What does it mean to refinance student loans?

What does it mean to refinance student loans?  


Student loans can create a significant financial burden when a person leaves school. 

According to the Education Data Initiative, the average student loan debt with federal and private loans combined is $39,981 in 2024.1 And, depending on the type of loan you have and your interest rate, that monthly payment could take up a significant portion of your budget. 

Refinancing your student loan is a way to save money, both on your monthly payment and on interest over your entire loan term. Though it has some clear benefits, refinancing also has some downsides to consider, so it’s important to understand how the process works and who it’s best for. 

What does it mean to refinance student loans? 

When you refinance your student loans, you’re essentially replacing your existing loan with a new one. The new loan has its own interest rate and repayment term. When you qualify for your new loan, your new lender will either send the funds directly to your former lender or send you a check that’s meant to pay off your original student loan. 

There are several reasons someone might refinance their student loans. Depending on your financial situation and the details of your loan, you may qualify for a lower interest rate or reduce your monthly payment. Additionally, it’s possible to refinance several different loans with one refinance loan — this is known as debt consolidation. This allows you to simplify your loan situation, so you have just one loan and one monthly payment instead of several. 

Read more: What to know about student loan debt (and tips for making payments)

How does student loan refinancing work? 

When you refinance your student loan, you replace your original loan with a new one. This requires applying for a new loan, just as you did when you originally borrowed the funds. 

Student loan refinancing has eligibility criteria like any other type of loan. Here are a few things lenders are likely to look for: 

  • Credit score: Your credit score helps lenders determine whether you’re eligible to refinance your loan and the interest rate on your new loan. 

  • Income: When you apply for student loan refinancing, your lender is likely to require proof of stable income, usually through employment. 

  • Debt-to-income ratio (DTI): Lenders may set a maximum DTI, which is the percentage of your gross income you spend on debt payments each month. 

  • Education: Some lenders may require that you either remain enrolled in school or have a degree from an accredited school to refinance your student loans. 

Many lenders allow you to pre-qualify or get pre-approved for a loan, so you can see what interest rate each lender would offer you without submitting to a hard credit check. 

The application to refinance your student loan requires you to provide your personal information, along with documentation needed for your lender to verify your income. You’ll also have to consent to a hard credit inquiry.  

Once you’ve completed your loan application, your lender will either approve or deny it. If approved, the new lender will send the money to either you or your original lender. But make sure to keep making payments on your original loan until you’re sure the refinance has been completed and the original loan balance is gone. 

Understanding student loan refinance rates 

One of the most important aspects of a student loan refinance is the interest rate. After all, the purpose of refinancing a student loan is often to get a lower interest rate. 

Refinance student loans can have either fixed or variable rates. A fixed rate has the same interest rate and monthly payment for the entire loan term. If interest rates go up, you don’t have to worry about your loan’s interest rate rising. The stable rate and payment make it easy to budget. 

When you have a variable-rate loan, your interest rate may change throughout the loan term based on market rates. The downside is that if interest rates rise, so does your monthly payment. However, it’s also possible that your loan rate could go down. Additionally, variable-rate loans generally have lower starting interest rates than fixed-rate loans. 

When you apply for a student loan refinance, several factors impact your interest rate. The first of those factors is the current economy. If market interest rates are high, so are student loan rates, and vice versa. In 2023 and 2024, interest rates have been higher than they were for the previous couple of years, meaning borrowers are paying more for loans. 

Some personal factors also affect your interest rates. The better your credit score, the better the interest rate you may qualify for. Additionally, shorter loan terms generally have lower interest rates, while longer terms have higher rates. 

Can you refinance all student loans? 

Technically, any type of student loan, whether federal or private, is eligible to be refinanced. However, the federal government doesn’t offer refinancing. No matter which type of loan you have, you can only refinance with a private lender. 

When you refinance a private student loan, your new loan will work remarkably similar to your old one. You’re likely to have similar repayment options and will still be making your monthly payments to a private financial institution. 

However, refinancing a federal student loan is a bit different. When you have a federal student loan, your loan is serviced by a private loan servicer, but through an agreement with the federal government. As a result, your loans are eligible for all of the loan benefits the federal government offers, including income-driven repayment plans, forbearance and deferment options, and the possibility of loan forgiveness. 

When you refinance your federal student loan with a private loan, you’ll no longer have the benefits federal student loans have to offer. You’ll no longer be able to use an income-driven repayment plan, and, if you were eligible for any forgiveness programs, that will no longer be the case. So, while you can technically refinance any type of student loan, it’s generally only advisable to refinance private loans. 

Refinancing student loans: What you need to know 

There are some key pros and cons to refinancing your student loans, and it’s important to understand them so you can make the right decision for your finances. 


  • Lower interest rate: Refinancing your student loans often allows you to get a lower interest rate, which can save you money in the long run. 

  • Lower monthly payment: When you refinance, you may get a lower monthly payment that leaves more money in your budget for other goals. 

  • Consolidated payments: You can refinance multiple loans into a single refinance loan, which simplifies your personal finances and can save you money. 

  • Become debt-free faster: If you have a lower interest rate and monthly payment, you may be able to repay your loans more quickly. 

  • Release a cosigner: If you have a cosigner on your original private loans, you can release their obligation by refinancing. 


  • Loss of federal benefits: If you refinance federal student loans, you lose access to key benefits such as income-driven repayment, forbearance, and loan forgiveness. 

  • Eligibility requirements apply: Refinancing your student loans requires meeting certain eligibility requirements, meaning not everyone will qualify. 

  • No guaranteed savings: Refinancing can save you money, but there’s no guarantee that will be the case. Some borrowers may have a higher interest rate and payment. 

Read more: How a third of American households are bracing for $1,000 monthly student loan bill  

Should I refinance my student loans? 

If you’re considering whether you refinance your student loans, it’s important to weigh all of the factors and decide whether it will benefit your finances. 

Refinancing your student loans makes sense if you have private loans, have a high interest rate on your current loans, and have a good credit score so you can qualify for a lower rate. On the other hand, refinancing likely isn’t the right choice if you have federal loans. It also may not be the right choice if you currently have a low interest rate or your credit score isn’t good enough to qualify for a low rate. 

Like any financial decision, refinancing your student loans comes with some advantages and disadvantages. Before refinancing your loans, it’s important to look at all of the factors to determine whether it’s the right choice for your situation. 

Read more: Student loan repayment: Tips and strategies 

Frequently asked questions (FAQs) 

Does refinancing student loans hurt credit? 

Refinancing your student loan can hurt your credit score. First, you’ll be closing an older debt account and replacing it with a new one, which reduces the age of your credit history. You’ll also have to get a hard inquiry, which can temporarily harm your credit. However, refinancing could also improve your credit score in the long run as you make your loan payments. 

How hard is it to refinance student loans? 

The process of refinancing your student loans is relatively simple. However, it may be more difficult for certain borrowers based on their credit score or income. The good news is that if you have a stable income and a good credit score, you likely won’t have a problem refinancing. 

What are the downsides of refinancing? 

Though refinancing also comes with financial benefits, there are no guarantees. Some people might find that they would actually end up with a higher interest rate and monthly payment when they refinance their loans. Additionally, if you have a federal loan, refinancing results in losing out on some important benefits. 

Is it better to refinance or consolidate student loans? 

When you consolidate your student loans, you’re technically also refinancing them. However, consolidation is when you’re refinancing multiple loans into one loan, while refinancing could refer to just one loan. The better option for you depends on your debt situation — if you have multiple student loans, consolidation might make more sense. 

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1 Education Data Initiative, “Student Loan Debt Statistics,” March 2024. 


Daniel Kuhl


Daniel Kuhl is an Insurance Specialist at Empower. He is responsible for providing clients and advisors with robust insurance advice and analysis.

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