The Pros and Cons of Student Loan Refinancing in 2023
Refinancing your student loans can potentially lock in better rates and terms, and save you some money on interest. While refinancing is a good idea in many cases, you should know both the pros and the cons so you’re not hit with any surprises.
In this article, I’ll explain all the benefits and downsides and walk you through the ins and outs of the process. Once you have all the information, it should be easier to decide if refinancing is right for you.
If you’re short on time and you just want to check what rates you can get, you can fill out the application form on Credible. There’s no commitment involved and checking your rates does not impact your credit score in any way.
How Does Student Loan Refinancing Work?
When you apply for a student loan refinance, you’re applying for an entirely new loan to cover the total balance of your existing student loans. Once approved, your new lender will pay off your current student loans – both federal and private – and then you’ll just need to pay off that new loan moving forward.
It really is that simple. You do have to meet the minimum credit score requirements, but if you don’t, you can always apply with a cosigner.
Pros of Student Loan Refinancing
Lock in a Lower Interest Rate
The biggest reason to consider refinancing your student loans is to get a better interest rate. By locking in a lower rate, you could save thousands of dollars over the life of the loan. When we’re talking about potentially tens of thousands of dollars in student loans and quite a few years to pay them back, every little bit helps when it comes to lowering your interest rate.
Lower Your Monthly Payment
Refinancing your student loans can lower your monthly payment and free up part of your income for other bills, savings, investing, or even just for fun.
Lowering your interest rate as described above is one way to lower your monthly payment, but not the only way. You can also try to get a longer repayment term to reduce your monthly payment even further. (Of course, while this has its short-term benefits, it also means you’ll be paying off your loan for longer.)
Combine Multiple Loans Into One Monthly Payment
When you refinance your student loans with a new lender, you can get one new loan that pays off all of your separate student loans at once. This means that refinancing also acts as student loan consolidation.
This can make it much easier to pay your bills every month, since you’ll only have one student loan payment to make instead of separate ones for each loan.
Reduce Your Repayment Terms and Pay Your Loans Off Sooner
I mentioned above that you can extend your repayment terms to lower your monthly payment, but you can also do the opposite. On the flip side, you can shorten your repayment term when you refinance and pay your student loans off much more quickly.
This will raise your monthly payment amount, but you’ll pay less in the long run since you’ll pay back less interest overall.
You Can Apply with a Cosigner for Even Better Rates
One additional bonus of refinancing your student loans is that many lenders allow you to use a cosigner on your new loan. This gives you the ability to use their creditworthiness and financial backing to lock in even more favorable rates and terms.
You might even be able to release a cosigner after certain conditions are met (such as making consecutive payments for several years in a row) so you can keep the low rate while taking full responsibility for your loan.
Cons of Student Loan Refinancing
You Lose the Protections and Benefits That Come with Federal Student Loans
If you have federal student loans, this is important to understand. A disadvantage of refinancing your student loans is that federal loans have a number of built-in protections and benefits that you’ll lose after refinancing. These include deferment, interest rate and payment freezes, student loan forgiveness, potential student loan cancelation, and income-driven repayment plans.
However, since a student loan refinance can come with better interest rates, flexible repayment terms, and the other benefits listed above, it might still be with it to you.
The Eligibility Requirements Can Be High
To refinance, you typically need to have a credit score of at least 670, verifiable steady income, and a debt-to-income (DTI) ratio of less than 40% to 50%. For many people that are fresh out of school and just starting their careers, these requirements can be difficult to meet.
This doesn’t mean all is lost, though. Many lenders will let you refinance your student loans with a cosigner.
You May Have to Spend More Years Paying Off Your Loan
In the previous section, I mentioned how you can extend your repayment terms to lower your monthly payment. Doing so might be nice in the short term, but it’s a double-edged sword. By lowering your monthly payment this way, you’ll have to spend more time paying the loan off and you’ll also pay more money in interest over the course of the loans.
If you’re planning on refinancing your student loans, it’s a good idea to plan wisely, taking into account not only your current situation, but also your hopes for the future. You can also refinance your student loans more than once, so if your financial situation does change in the future, you’ll be able to make any necessary adjustments.
When Should You Refinance Your Student Loans?
If you’re considering refinancing your student loans, the best time to do so is now. Following everything that’s been going on the last couple of years, interest rates are at historically low prices across this board. This makes it an ideal time to lock in lower interest rates while banks are offering them.
Waiting too long to refinance means that you could miss your chance at these low rates, since they won’t last forever. In fact, the Federal Reserve is on the cusp of raising interest rates sooner rather than later. When you look at the bigger picture, this is a good thing – it’s a necessary move to combat inflation. But it means you might not see rates this low again for a very long time.
4 Steps to Get a Student Loan Refinance
Step 1: Shop Around and Get Rate Estimates
The first thing you’ll want to do if you’re thinking about refinancing your student loans is to shop multiple lenders and get rate estimates from more than one. While most lenders might seem similar, each one has its own set of requirements and might give you slightly different rates than the next one on your list.
One of the easiest ways to do this is to fill out the application form on Credible. This loan marketplace lets you quickly compare rates from multiple lenders side by side, with no effect on your credit score.
When you apply for a student loan refinance, you’ll have to provide some basic information about yourself such as your name, income, student loan debt, monthly expenses, and more.
Step 2: Pick a Lender and Loan Terms
Once you see rates and terms from multiple lenders, you can pick the offer that works best for you. Most lenders offer both variable- and fixed-rate loans, and the variable interest rate will often be lower at first.
Over time, variable rates begin to go up and down with the market, but a fixed rate stays the same for the life of the loan. With rates as low as they are right now, a fixed interest rate will likely be the best option.
Step 3: Collect Documentation and Apply
Once you decide on a lender, you’ll have to submit your application where you need to verify the information you provided when getting a quote. At this time, the lender will perform a hard credit check and ask you to provide the following documents:
- Social security number
- Student loan statements
- Proof of income
- Bank statements
Step 4: Wait for Approval and Loan Payoff
After you upload all the necessary documentation and submit your application, you just need to wait for the lender to approve your student loan refinance. It will typically take about 3-4 weeks to get approved. Once you’re approved, your current student loans will be paid in full and you’ll have to start making payments on your new loan.
What Can You Do If You Don’t Meet the Requirements for Student Loan Refinancing?
As I mentioned above, most lenders have relatively high requirements for student loan refinancing. But even if you don’t meet these requirements on your own, you still have options. You might be able to refinance with the help of a cosigner.
If you have someone willing to cosign your loans, the lender will take that person’s creditworthiness, DTI ratio, and income into account on your refinancing application. This means that you can greatly increase your chance of being eligible to take advantage of historically low interest rates.
The Best Lenders for Student Loan Refinancing in 2023
Credible is an online loan marketplace that specializes in student loan refinancing. When you get a free quote from Credible, the platform instantly matches you with up to 13 different lenders so you can quickly see what rates and terms you qualify for.
The lenders that Credible works with have rates starting as low as 2.15% (fixed) and 1.74% (variable), with terms ranging from 5 to 20 years.
The platform also has a Best-Rate Guarantee where it pays you $200 if you find a better rate from any other lender. There’s really nothing to lose!
Splash Financial is another loan marketplace, where you’re matched with a network of lenders. The platform offers some of the lowest rates in the industry, with fixed interest rate refinance loans starting as low as 4.64% (with autopay).
There are also no application fees, origination fees, or prepayment penalties with Splash.
See Your Rates on Splash Financial
Unlike the first two platforms I’ve mentioned, Citizens Bank is a direct lender. This means that you’ll only have to deal with Citizens throughout the entire process, with no third-party lenders involved.
The rates here are a bit higher, with variable rates starting at 1.99% and fixed rates starting at 2.74%. But, Citizens Bank has one of the highest autopay discounts in the industry, at a whopping 0.50%.
See Your Rates on Citizens Bank
The Bottom Line
At the end of the day, refinancing your student loans can be a great way to get a lower interest rate and better repayment terms to save you both time and money.
Credible’s application process is simple and you can see offers from multiple lenders right away. Even if you’re still on the fence, you have nothing to lose by checking what rates you could qualify for – especially while interest rates are so low!
What are the advantages of refinancing your student loans?
The advantages of refinancing your student loans include getting a lower interest rate, lowering your monthly payment amount, consolidating federal and private loans, shortening the repayment period, and the option to use a cosigner to qualify for better rates.
What are the consequences of refinancing student loans?
If you have federal student loans, the consequences of refinancing include losing the protections and benefits of federal student loans.
If you choose to lengthen your loan term when you refinance, there’s a chance you’ll find yourself paying more in interest over the life of the loan.
Does refinancing your student loans hurt your credit score?
When you submit your refinancing application, your new lender will perform a hard credit check, which can negatively impact your credit score. Nothing else along the way will hurt your credit score, and this potential impact will only be temporary.
If you just want to check your rates, you can fill out the form on Credible – this doesn’t affect your credit in any way.
Is this a good time to refinance my student loans?
Yes, now is the perfect time to refinance your student loans. To combat inflation and keep the economy relatively stable, the Federal Reserve is planning on raising interest rates across the board soon. So take advantage of lower rates while you can and refinance today!