If you have student loans with a high interest rate, refinancing them into a new loan with a lower rate could help you save money. With rates currently hovering at high levels, does it make sense to refinance right now?
"Interest rates are at their highest right now, but if you can qualify for a lower interest rate, go for it," says financial aid expert and CNET expert review board member, Mark Kantrowitz.Â
Refinancing your student loans can also be beneficial if you want to accomplish another goal, such as releasing a cosigner. It's important to consider both the benefits and potential downsides of student loan refinancing before you make a move.Â
With interest rates expected to drop this fall, here's how to decide if refinancing can save you money on your student loan payments.
What is student loan refinancing?Â
When you refinance student loans, you trade in one or more of your current student loans for a new loan with adjusted terms. If you have a good credit score, you might qualify for a better interest rate than you have now, which could result in significant savings.Â
You can refinance your student loans with private lenders, such as banks, credit unions and online loan providers. Each lender sets its own rates, terms and requirements, so it's worth comparing offers from multiple lenders to find the best deal.Â
"Each lender uses a unique algorithm to evaluate applicants," says Michael Lux, attorney and founder of The Student Loan Sherpa. "The key to getting the best deal on a refinance is to shop around and check rates with many different lenders."Â
Although refinancing could save you money, most excerpts warn against refinancing federal student loans with a private lender. When you do this, you'll lose federal loan benefits, such as access to forgiveness, income-driven repayment plans, payment pauses and more.
When should you refinance your student loans?
In general, it can make sense to refinance private student loans if you can lock in a lower interest rate. Qualifying for a lower interest rate could save you hundreds or even thousands of dollars over the life of your loans. For example, if you reduced your rate from 10% to 7% on a 10-year, $30,000 loan, you'd save nearly $5,800 on interest charges.Â
There are other scenarios when refinancing may make sense, even if your rate stays the same.Â
You want to change your repayment terms
You can also select new repayment terms for your refinanced student loan, typically between five and 20 years. A shorter term could help you get out of debt faster, while a longer term could result in more affordable monthly payments.Â
You have multiple loans you want to consolidate
If you refinance multiple loans, you can pay back a new, single loan with one payment due date. This opportunity to combine loans can help simplify debt and make it easier to track your repayment progress.Â
You want to switch from a variable to a fixed rate
When you refinance, you can usually choose between a fixed or variable interest rate. If your current variable rate has been rising over the past few years, you may appreciate the opportunity to switch to a fixed rate.Â
You want to release a cosigner
If you borrowed a private student loan for college, you might have applied with a cosigner, such as a parent. But if you can qualify to refinance student loans on your own, you can release that cosigner from responsibility for your debt.Â
When shouldn't you refinance your student loans
Refinancing could save you money on your student loans, it bears repeating that it rarely makes sense to refinance a federal student loan with a private lender. If you do, you forfeit eligibility for federal repayment plans and other protections. Your new refinanced loan wouldn't qualify for federal income-driven repayment plans, federal forgiveness programs, forbearance or deferment, for example. Â
"It's almost never a good idea to refinance federal loans into private as it means permanently losing all the safety nets and lower payment options federal loans provide," says Betsy Mayotte, president and founder of The Institute of Student Loan Advisors. "I've seen too many borrowers do that, only to have a financial crisis in the future and not have any options for their loans."
If you have private loans and decide to refinance to lower your monthly payment, stretching out your repayment timeline could cost you more in interest in the long run. You also may not be able to refinance and lock in a lower rate unless you meet the lender's requirements, which include an acceptable credit score, income and debt-to-income ratio. Borrowers with weak credit may be able to qualify or get a better rate by applying with a cosigner.Â
Lenders have sneaky fees you'll want to watch out for when refinancing. Even if you qualify for a lower interest rate, hidden fees could end up costing you more. Do the math to make sure paying any required fees will still save you money.
Is now a good time to refinance?Â
Typically, the best time to refinance student loans is when rates are low. Rates reached all-time lows in 2021 but have increased since March 2022, when the Federal Reserve began hiking the federal funds rate to combat inflation.Â
Today, the average student loan rate is 7.23% for 10-year fixed-rate loans and 6.80% for five-year, variable-rate loans, according to an analysis done by student loan marketplace Credible, based on borrowers with a credit score of 720 or higher.Â
If your current student loan rate is higher than that, refinancing your loans could result in savings. If refinancing would cause your rate to increase — or make you lose eligibility for federal benefits — then refinancing student loans may not make sense right now.Â
Many lenders let you check your rates online through prequalification, a quick process that won't impact your score. Prequalifying with multiple lenders can help you determine whether student loan refinancing would make sense for you, as well as help you root out the best offer.
