How Student Loan Refinancing Works: A Complete Guide for Beginners

Last Updated on November 17, 2020

This page provides detailed information on how student loan refinancing works. Here you will learn what refinancing is, how refinancing works, types of refinancing, the benefits of refinancing, and all other important information about student loan refinancing that you might need. Keep for updates.

What Is Refinancing?

Refinancing involves the process of reviewing and replacing the terms of an existing credit agreement, usually with respect to a loan or mortgage.

When a business or individual decides to refinance a credit obligation, they are effectively seeking to make favorable changes to their interest rate, payment schedule, and / or other terms set out in their contract. If approved, the borrower gets a new contract that replaces the original agreement.

Borrowers often choose to refinance when the terms of interest rates change significantly, causing potential savings on debt repayments under the new arrangement.

How Refinancing Works?

Consumers typically seek to refinance certain debts in order to obtain more favorable borrowing terms, often in response to changing economic conditions. The common goals of refinancing are to lower its fixed interest rate to reduce payments over the life of the loan, change the term of the loan, or move from a fixed rate mortgage to an adjustable rate mortgage (ARM) or vice versa.

Borrowers can also refinance because their credit profile has improved, due to changes in their long-term financial plans, or to pay off existing debts by consolidating them into one loan at a low cost.

The most common motivation for refinancing is the interest rate environment. As interest rates are cyclical, many consumers choose to refinance when rates fall. National monetary policy, the economic cycle, and market competition can be key factors that raise or lower interest rates for consumers and businesses.

These factors can influence interest rates across all types of credit products, including both non-revolving loans and revolving credit cards. In a rising-rate environment, debtors with variable-interest-rate products end up paying more in interest; the reverse is true in a falling-rate environment.

In order to refinance, a borrower must approach either their existing lender or a new one with the request and complete a new loan application. Refinancing subsequently involves re-evaluating an individual’s or a business’ credit terms and financial situation. Consumer loans typically considered for refinancing include mortgage loans, car loans, and student loans.

Businesses may also seek to refinance mortgage loans on commercial properties. Many business investors will evaluate their corporate balance sheets for business loans issued by creditors that could benefit from lower market rates or an improved credit profile.

Types of Refinancing

There exist several types of refinancing options. The type of loan that a borrower decides to get depends on the needs of the borrower. Some of these refinancing options include:

1. Rate-and-term refinancing

The most common type of refinancing. Rate-and-term refinancing occurs when the original loan is paid and replaced with a new loan agreement that requires lower interest payments.

2. Cash-out refinancing

Cash-out refinancing are common when the underlying asset used as collateral has increased in value. A transaction involves the withdrawal of value or equity in an asset in exchange for a higher loan amount and often a higher interest rate. In other words, when an asset increases in value on paper, you can access that value through a loan rather than selling it. This option increases the total loan amount but gives the borrower immediate access to funds while retaining ownership of the asset.

3. Cash-in refinancing

A cash-in refinance allows the borrower to pay down some portion of the loan for a lower loan-to-value (LTV) ratio or smaller loan payments.

4. Consolidation refinancing

In some cases, a consolidation loan may be an effective way to refinance. A consolidation refinancing can be used when an investor obtains a single loan at a rate that is lower than their current average interest rate across several credit products. This type of refinancing requires the consumer or business to apply for a new loan at a lower rate and then pay off existing debt with the new loan, leaving their total outstanding principal with substantially lower interest rate payments.

Understanding Student Loan Refinancing

The average student graduates from college with over $20,000 in student loans. Those who go to graduate school will graduate with even more debt, in many cases six-figure for professional degrees. Borrowers do not always realize that their loans are costing them more than they think. Interest is added to the loan amount that is, the principal amount of the debt, resulting in an increase in the total cost of the loan. While there is no way to pay off your student loan debt without paying it back, there are some strategies that can help you lower your total cost of principal and interest. One way is, student loan refinance.

Refinancing student loans allows you to do a few things. If you have more than one loan, you can combine them into a brand new loan, which will allow you to better manage your personal finances. You will also sometimes have the option of releasing the co-signers of your existing loans, thus removing them from any liability for your loans. But the most exciting is probably the possibility of saving money.

When refinancing a student loan, you replace all of your existing student loans (or a single student loan if you only have one) with a new loan with new conditions. By qualifying for a lower interest rate or by shortening the payback period of the new loan, you can save thousands of interest over the life of the loan.

Qualifying For a Student Loan Refinance

To qualify for student loan refinancing, you will need either good credit history and stable income, or a co-signer. Most student loan refinancing options require very good credit, which means you have at least three years of responsible credit use – the longer the better. Most applicants will need good or excellent credit in order to get approved to refinance a student loan.

Some lenders like, however, will approve a loan based on other factors like your academic and employment history even if you don’t yet have established credit.

Finally, you can always apply with a co-signer and the bank may approve the loan based upon the co-signer’s income and credit history. Even with a co-signer, however, remember that repaying your loan will be your full financial responsibility.

Student Loan Refinance Process: How to Refinance Student Loans

Depending on the type of loans you have, there are two options when refinancing your student loans. If you have only federal student loans, refinancing is usually done through the Federal Direct Consolidation Loan Program offered by the government. If you have private student loans, you’ll have to go through a private lending institution such as a bank or credit union.

Finally, federal and private student loans can both be combined into a single new loan with better rates, better terms and one easy-to-keep-track-of bill to pay every month. However it must be done through a private bank or credit union. Keep in mind that refinancing federal student loans will eliminate the benefits that come with them.

Here’s a closer look at the seven steps that make up how the student loan refinancing process works.

1. Decide If Refinancing Is Best for You

Refinancing can make sense if it can save you money, but not everyone should refinance. You will need strong credit and finance to be eligible for the lowest rates and meet a refinance lender’s eligibility criteria.

If you refinance federal student loans, they will not be eligible for government programs such as income-based repayment and student loan relief due to the coronavirus pandemic.

Don’t refinance federal student loans unless you are sure your job is safe and you won’t need these options. On the other hand, refinancing private student loans has minimal disadvantages. Private loans won’t qualify for those federal programs.

2. Research Lenders

Your refinancing options will depend on which lender you choose. In order to make the best decision, it makes sense to get personalized quotes from different lenders. This allows you to search for specific features depending on your situation.

For example, you want to refinance parent PLUS loans in your child’s name? Find a lender that allows it. Didn’t graduate? Find a lender that doesn’t require a college degree.

3. Get Multiple Rate Estimates

Once you identify a few lenders that fit your needs, get rate estimates from all of them. Ultimately, the best refinance lender for you is the one that offers you the lowest rate. You can compare rates from multiple student loan refinance lenders at once, or visit each lender’s website individually.

As you shop, some lenders will ask you to pre-qualify, supply basic information to give you its best estimate of the rate you might qualify for. Other lenders will show you a rate only after you submit a full application, but that rate is an actual offer.

A soft credit check, or pre-qualification, typically doesn’t affect your credit scores. An actual application requires a hard credit check that may briefly lower your credit scores.

4. Choose a Lender and Loan Terms

Once you’ve landed with a lender, you still have a few decisions to make: Do you want a fixed or variable interest rate, and how long do you want your repayment period?

Fixed interest rates are generally the best option for most borrowers. Variable rates may be lower at first, but they’re subject to change monthly or quarterly.

To save the most money, choose the shortest repayment period you can afford. If you would like lower monthly payments so you can prioritize other expenses, pick a longer repayment timeline.

5. Complete the Application

Even if you are prequalified, you need to submit a complete application to continue working with the lender. You will be asked to provide additional information on loans and financial situation, as well as upload supporting documents. You will need a combination of the following:

  • Loan or payoff verification statements.
  • Proof of employment (W-2 form, recent pay stubs, tax returns).
  • Proof of residency.
  • Proof of graduation.
  • Government-issued ID.

Finally, you must agree to let the lender do a hard credit pull to confirm your interest rate. You’ll also have the option to add a co-signer, which could help you qualify for a lower rate.

6. Sign the Relevant Documents

If you’re approved, you’ll need to sign some final paperwork to accept the loan. A three-day rescission period begins once you sign the loan’s final disclosure document. During that time, you can cancel the refinance loan if you change your mind.

If you’re denied, the lender will let you know the reason why. If it’s because you have bad credit, you may be able to qualify by adding a co-signer, or you may need a lower debt-to-income ratio to qualify.

7. Wait for the Loan Payoff

After the rescission period ends, your new lender will pay off your existing lender or servicer. Going forward, you’ll make monthly payments to your new refinance lender.

Keep making payments to your existing lender or servicer until you get confirmation that the process is complete. If you end up overpaying, you’ll get a refund.

When Is the Best Time to Refinance Student Loans?

Many lenders require a degree to refinance, so it’s best to wait until you graduate. Some lenders have more flexible degree requirements, but they may want to see a history of on-time student loan payment for a specific period of time (for example, 12 months) first. You also usually need to be out of school before refinancing, with a few exceptions.

If you don’t yet meet the credit and income requirements but you want to refinance anyway, it’s possible to use a co-signer. Due to the risk to their credit score the co-signer takes on, though, it’s ideal to wait to refinance until you have the financial profile to be eligible as the sole borrower. You can take the time to improve your credit score and refinance later on.

Student Loan Consolidation vs. Student Loan Refinancing

Student loan consolidationStudent loan refinancing
What does it do?Combines multiple federal loans into one federal loan.Combines private and/or federal loans into one private loan.
Which loans can I combine?Federal loans only.Private and/or federal loans.
Can I lower my rates?No.Yes.
Can I save money?No. Consolidation may lower your payments by extending the loan term, but your interest amount will increase.Yes.
Can I access federal loan protections, repayment options and forgiveness programs?Yes.No.
Will I pay just one monthly bill?Yes.Yes.

Best Student Loan Refinance

1. Credible: Best Refinancing Marketplace

Before refinancing your student loans, it’s wise to get rate quotes from several different lenders to ensure you get the best terms. While you can do that manually on your own, there’s a simpler way: you can go through a refinancing marketplace.

With Credible, you submit your information just once and get quotes from multiple lenders, without affecting your credit score. You can compare interest rates and loan terms from up to ten top lenders and choose the best one for your needs. Once you choose a loan, you can complete your application online. You can use Credible to get quotes to refinance federal loan, private loans, and even Parent PLUS Loans.

Credible offers a best rate guarantee. If, after receiving prequalified options for student loan refinancing, you receive an offer for a better rate from a lender not on the Credible website and refinance with that lender at a lower rate, you’ll get a $200 Best Rate Reward.

The service is completely free to use. Instead of charging users fees, Credible makes money through referral commissions if you for a loan through its website.

2. RISLA: Best Overall

The Rhode Island Student Loan Authority (RISLA) stands out from other student loan refinancing lenders because of its competitive rates and the substantial benefits it offers to borrowers.

Despite RISLA’s name, borrowers can refinance student loans used to attend colleges nationwide. You can refinance between $7,500 and $250,000. All refinancing loans have fixed interest rates, and, as of Oct. 22, 2020, the lender offers the following interest rates: Fixed rates: 3.49% to 7.69% (including 0.25% autopay discount)


RISLA’s student loan refinancing program has a wide range of benefits that go beyond what you typically expect from private lenders. Its protections include:

Income-based repayment: If you can’t afford your payments, you may qualify for RISLA’s income-based repayment (IBR) plan. With this option, RISLA will base your monthly payment on your income and family size, potentially reducing your payments.

Total and permanent disability: Private lenders typically don’t offer loan discharges in the case of disability; RISLA is an exception. If you are unable to work because of a physical or mental impairment, you may qualify for total and permanent disability discharge. If eligible, your loan balance will be forgiven upon submission of medical documentation.

Graduate school deferment: If you decide to attend graduate school, you can defer your loan payments for up to 36 months.

Forbearance: If you are unemployed or have another emergency, you may be eligible for forbearance. If you qualify, you can postpone your payments for up to three months at a time, for up to 12 months over the life of your loan.

3. Splash Financial: Best Interest Rate

Out of all the lenders reviewed, Splash Financial has the lowest interest rates for student loan refinancing. As of Oct. 22, 2020, the lender offers the following rates (lowest rate includes 0.25% autopay discount):

  • Variable: 1.89% to 7.10%
  • Fixed: 2.63% to 7.27%7

You can choose a loan term of five, eight, 10, 12, 15, or 20 years in length. You must have at least $5,000 in student loan debt to refinance with Splash Financial, and there is no loan maximum. The lender does not charge any application, origination fees, or prepayment penalties.

4. SoFi: Best Benefits

If you want a refinancing lender that offers comprehensive benefits, consider SoFi. The company provides robust perks to refinancing borrowers, including:

Unemployment Protection: If you’re laid off from your job, you can postpone making payments for three months at a time, for a maximum of 12 months.

Career Coaching: Get access to a career coach to get advice on asking for a raise, preparing for a promotion, or building your personal brand.

Referrals: Refer a friend to SoFi’s loan program. If they apply for a loan and are approved, you’ll get $300.

Financial Advice: Make an appointment with a financial advisor to get free personalized guidance on investing, saving for retirement, and budgeting.

With SoFi, you can refinance as little as $5,000, and there is no maximum loan amount. To be eligible for a loan, you need to have graduated with at least an associate’s degree. SoFi does not publicly list its minimum income or credit requirements.

There are no application or origination fees, and the following interest rates apply as of Nov. 3, 2020 (autopay discount included):

  • Variable: 2.26% to 6.09%
  • Fixed: 2.99% to 6.09%9

5. Discover Student Loans: Best for No Fees

While some lenders charge origination, application, or late fees, Discover is different. It charges no fees at all, even if you miss a payment. With no added fees, the only charge you have to worry about is the interest that accrues on your loan.

With Discover, you may qualify for a loan without a cosigner. As of Oct. 2, 2020, the following interest rates apply (rates include autopay discount):  

  • Variable: 1.87% to 5.87%
  • Fixed: 3.49% to 6.99%10

You can refinance $5,000 to $150,000, and you can choose to refinance your loans while you’re still in school. To qualify for a loan, you must be at least 18 years old, pass a credit check, and have verifiable income.

6. CommonBond: Best Repayment Options

If you’re looking for a lender that offers flexible repayment options, CommonBond is hard to beat. Two features make CommonBond stand out from other lenders:  

Hybrid Loans: With a hybrid loan, the first five years of the loan have a fixed interest rate. After that, the loan will have a variable-interest-rate. This approach is a good idea if you want to take advantage of a low-interest rate and pay off your loans as quickly as possible, but also want the security of a fixed-rate loan.

Forbearance: If you’re dealing with financial difficulties after losing your job or receiving a medical diagnosis, you can postpone making payments on your loans for up to 24 months over the length of your loan—the longest forbearance option offered by any lender. Being able to skip payments without entering into default can give you time to get back on your feet.

As of Oct. 22, 2020, CommonBond offers the following rates (rates include a 0.25% autopay discount):

  • Variable: 2.96% to 6.50%
  • Fixed: 2.99% to 6.35%
  • Hybrid: 4.05% to 5.55%13

7. Citizens Bank: Best for Student Who Didn’t Graduate

If you didn’t graduate from school, you’d struggle to find a lender willing to work with you. Citizens Bank is the one of the few national lenders that allows borrowers to refinance without a degree.

Interest Rates: As of September 9, 2020, Citizens Bank offers the following interest rates (rates include 0.25% autopay discount and 0.25% loyalty discount):

  • Variable: 1.99% to 8.24%
  • Fixed: 2.99% to 8.49%14


Citizens Bank offers borrowers some useful perks:

  • Loyalty Discounts: If you have another account with Citizens Bank, such as a checking or savings account, you can qualify for a 0.25% reduction on your interest rate.
  • Automatic Payment Discounts: Sign up for automatic payments and get another 0.25% off your interest rate.
  • Cosigner Release: After making 36 consecutive, on-time payments, you may qualify to have your cosigner removed from your loan.

To qualify for a student loan from Citizens Bank, you must not be currently in school, and your loans must be in repayment. If you didn’t graduate, you need to make 12 on-time, consecutive payments on your loans before you can apply for refinancing.

8. PenFed Credit Union: Best for Spousal Loans

If you and your spouse both have student loans, you may want to combine your debt together. It will streamline your payments, so you have just one monthly payment and one loan servicer to remember.  

While most lenders will allow you to cosign your spouse’s refinancing application, the only lender that actually offers spousal loan refinancing—where the loans are consolidated together—is the PenFed Credit Union.

To determine your eligibility and to set your interest rates, PenFed will look at your combined income. If one person is a stay-at-home parent, this approach can be beneficial and help you get a lower interest rate than you’d receive on your own

With PenFed, you can refinance between $7,500 and $300,000 of student loan debt. Loan terms range from five to 15 years, and there are variable and fixed interest rates. As of Oct. 8, 2020, the following rates apply:

  • Fixed: 2.99% to 5.15%
  • Variable: 2.25% to 4.49%17

9. Laurel Road: Best Parent Loan Refinancing

If you took out student loans to pay for your child’s education, you might be stuck with a high interest rate. Federal Parent PLUS Loans have the highest interest rate of any federal loan. If you have these types of loans, refinancing can be a smart decision.

Laurel Road is one of the few lenders that offers refinancing for Parent PLUS Loans and allows you to transfer your loans into your child’s name. By refinancing your debt into your child’s name, you eliminate your obligation to repay the loan, and your child is responsible for repaying it instead.

Laurel Road offers variable and fixed-rate loans for parent loan refinancing. As of September 14, 2020, the following rates apply on parent refinancing loans, including a 0.25% autopay discount:

  • Variable: 1.89% to 5.90%20
  • Fixed: 2.80% to 6.00%21

Frequently Asked Questions about Student Loan Refinance

1. Is it worth it to refinance student loans?

Reputable lenders will warn you of the risks of refinancing federal loans even as they tout the benefits, and you should have stable personal finances and emergency savings before taking those risks. For those who qualify for a lower interest rate, student loan refinancing may help you accomplish one or more of these goals:

  • Pay less interest over the life of the loan
  • Pay off education debt faster
  • Reduce monthly student loan payments
  • Release a co-signer
  • Refinance a parent loan in the child’s name
  • Use a student loan refinance calculator to estimate your savings.

2What happens when you refinance student loans?

When you refinance student loans, a private lender pays off your existing loans and replaces them with one loan with a new interest rate and repayment schedule. Going forward, you’ll make monthly payments to the new lender.

3. What credit score do I need to refinance student loans?

You or your co-signer typically need credit scores that are at least in the high 600s. Many refinance lenders seek borrowers with scores in the mid-700s. The better your (or your co-signer’s) credit, the better the rate you’ll likely qualify for. Additionally, you need enough income to comfortably cover your expenses, student loan payments and other debts.

4. Is it a good idea to refinance a student loan?

Refinancing is a good idea if you qualify for a lower rate and you’re comfortable giving up the benefits that come with federal student loans. When you refinance federal loans, you lose access to income-driven repayment plans, loan forgiveness programs and other federal loan perks.

5. Is refinancing student loans better than consolidation?

It depends on your situation and goals. If you have the credit and income requirements to qualify for a lower rate, refinancing can save you money and help you become debt-free faster.

If you consolidate your federal loans through the government, you won’t receive a lower interest rate, but you may qualify for loan forgiveness programs or income-driven repayment plans. Federal student loan consolidation won’t save you money. In fact, it may extend your loan repayment schedule, increasing the amount of interest you pay long term.

6Which is the best lender to refinance with?

Most borrowers will want to go with the lowest interest rate they qualify for. But if rates are similar, look for lenders offering other features you value, such as the ability to refinance parent PLUS loans in the child’s name or flexible repayment options in case of an unexpected financial hardship.

Refinancing your student loans can be a great way to save money and accelerate your debt repayment. There’s no one perfect lender for everyone, so shop around and get rate quotes from multiple lenders so you can find the best deal for you.

We hope you will find this information useful. Do you have any queries on Student Loan Refinancing? Please feel free to let us know so we can assist you with any information you will need.

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