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Understanding student loan refinancing—and whether it’s an option worth considering

December 2, 2022, 3:10 PM UTC
Photo illustration of a graduation cap with a calculator screen on it on a red and green background.
Average refinancing rates for private lenders can range from 2% to 12%.
Photo illustration by Victoria Ellis/Fortune; Original photo by Getty Images

If your student loan payments seem to get the better of your bank account each month, it may be time to consider a new repayment strategy. 

According to the latest data from the Federal Reserve, 12% of borrowers were behind on their student loan payments in 2021. The student loan moratorium brought some much-needed relief to federal borrowers, but private borrowers were left out of the mix. And the moratorium will eventually expire. 

For those who are worried about being able to repay their student loans, refinancing could help them make their debt repayment journey a bit more manageable. 

What is student loan refinancing? 

Student loan refinancing is when you secure a new loan, with more favorable terms, to pay off your student debt. Why do some borrowers go this route? Because it can lower your interest rate and your monthly payments, and possibly help you pay off your debt faster. If you have multiple student loans, it can also help you simplify your payment by consolidating your debt into one monthly payment. 

Average refinancing rates for private lenders can range from 2% to 12%, according to the Education Data Initiative. Say you owe $30,000 to your student loan servicer and your current interest rate is 9.5%. Your monthly payment would come out to about $500 for the next decade. Refinancing your loan to a loan with the same 10-year term at a 4.5% interest rate would lower your monthly payment to $311, and save you $22,700 in interest over the life of your loan. 

When does it make sense to refinance your student loans?

There are instances when you could stand to benefit from refinancing your student debt. But it’s important to remember that this will largely depend on your financial circumstances, the terms and interest rates on your student loans, as well as the kind of student loan(s) you have (private or federal). 

“The first thing borrowers and their families should do is take stock of how many student loans they have, what their total debt owed is, and what their timeline of repayment looks like,” says Chris Ebeling, Head of Student Lending at Citizens. “On average, college graduates come out with six loans. If you have federal loans, it’s important to check what type of federal loans they are; refinancing may not make sense with certain federal loans that are eligible for forgiveness programs or income-driven repayment plans.” 

You might consider refinancing if… 

  1. Your monthly payment is unmanageable: Depending on your interest rate(s), your student loan payment could take a huge chunk of your monthly budget. If it feels like your payments are interfering with your ability to cover your basic expenses, save for retirement, or hit your other financial goals, you may want to do some research and figure out if you can secure a lower rate and lower monthly payment by refinancing. 
  1. You could save a significant amount over the life of your loan: Your interest rate will determine how much you’ll pay in interest over the life of your loan, on top of the principal amount you borrowed. A higher interest rate could translate to thousands in interest over the course of just a few years. 
  1. Your student loans have variable interest rates: If you have federal student loans, you only have the option to select a fixed nterest rate. However, private student loan borrowers can choose between a fixed interest rate and a variable interest rate that will fluctuate over the course of their loan term. A variable APR can save you money if you secure the loan when rates are low, but it could also end up costing you down the line if things change for the worse. In these cases, refinancing and securing a fixed rate could help you save. 
  1. Your finances have improved and you can secure a better rate: If your financial circumstances have improved since you applied for your original loan—say, your income has increased or your credit score has improved—you may be able to secure a loan with a lower interest rate by refinancing. 
  1. You’re not eligible for forgiveness or income-based repayment: Depending on your loan type, refinancing could help you or it could strip away some of the protections that other loan types offer. For private student loan borrowers who don’t qualify for the same protections, relief programs, or income-based repayment plans as federal borrowers, refinancing could help make payments more manageable. 

Pros and cons of refinancing your student debt 

Refinancing student debt may not be the best solution for every borrower. While it could be one way to save money now, it could end up costing you more over time. 

“Private refinance loans offer a standard or level repayment plan that is designed for you to make equal payments and pay off debt based on the term of the loan,” says Ebeling. “You should take into account what you are trying to achieve with a repayment plan—such as seeking the fastest repayment plan to save longer-term interest charges or achieving a lower monthly payment, which comes with an overall aggregate higher interest cost.” 

When deciding if refinancing is the right move for you, think about your short- and long-term goals and how refinancing might help you achieve them. You’ll also want to consider the following pros and cons:

Pro: You may be able to secure a lower interest rate. On average, these rates can go as low as 2% or 3% for fixed-rate loans, which is a significant decrease from the average 5% to 8% rates for federal borrowers. “Often, refinancing a loan can help you lower your interest rate, monthly payment, or both, and can simplify multiple loans into one, while potentially changing the loan term or possibly removing a cosigner,” says Ebeling. 

Pro: You can consolidate all of your payments into one. If you have multiple student loans and work with more than one student loan servicer, your monthly payments could become difficult to keep track of. Refinancing is one way to help simplify your payments and even work with a new servicer if you’re not a fan of your current servicer(s). 

Con: You may lose federal protections if you refinance your federal loans. Federal borrowers should think carefully about refinancing because it would mean sacrificing federal protections that could be beneficial for them at some point during repayment. Federal borrowers have access to certain debt relief programs and income-based repayment plans that private borrowers do not. 

Con: It could take you longer to pay down your debt. Refinancing to a lower interest rate could lower your monthly payment, but it could also extend the amount of time it takes you to hit zero on your student loan balances. 

The takeaway 

If you’re on the fence about whether refinancing is the right move for you, do some research to figure out what kinds of interest rates you may qualify for and how much you could potentially save on a monthly basis, as well as over your loan’s terms. Consider what you may have to sacrifice and if switching to a new loan with better terms makes the most sense for you and your financial goals.

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