When Does it Make Sense to Refinance or Consolidate Your Student Loans?

Tackling student debt is something many former students deal with for years after they graduate or leave school. Student loan refinancing is an option that may help some with debt save on interest or lower their payment size. Whether you have federal student loans or private student loans, the opportunity to refinance is an option to consider.

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When to refinance student loans

A simple definition of refinancing is when you get a new lender to pay off an existing loan. You no longer make payments on your initial loan (because it is paid off), but instead, you make payments to the new lender who paid off your initial loan.

But why would you want to refinance your student loans? Melissa Brock, Money Editor at Benzinga, can name two good reasons.

“There are two reasons you might want to refinance your student loans. First, you may want to reduce your overall interest rate, particularly if you’ve got high student loan interest rates on your plate. You could save thousands of dollars.” says Melissa Brock, Money Editor at Benzinga. “Second, you could reduce your monthly payments as a result. This could be a major benefit if you’re trying to be budget-conscious.”

Refinancing only makes sense when you can get a better interest rate than you currently have. If you refinanced with a worse interest rate, you would owe more money.

The only time that you might consider refinancing for a worse rate is if you are concerned with lowering your payments. By refinancing with a longer repayment period, you’ll pay more money in the long run, but your payments will be smaller. This option should only be utilized on rare occasions where you have no other choice.

Ultimately, those with private student loans should refinance whenever they can get a better rate and save. If you have a federal student loan, you may want to consider refinancing to save money, but you will need to know that you’ll no longer be on a federal plan.

When refinancing student loans doesn’t make sense

Refinancing student loans is not just about saving money if you have federal student loans. Federal student loans come with additional repayment options and protections not afforded to private student loans. You are not able to refinance a federal student loan into another federal student loan.

Your only refinancing option is to move to a private student loan option. While this may still be a good option as you can save money, you will lose the additional protections of federal student loans. More specifically, this includes the unique repayment options available through FedLoan servicing. Additionally, those seeking public service federal loan forgiveness will not want to refinance, as they will become ineligible for this program.

How to refinance federal student loans

  1. Gather all necessary documentation to refinance your federal student loan. The list of documents includes your current loan information, a copy of your credit report, income statements (W2s, pay stubs, etc.), and any other asset information that may be pertinent to lenders. You’ll need this information and documentation for the loan refinancing approval process.
  2. Shop lenders willing to refinance federal student loans. Look at trusted lenders who offer refinancing options. Start looking at the rates, repayment terms, and loan details pertinent to your refinance. The goal is to find the lender offering the best student loan refinancing rates and the most favorable repayment terms.
  3. Understand the differences between federal student loans and private student loans. When you refinance your federal student loan, you’ll be taking on a private student loan. Yes, this can save you a substantial amount of money. Just make sure you know the differences between the two types of loans. You won’t have the same repayment options or loan forgiveness programs available with a private student loan.
  4. Complete the approval process. Most lenders will run a quick prequalification process. If you pass this, you’ll then push forward with the approval process. Upon final approval, your new lender will pay off your existing federal student loan. From then on, you will make your payments to the new lender.

How to refinance private student loans

  1. Find the best student loan provider offering to refinance. Look at the available rates, repayment terms, loan terms, and the reputation of the different lenders. Find the one that offers the most savings and the most favorable terms for your situation.
  2. Get together all your loan documents, including everything you needed when you applied for your initial private student loan. You’re going to need your current loan information, a copy of your credit report, income verification, 10-day pay off amount for the original loan and anything else pertinent that a lender requests.
  3. Complete the loan refinance approval process by providing your necessary paperwork. Once you are approved, your new lender will pay off the old lender. From then on, you’ll make payments to your new lender at the lower rate.

Consolidation vs. refinancing

Refinancing a student loan is different than consolidation. Consolidation is taking several loans and lumping them together into one new loan. Instead of your new loan provider paying off one loan, it will pay off all of your different loans.

Consolidation Refinance
Best utilized when you have multiple loans Best for one loan or when you can achieve a better rate with only one loan
Offers simplicity by turning multiple monthly payments into one single payment Stays constant at one single monthly payment
Generally utilized one time throughout the life of your loans May be utilized multiple times when applicable

The risks of refinancing

While the financial rewards can be ample when you refinance high interest or unmanageable loans into a new product, there are risks to consider as well. Most of these risks come into play when you refinance or consolidate federal loans with a private lender.

Doing so means saying goodbye to all of the Department of Education benefits offered on federal loans, like income-driven repayment plans and public service loan forgiveness, plus stopgap measures such as deferment and forbearance.

The other big risk that comes with refinancing is one we already talked about — extending your repayment timeline so much that you actually pay a lot more interest on your student loans over time. Before you refinance your loans to get a new monthly payment, make sure to look at the total amount you’ll pay over time and compare it to your total loan costs now. If it’s considerably more, you might want to rethink refinancing and consider alternative strategies to lower your monthly payment instead.


Refinancing or consolidating your loans is not the only option. FedLoan Servicing is a federally approved provider who can assist with loan repayment options. The company offers three main repayment options that may help you to lower your payments. Additionally, you may have access to a federal loan forgiveness program if you meet the eligibility criteria.

  • Pay as you earn (PAYE)
  • Income-based repayment
  • Income contingent repayment
  • Federal loan forgiveness program

More information about federal loan repayment options is available through FedLoan Servicing.

Too long, didn’t read?

Determining if student loan refinancing is a good fit for you requires a detailed look at the cost-savings, loan term changes, and your financial goals. When interest rates drop or your credit profile increases, you may find options to save on the lifetime of your loan. Lenders offer better rates when money is less expensive to them (lower fed interest rates) or when lending to you is less risky (your credit score or creditworthiness gets better).

You’re never going to be forced to refinance just by shopping for your options. Take a look at the available rates and loan options and see what your potential refinancing savings are.

Meta – Refinancing your student loans may deliver extensive savings, lower monthly payments, and more favorable repayment terms for some borrowers.

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Jason Lee
Jason Lee
Contributing Writer

Jason Lee is a U.S.-based freelance writer with a passion for writing about dating, banking, tech, personal growth, food and personal finance. As a business owner, relationship strategist, and officer in the U.S. military, Jason enjoys sharing his unique knowledge base and skill sets with the rest of the world. Follow Jason on Facebook here

Reviewed by

  • Courtney Mihocik is an editor at The Simple Dollar who specializes in insurance, personal finance, and loans. Previously, she wrote and edited for Interest.com, PersonalLoans.org, Ballantyne Magazine, Thread Magazine, The Post, ACRN, The New Political, Columbus Alive and the Institute for International Journalism.