Refinancing student loans: a complete guide


The average student loan debt balance as of 2022 was $40,780, according to the Education Data Initiative, and often that debt is made up of multiple loans, including both federal and private loans. 

Keeping abreast of several student loan payments each month can be challenging at best, and in such situations, refinancing may be a wise step. Not only will doing so streamline your debt, but in some cases may also lower your interest rate.

Before refinancing student loans, however, be sure you understand how best to navigate the process successfully. And more importantly, take the time to consider all of the ramifications of your choice—particularly if you’re considering refinancing federal student loans and may lose valuable benefits in the process. 

Why should you refinance your student loans?  

There are many reasons why you might want to refinance student loans, including saving money and simplifying your debt management efforts.

“The reason why most people refinance is to get a lower interest rate. If your credit has improved since you first took out the loan, you may be able to qualify for a better rate and save a significant amount of money,” explains debt relief attorney Leslie Tayne, founder of Tayne Law Group.

Refinancing and consolidating multiple loans will also reduce the number of payments you have to track and worry about each month. This in turn, can make it less likely that you’ll miss or forget to make a payment.

Yet another reason to refinance is to obtain new and potentially more favorable loan terms.

“For instance, if your income has dropped, you can refinance to a longer repayment period, which translates to lower monthly payments,” says Tayne. Though you’ll pay more in interest over time, this could be worth it if it means opening up more cash flow to cover your bills.”

When to think twice about refinancing

While there are indeed benefits associated with refinancing under the right circumstances, this move is not necessarily right for everyone. This is an important point. And it is particularly true for those holding federal student loans, as refinancing may result in losing a long list of valuable benefits. 

When refinancing federal student loans into private loans, for instance, you lose access to such valuable programs as forbearance and deferment, which allow you to pause payments when facing financial challenges.

You’ll also forfeit the opportunity to utilize income-driven repayment programs, which set monthly loan payments at a reasonable percentage of your income. Finally, federal student loans also offer the opportunity to earn forgiveness or discharge of the debt—particularly for those working in the government or nonprofit sector or other specific industries that are eligible for such forgiveness.

“If you’re worried about the potential of repaying the loans or the stability of your job, then you may want to consider holding off on refinancing so that you don’t miss out on these benefits,” says Jeff White, financial advisor with Saving for College, a platform that provides education surrounding student loan financing and refinancing. “Even the lowest interest rates aren’t going to be that appealing if you end up needing to postpone payments while you look for a new job.”

5 steps to navigate student loan refinancing

In order to make the most of student loan refinancing, it’s helpful to understand your total loan picture, take ample time shopping around for loan offers, and think through which of your loans make the most sense to refinance. These are just a few key moves that can make refinancing more truly beneficial. Here’s a closer look at these steps, and others, that should be part of your student loan refinancing journey.

1. Crunch the numbers

To truly understand how valuable refinancing may—or may not be—first sit down and crunch the numbers. Calculate how much you owe overall across all student loans and identify the critical details associated with each loan to help you comparison shop knowledgeably. This should include identifying the specific interest rate associated with each loan and reviewing each loan’s terms, which can help you understand which loans make the most sense to refinance.

You may also want to use a student loan refinancing calculator to determine how much refinancing at a new interest rate may save you over the life of your loan.

“If you’re thinking about refinancing or changing anything about the repayment of your student loans, then you should first make sure the move is right for you,” says White. “This means understanding how much you owe and how that could change over time with your current repayment terms and interest arrangements. You also need to understand your current balance, your interest rate, and your repayment terms.”

2. Assess your overall financial profile 

In addition to reviewing the details of your student loan agreements, take a step back and review your broader financial picture. This includes identifying your total current monthly income and checking your credit profile and credit scores.

You may also want to calculate your current debt-to-income ratio, which is the percentage of your monthly debt payments compared to your monthly income. It’s important to understand your DTI because lenders will consider this figure when reviewing your loan application.

3. Shop around for the lowest interest rate 

Once you’ve identified all the pertinent details of your existing student loan agreements and overall financial picture, it’s time to shop around for refinancing. You’ll want to take the time to explore other offers thoroughly and get the most competitive loan possible. This should involve comparing multiple lenders before making a decision.

“There are multiple options for refinancing, and it’s smart to check all options available before committing to refinancing,” says Zack Geist, CEO of Student Loan Tutor, a financial advisory company that provides custom student loan repayment strategies. “There are marketplaces and banks that specifically assist with student loans, so always check with multiple banks, credit unions, and institutions and shop around before making a decision.”

As you’re shopping around for the lowest interest rate and best loan terms, remember to also pay attention to loan fees, as they will play a role in the total cost of the loan as well. While many private lenders may offer a lower interest rate, they may seek to recoup that money in the form of large fees.

4. Consolidate multiple loans 

When pursuing student loan refinancing, saving on interest is typically just one of the goals. Refinancing also presents the opportunity for many borrowers to consolidate multiple debts. The benefit of this, of course, is making monthly debt management simpler. And by reducing the number of bills you need to manage, it’s less likely that a payment will fall through the cracks.

“The more debt payments you’re managing, the greater your chances of making a mistake,” says White. “Missing a payment or paying the wrong lender could wreak havoc on your credit. Plus, having multiple loans could end up costing you more as there are servicing fees, and the interest could end up being higher altogether than it would be if you refinance.”

Borrowers with multiple federal student loans can consolidate into a Direct Consolidation loan, which is also offered by the U.S. Department of Education. These loans offer a fixed interest rate that’s calculated based on the average of the interest rates on the loans being consolidated. A benefit of this approach is that there’s no application fee when applying for Direct Consolidation loans.

5. Don’t feel compelled to refinance all of your loans 

Finally, it’s important to bear in mind that you don’t have to refinance all of your student loans. Sometimes, it may make sense to only refinance those with the steepest interest rates or the least favorable terms.

And remember, refinancing federal student loans is often not the best choice.

“Refinancing is usually the last recommended solution for borrowers with federal student loans and only in certain instances,” says Geist. “Refinancing should be looked at for balances under $75,000 on federal student loans…or for borrowers that already have private student loans and are looking to get a lower interest rate. For those with federal student loans who have income-driven repayment plans, refinancing and paying the loans off in full is usually the most expensive route.”

The takeaway 

Refinancing student loans may offer benefits if you’re struggling to keep up with multiple monthly payments or have steep interest rates on your debt. But this move is not the best step for everyone—particularly those who have federal student loans and will lose valuable loan program benefits.

If you do choose to pursue refinancing, make sure you understand both your current student loan details and the terms of the refinancing offers you’re considering before making a decision to proceed. Use online student loan refinancing calculators to determine your total cost for both your existing loans and the refinance offers to determine the best option. If you’re still uncertain about how to proceed, consult a professional financial adviser who can help you make the right decision.