but some may go as high as 65%.
  • A good to excellent credit score: A higher score may make it easier to qualify for a loan and may result in a better interest rate. Most credit scores range from 300-850, according to the Consumer Financial Protection Bureau.
  • History of making on-time payments: Autopay can help you make these on-time payments and ultimately aid in keeping you on top of your payments.
  • A cosigner if you do not have good credit: If your finances are not strong enough to stand on their own, some student loan refinancers will allow you to bring in a cosigner to qualify for refinancing.

Lenders will also perform a hard credit inquiry to determine your eligibility and creditworthiness for their refinancing programs. Your application approval will depend on a variety of factors, including term of loan, financial history, income and other factors. As such, many people wait until they have good to excellent credit to apply for student loan refinancing.

Reasons To Refinance Student Loans

Beyond the several benefits outlined above, it’s worth talking about some of the real-world reasons why you might want to refinance your student loans.

These range from personal reasons to nationwide economic factors, but one thing remains true across the board: there are some very practical reasons for pursuing a refinance beyond just wanting to improve your payment terms and interest rates.

Some other reasons to refinance your student loans may include:

  • Cosigner Release: When you took out your student loans, it’s possible that your private lender asked you for a cosigner to be eligible for funds. Now that you’re out of school, and you potentially have a better credit history and sturdier finances, you may be interested in refinancing for a cosigner release. This would get your cosigner off your loan and put it entirely in your hands instead.
  • Improved Credit Score: If your credit score has improved since taking out your student loans, it may be worth looking into refinancing so your new loan can reflect that new and improved credit score. An improved credit score also may make you a more qualified borrower for other financial products, such as auto loans.
  • Better Interest Rates: During period of federal student loan forbearance and deferment, private student loan refinance rates have reached record lows. It’s not a bad idea to refinance your private student loans before the fed raises rates and federal student loan forbearance ends, so you can take advantage of the lower interest rates being offered.

In the end, the choice to refinance is yours — with that being said, there are all sorts of reasons to make that choice to refinance. Of course, there are also a few instances where refinancing might not be advisable.

Reasons Not to Refinance

Refinancing can be a great option. However, there are a select few instances where refinancing might not be the best choice for you and your personal finances. These include:

  • An Impending Loss or Decrease in Income: If you expect to see a sudden drop in your usual income, refinancing could do more harm than good. This is because a decreased income could bring you some federal student loan relief options, and refinancing could end up squandering that by making you ineligible for those repayment options (such as income-driven relief)..
  • You’re Interested in Student Loan Forgiveness: As with government repayment options, refinancing could hurt your chances at student loan forgiveness options. This is because refinancing federal student loans into private student loans makes them no longer eligible for federal benefits.
  • You Have Declared (or Plan to Declare) Bankruptcy: Refinancing student loans after declaring bankruptcy isn’t necessarily impossible, but it’s going to be a whole lot harder for you to refinance in this specific scenario. Some lenders even require anywhere from four to 10 years post-bankruptcy before you can even begin the refinancing process.

Throughout this guide, it’s clear to see that refinancing could be a positive and helpful option for student loan borrowers. However, these few qualifications are a good reminder that you need to think carefully about refinancing before you dive in.

Frequently Asked Questions

What type of loans qualify for refinancing?

All student loans qualify for refinancing. This includes private loans, Parent PLUS Loans and all federal student loans.

What is a fixed interest rate vs. a variable interest rate on a refinanced loan?

The difference between a fixed interest rate and a variable interest rate on a refinanced loan is this: a fixed interest rate on a loan is when the rate stays the same throughout the loan term. Variable interest rates have an interest rate that can change throughout the loan term.

Should I refinance my student loans with a personal loan?

Refinancing student loans with a personal loan is possible, but many lenders prohibit using personal loans to pay off student loan debt. You may have the option to pay off your student loans with a personal loan, but refinancing with a student loan could help save you more money in the long run. Do your homework on what is right for you.

Check Out Student Loan Refinance Rates With Splash Financial

There are several benefits to student loan refinancing — such as new repayment terms, better interest rates, lower monthly payments and autopay discounts — and several drawbacks — such as no longer being able to qualify for federal loan programs and related protections — but all in all, you’ve learned that refinancing student loans is a plan to consider.

Student loan refinancing is oneoption for both private and federal student loan debt. If you’re interested in refinancing your student loans, explore today’s current rates through Splash Financial and decide if it’s the right option for you.


The information provided in this blog post is not intended to provide legal, financial or tax advice. We recommend consulting with a financial adviser before making a major financial decision.

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