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Why you may want to refinance your student loans

Aug 25, 2022
Empower Insights

Refinancing student debt can be an effective way to save

When you signed on the dotted line for your student loans, you agreed to a slew of conditions — most importantly, that you’d pay off your debt over a certain period.

However, you may not be stuck with those exact loan terms forever, especially after President Joe Biden announced the U.S. government will forgive thousands of dollars in student loans. On August 24, 2022, Biden agreed to wipe out up to $20,000 of federal student loan debt for Pell Grant recipients and forgive $10,000 for other eligible borrowers.1

The effort could completely erase the balances for nearly 20 million individuals.2

The plan itself applies to qualified Americans who earn under $125,000 per year, or less than $250,000 for married couples who file tax jointly. The student loan pause, which has suspended all payments and interest on federal student loans since March of 2020, was also extended to December 31, 2022.3

Even with Biden’s forgiveness plan, you may still owe plenty of money on your student loan. But refinancing may give you better terms that improve your overall financial picture.

Here are some of the top reasons to refinance student loans:

Get a lower interest rate. If interest rates are lower now than they were when you took out the loan, you may be able to get a lower rate on your student loan. Doing so can save you a substantial amount of money over the life of the loan.

Lower your monthly payments. Depending on the offer, your refinanced loan may give you a lower interest rate or a longer term—or both, which reduces your monthly payment. With your leftover savings, you’ll have more cash to allocate to other financial goals. And you’ll also lower your debt-to-income ratio, which can be an important factor if you’re applying for a mortgage or auto loan.

Simplify your finances. When you’re paying off student loans, you’re often dealing with several different lenders. That can make paying bills a hassle—especially if you encounter any confusion or need to ask a question. Consolidating your loans allows you to cut down the number of lenders, so you may have just one student loan to pay each month. In the long run, dealing with fewer lenders could save you time and some headaches.

Cut your co-signer free. Circumstances and relationships change. There may come a day when your co-signer no longer wants to be on the hook for your student loans, and refinancing gives you a chance to let them off.

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The difference refinancing can make

What exactly does refinancing your student debt look like? The answer will depend on how much you owe, the offer you accept and when you refinance student loans. For example, let’s assume you borrowed $30,000. If you have a 10-year term and your interest rate is 7%, you’re paying roughly $350 per month. That means you’ll pay about $11,800 in interest over the life of the loan.4

Say you refinance for a 10-year term with a 3% interest rate. Your monthly payment would be about $290, and you’d pay $4,760 total in interest. You’d save about $60 every month—and more than $7,000 over the life of the loan.

Should I refinance my student loans?

Refinancing isn’t right for everyone. If you have federal loans and an income-driven repayment plan, for example, refinancing may not offer the same benefits. And not everyone is eligible to refinance. In general, you’ll need a good credit score and a reliable source of income to qualify. As with all loan-related decisions, it’s critical to read all of the fine print, so that you understand the terms you agree to.

Interested in different options in dealing with student loan debt? Read Personal Capital's article on 6 Ways to deal with student loan debt.

If you are eligible, refinancing to get a lower interest rate can be a smart move that may help you achieve your financial goals more quickly.


Save for those financial goals in an Empower Investment Account

Personal Capital is an affiliate of Empower Retirement.

1 NPR, Biden is canceling up to $10K in student loans, $20K for Pell Grant recipients,” August 2022.

2 USA Today. “Biden will forgive up to $20,000 in student loan debt and extend payment pause: live updates,” August 2022.

3 CNBC, “Biden cancels $10,000 in federal student loan debt for most borrowers,” August 2022.

4 NerdWallet, Student Loan Calculator. https://www.nerdwallet.com/blog/loans/student-loans/student-loan-calculator/, July 2020