Should You Refinance Your Private Student Loan?

With interest rates on the rise, borrowers may consider refinancing their student loans to lock in lower interest rates while they can. And if you have private student loans, refinancing carries fewer downsides than if you have federal student loans.

Still, deciding if you should refinance your private student loans is a complex decision that requires time and thought. Review some of the most common reasons to refinance your student loans—and when to avoid it.

When Refinancing a Private Student Loan Makes Sense

Because private student loans don’t carry the same benefits and protections as federal student loans, there are fewer risks when it comes to refinancing. You might refinance to reap the following benefits:

1. You Can Get a Lower Interest Rate

Qualifying for a lower interest rate is a common reason to refinance your student loans. If you’re approved for a lower interest rate, then you may be able to save hundreds or even thousands of dollars in total interest.

For example, let’s say you currently owe $60,000 in student loans with a 7% interest rate and a 10-year repayment term. If you refinance to a 10-year term but secure a 5% interest rate, you could save more than $7,000 in total interest. Your monthly payment will also be $60 less each month.

You could use that extra cash to pay off other loans with higher interest rates, invest toward retirement or save for a down payment on a house. A refinancing calculator can help you estimate how much you could save.

To qualify for the best interest rates on a refinance loan, you’ll need good to excellent credit and a steady income. If you don’t meet those requirements, you could add a qualified co-signer to your application.

2. You Want to Change Your Repayment Term

Generally, the only way to adjust your repayment term is to refinance into a new loan. Extending your repayment term typically reduces your monthly payment, making it easier to achieve other financial goals like opening a business, starting a family or buying a house.

However, extending your loan term also means you’ll likely pay more in interest over the life of your loan. Your interest rate may also increase when you extend your repayment term, as longer term loans usually carry higher rates.

Decreasing your repayment term will result in a higher monthly payment, but you’ll also likely get a lower interest rate. By paying your loan off sooner and snagging a lower rate, you could pay much less in total interest than if you chose the same or longer repayment term.

3. You Want to Consolidate Multiple Loans into One

Most students take out multiple student loans over the course of their education—which means they may have several student loan payments to track each month. You can simplify the repayment process by refinancing multiple debts into one new loan. This will reduce the number of monthly payments you have.

4. You Need to Remove a Co-signer

Because most private loans require good credit and steady income, college students often aren’t able to qualify on their own. To address this, many add a qualified co-signer to their loan application. A co-signer is an individual who meets the lender’s credit score and income requirements and will take over the student loan payments if you can’t afford them.

Co-signing a student loan carries some risk. Your student loan will appear on the co-signer’s credit report, which could affect their ability to qualify for a loan of their own. In addition, any missed payments will appear on both your and your co-signer’s credit report. If you can’t make the payments, your co-signer will have to step in and take on the responsibility.

Some lenders offer a co-signer release, which lets you remove the co-signer from the loan after you’ve met certain conditions. But not all lenders offer this option; if your lender won’t let you remove a co-signer, you can refinance into a new loan under only your name.

5. You’re Unhappy With Your Lender

If you’ve received poor customer service from your lender, refinancing your loan with a different company could make your life easier. Before you refinance, read through customer reviews on sites like Trustpilot and the Better Business Bureau and see what others think of prospective lenders.

Figure out if there’s anything else you don’t like about your lender. For example, if they have a short forbearance period, look for a lender with a longer one. If they don’t let you choose your due date, find a lender that does.

When You Shouldn’t Refinance Private Student Loans

Even though refinancing private student loans carries relatively little risk, there are times when this strategy likely isn’t a good idea.

1. You’re Close to Paying Off Your Debt

If you only have less than a year left on your loan, it may be better to keep the loan as it is and not refinance. You likely won’t save much in total interest in such a short timeframe, so it may not be worth the time and effort. Plus, refinancing can cause a small (but temporary) ding on your credit score.

2. You’re Applying for a Mortgage or Other Large Loan

If you’re in the process of applying for a mortgage, it’s likely wise to avoid refinancing your student loans until after the homebuying process is complete. Refinancing student loans can affect your credit score, which can impact the interest rate you receive from the mortgage lender.

If you want to refinance your student loans, do so at least six months before you apply for a mortgage. That should provide enough time for your credit score to rebound.

Bottom Line

If refinancing private student loans might help you, start by researching refinance lenders and comparing their interest rates, loan terms, fees and other factors. Many lenders allow you to prequalify, which shows you the estimated rates and terms you could qualify for.

Once you’ve narrowed down your list of lenders, you can submit an application and wait for approval. Before long, you could be well on your way to saving money or simplifying your student loans.

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