As Rates Fall, Should You Refinance Your Student Loans?

As interest rates start to soften, you may hear more buzz about student loan refinancing as a way to lower your bills.

“Essentially, what it means is you are taking the debt that you owe and you are giving it to another company. They're going to pay off the debt that you have with the company you currently work with, and then you're going to pay this new company,” explains Kristen Ahlenius, director of education and advice at Your Money Line, a workplace financial wellness company.

For private loan borrowers who can qualify for a better interest rate, refinancing can shrink your student loan payments with little or no downside. But student loan refinancing comes with a steep opportunity cost if you have federal student loans — even if you can get a lower rate. You’ll transfer your debt from the Education Department to a private lender, and you’ll permanently forfeit federal borrower protections.

If you’re considering student loan refinancing, here’s what to know based on your loan type — plus alternate ways to lower your payments and get student debt relief.

Private student loan borrowers: Consider refinancing if you can save on your interest rate

A borrower with only private student loans is a good refi candidate, as long as they meet credit-worthiness guidelines, says Stanley Tate, a lawyer focused on student loans. Typically, you must have a stable source of income and a credit score at least in the high 600s to qualify for the lowest advertised rates.

Consider refinancing now if you can save at least half a percentage point on your current interest rate, Tate says. Keep an eye on rates even after you refinance — you can refinance multiple times if rates keep falling.

“You should be aggressive in monitoring your rates until you get to a really good rate,” Tate says. “We may not see 2% or 3% anytime soon, but 7.5% versus 8% is way better. It seems small, but over a 20-year loan, that adds up.”

Before deciding to refinance, research lenders and loan terms. A student loan refinancing calculator can help you compare options. Pay attention to all aspects of the loans you’re considering — not just the interest rate.

“Rate is what most people think of, but a lot of times, people don't think, ‘What happens if I lose my job? Do I need a co-signer? What are the terms of this loan? When can it be in default? What are the collection terms? What are cases where the interest rate may go up or down in the future for this loan?’” says Jantz Hoffman, executive director of the Certified Student Loan Advisors Board of Standards, a nonprofit that trains financial planners to help their clients make student loan decisions. “And because they're not uniform, those contracts and the language in those contracts matter.”

And if you’re having a positive experience with your current private student loan lender — no issues with autopay, the online portal or customer service — refinancing with a new lender might not be worth it.

“Just consider that sometimes that's not always the experience,” Ahlenius says. “Unless there's a significant cost savings, remember that that experience is also worth something.”

Federal student loan borrowers: Think twice before refinancing and forfeiting borrower protections

Refinancing is risky if you have federal student loans.

When you refinance federal student loans, the lender you choose pays off your remaining federal debt and issues a new private student loan. It’s a permanent move: You can never turn your private refinance loan back into a federal loan.

“That decision to give up federal loans for private loans is one that is oftentimes regretted by the borrower,” Hoffman says. “Once that decision is made, there is no ‘Whoops, I wish I would have stayed. I could have gotten Public Service Loan Forgiveness. I lost my job and need forbearance.’”

That’s true even if you can get a lower rate through refinance: “Even if a private refi is long-term cheaper for [borrowers], that opportunity cost of losing potential federal protections usually keeps people from moving to the private space,” Ahlenius says.

You give up access to existing federal relief programs — like borrower defense for students defrauded by their schools, more than a dozen student loan forgiveness programs, income-driven repayment (IDR) plans, payment pauses if you lose your job and loan discharges if you face a permanent disability.

You also lose access to any future relief programs. For example, borrowers who refinanced their federal student loans before the pandemic did not benefit from the three-year interest-free payment pause that began in March 2020.

Exceptions when federal borrowers may consider refinancing

There are a few situations in which borrowers with federal student loans may consider refinancing to a lower rate, experts say. Those characteristics include:

• A high income, so IDR plans don’t offer a lower payment relative to the standard 10-year plan. 

• Steady employment, so you can be sure you won’t lose your job in the future and need temporary payment relief. 

• A good credit score, so you can qualify for the lowest advertised interest rates. 

• You don’t work as a teacher, nurse, government employee or other type of public servant, so you won’t qualify for 10-year Public Service Loan Forgiveness.

• You are not working toward any other loan forgiveness programs, including IDR forgiveness.

Certain borrowers with federal parent PLUS loans may also be refi candidates, since these loans have higher interest rates than those doled out directly to students, Tate says.

“If you're someone who is several years away from retirement, you're a high earner and you have a fairly low loan balance in relation to your income, then refinancing can make sense, because you may not reach the [forgiveness] finish line before you would pay off the loan under the income-driven terms,” Tate says.

Explore other student loan relief options

Refinancing isn’t the only way to lower your student loan payments. Consider these other relief options:

• Flexible repayment plans. Income-driven repayment plans cap your monthly federal student loan bills based on your income and family size, to as low as $0. These plans are not typically available for private loans. 

• SAVE lawsuit forbearance. Due to SAVE lawsuits, borrowers enrolled in this federal loan repayment plan have an interest-free payment pause until at least April. If you’re not on SAVE, you can still get this forbearance if you apply for the plan now. 

• Deferment or forbearance. Temporarily postpone your federal student loan bills by asking your servicer for a deferment or forbearance. Some private lenders offer this option, too.

• Federal loan consolidation. You can consolidate multiple federal student loans into a single loan and extend your repayment term up to 30 years, which can lower your monthly payment. Consolidation is different from refinancing, because your loans stay in the federal system and you won’t lose any federal borrower protections.

• Set up autopay. Get a 0.25% interest point rate deduction by setting up automatic student loan payments through your servicer. If you have private loans, ask your lender about autopay benefits.