Making student loan payments can seem like a daunting task, especially if you’re struggling financially. If you’re looking for a way to lower your monthly payment and improve your cash flow, refinancing is one strategy.

However, before deciding to refinance, it is important to consider your personal circumstances and whether it makes sense to choose refinancing over other options that could help you better manage your student loan debt and your global budget.

Key points to remember

  • Student loan refinancing allows you to combine multiple student loans (federal or private) into one loan with one monthly payment and possibly a lower interest rate.
  • Refinancing your federal student loans means losing government programs and benefits, such as Public Service Loan Forgiveness (PSLF) and income-contingent repayment.
  • Conversely, it may actually make more sense to refinance your private student loans, especially if they don’t have a fixed interest rate, and therefore will become more expensive if the Federal Reserve implements additional rate hikes.

What is student loan refinancing?

Student loan refinancing involves using a larger loan to pay off your smaller student loans. You can refinance federal and private student loans. Depending on your situation and the lender, you may be able to get a loan large enough to pay off federal and private student loans and combine them into one loan, with one payment and a (potentially) lower interest rate.

However, you should also consider that refinancing a student loan often requires a good credit score. If you don’t meet the credit and income criteria to refinance your student loans, you may need a co-signer. However, not all lenders allow you to release a co-signer from their obligation, which can make it difficult to find someone willing to take responsibility for your student loan debt.

Finally, if you refinance your federal student loans, you replace them with a private loan. You lose access to federal benefits and programs associated with federal student loans when you refinance.

Advantages and disadvantages of refinancing student loans

Advantages
  • Potentially lower interest rate

  • Lower overall payout

  • Easier to manage a single loan, rather than multiple loans

  • Potential savings over the life of the loan

The inconvenients
  • You may need a good credit score to qualify

  • You may need to find a co-signer to qualify

  • Refinancing replaces federal loans and you lose any potential benefit

Does it make sense to refinance your student loans?

As you review your situation, there are a few things to consider when deciding if it makes sense to refinance your student loans, depending on the type of loan you have taken out.

Federal student loans

Before refinancing federal student loans, consider whether you might need to access programs and the benefits associated with them. For example, if you qualify for Public Service Loan Forgiveness (PSLF), it doesn’t make sense to refinance your federal student loans. Many federal student loan forgiveness programs, like the PSLF, are not available for private loans, so refinancing would remove your eligibility.

Another consideration is that refinancing federal loans takes away your ability to use income-based repayment. If you’re struggling to make your federal loan payments, you may qualify for income-contingent repayment, which reduces your monthly student loan payments by 10% to 20% of your Discretionary Income, depending on the plan.

If you’re trying to lower your monthly payment, an income-driven plan can be an effective way to achieve that goal while still maintaining access to federal benefits. However, be aware that you could pay more over time with an income-based reimbursement. Even though your balance may be canceled after 20 or 25 years of repayment depending on income, what you pay in interest could potentially be higher over time.

Finally, if you still prefer to have just one payment, it may be worth considering a direct consolidation loan. This type of loan combines all of your federal loans into one payment to make it more manageable. You can also choose a loan term of up to 30 years, allowing you to benefit from lower individual repayments.

Refinance your federal student loans if you know you won’t need to access benefits. If you are already earning too much money to qualify for an income-tested refund or if you are not working in a job that qualifies you for PSLF and you know you will not be using federal benefits, it may be smart to refinance your federal student debt. if your credit score is good enough to result in a lower interest rate.

Private student loans

On the other hand, if you have private student loans, it might make more sense to refinance. The Federal Reserve raised rates in May 2022, and there is speculation that further rate hikes may occur. If you don’t have a fixed interest rate on your private student loans, it could lead to higher payments later.

Also, if more rate hikes are coming, it might be a good idea to refinance before rates go up, which will ultimately force you to pay more.

There has been speculation that the Biden administration may announce some measure of loan forgiveness in the near future. If you’re refinancing, you might miss a general federal loan forgiveness. In addition, you would lose access to the temporary federal loan payment suspension.

In many cases, you can lock in a fixed interest rate when you refinance your private loans, giving you stability and saving you money in the long run.

Some borrowers may decide to refinance their private student loans and consolidate their federal student loans separately. This further simplifies the situation, resulting in only two monthly payments and potentially lowering overall costs, while allowing borrowers to remain eligible for federal programs and benefits on their federal loans.

Does student loan refinancing reduce payments?

Depending on the situation, refinancing can lower your interest rate, which can lead to lower monthly payments and help improve your cash flow.

Should I refinance my federal student loans?

Although refinancing federal student debt may result in a potentially lower interest rate and monthly payment, it is not always the best choice. When you refinance federal student loans, you lose the ability to get student loan forgiveness and access programs like income-contingent repayment. If you think you might need these programs, a direct consolidation loan might make more sense than a refinance.

How can I lower my monthly federal student loan payments?

If you’re hoping to lower your monthly student loan payments, there are a few options. You can get a direct consolidation loan to extend your term and combine your payments into one, take advantage of income-contingent repayment (if you qualify), or enroll in an extended repayment plan. You can also refinance your loans for a lower monthly payment, but this will replace your federal loans with a private loan and you will lose access to federal programs.

The essential

Refinancing your student loans can potentially lower your monthly payment and provide you with a way to better manage your budget. However, it is important to determine whether your loans are private or federal and what benefits you have access to. If you want to qualify for federal programs and benefits, you should consider consolidating your federal loans separately and refinancing only your private student debt.