Find the Best Way to Refinance Student Loans

Compare student loan refinance options to find the right solution to get out of debt faster.

Student loans are now the second largest source of consumer debt in the U.S. after mortgages. Households that carry student loan debt can face shortages in income and major life delays. If you want to get ahead, you need to find a solution. Often the best way forward is to refinance student loans to lower the interest rate so you can get out of debt faster.

Use this tool to compare student loan refinance options. If you have questions about how to refinance private or federal student loans, you can find more information below.


How to find the best way to refinance student loans for your financial situation

There are a range of factors to consider as you compare options to refinance student loans. The biggest factor is what types of loans you have – federal, private or both. It also matters whether your loans are current or in default. Finally, the right solution depends on your financial situation, budget and overall goals.

Refinancing Student Loans: Federal vs. Private

There are several ways to consolidate and refinance student loans, depending on your needs and debt. Most federal student loan debt solutions don’t focus on interest rate reduction. In fact, these solutions typically assign your interest rate by taking a “weighted average” of the rates on your existing loans. As a result, you don’t always enjoy significant rate reduction when you consolidate your loans using these options.

How federal student loan interest rates work

Federal student loan interest rates are never set based on your credit score, like other loans. In the past, interest rates on federal student loans were set each year by Congress. The new rates always took effect on June 1. However, legislative gridlock led to a change in the system. Now federal student loan interest rates depend on the 10-year Treasury note index. That means when the Federal Reserve raises its rates, the rates on new student loans go up, too. Still, federal loans tend of have relatively low interest rates compared to other types of debt.

However, this also means that refinance rates when you consolidate your loans are not credit-based either. When you consolidate federal loans, the lender takes a weighted average of the existing loans. If your largest loan also has the highest rate, the new rate on your consolidated debt will also be higher. This is true whether you use a Federal Direct Consolidation Loan or a federal repayment plan.

As a result, if your main goal is to reduce the rates on your student loans, federal solutions may not provide the benefit you want. These solutions tend to work best if you’re struggling to make your payments each month. However, if you want to reduce your interest rates and get out of debt fast, you may be better off with a private solution.

Private student loan refinance solutions may offer better rates

By contrast to their federal counterparts, private student loan solutions do consider your credit score. Most lenders offer lower rates on private student loans compared to other financing options that they offer. However, the rates are still credit-based. As a result, if you have a good credit score, you can qualify for a lower interest rate. In some cases, it may even be better than the rates you have on your federal loans.

However, this is where you need to make some key decisions about how you want to pay off your debt. If you use private student loan consolidation for federal student loan debt, you convert the debt to private. This means your debts are no longer eligible for federal student loan solutions. This includes Public Service Loan Forgiveness that can erase a significant portion of what you owe without penalties.

This means you need to think carefully before you use a private student loan refinance option for your federal student loan debt. It may provide the rate reduction you’re looking for now. But it could be worse for you overall, particularly if your situation changes and you face financial hardship.

How to refinance student loans using private student loan consolidation

Private student loan consolidation generally works the same as any debt consolidation solution. It essentially rolls multiple loans into a single monthly payment at the lowest interest rate possible. A lower rate saves you money and can save you time. More of each payment you make goes to paying off principal (the actual debt you owe). As a result, you can pay the same amount or even less than you’re paying now, but could get out of debt faster.

  1. You apply for a student loan debt consolidation loan through a private lender.
  2. In the loan application, you tell them how much debt you wish to consolidate
    1. This is equal to however many loans you wish to include
    2. You are not required to include all your loans, so you can strategically leave some out
  3. You choose a term that offers minimum monthly payments you can afford.
    1. A longer term means lower payments, but higher total costs
    2. A shorter term means higher payments, but lower total costs
  4. The loan underwriter reviews your debts and credit.
    1. They check your credit score, which will determine the rate you qualify for
    2. They check your debt-to-income ratio to make sure your DTI will be below 41% with the new loan
  5. Once approved, the funds from the new loans are disbursed to pay off all the loans you wished to consolidate.
  6. This leaves only the consolidation loan and any debts that you left out to repay.

Student Loan Refinance FAQ

How do you know when to refinance student loans?

In general, the right time to refinance student loan debt is when you see that private consolidation will provide a lower interest rate. If you use the comparison tool above and don’t see a significant rate reduction, then private consolidation won’t provide as much benefit.

If you only have private student loans, then it’s usually advisable to at least see what refinancing through a consolidation loan will do. But if you have federal loans and won’t enjoy a large rate reduction, weigh consolidation carefully against other solutions.

How do you compare solutions to find the best student loan refinance option?

You basically need to evaluate each of the solutions available to you to find the benefit you need.

Student loan refinance optionBenefitsDrawbacks
Federal Direct Consolidation LoanCombines federal loans into a single monthly payment; makes more of your loans eligible for federal repayment plansRarely offers interest rate reduction, since it takes a weighted average of your existing loans
Federal repayment plansRange of programs to suit your needs; hardship-based repayment plans tend to offer the lowest payments of any solutionInterest rate takes a weighted average of your existing rates; hardship plans have long terms (25-30 years)
Private consolidation loanThe only solution where interest rate reduction is a main goal, instead of a side effect; you can choose the term that offers payments you can affordConverts federal student loan debt to private

 

If you have federal and private student loans, you need to do some calculations to see which option offers:

  1. The lowest interest rate
  2. Monthly payments you can afford
  3. The lowest total cost

Total cost relates to both the interest rate assigned to your debt and the term of repayment. A higher rate and longer term will both increase total cost. More months to apply interest charges drives up the cost of getting out of debt.

What’s the difference between student loan refinancing and consolidation?

Strictly speaking, refinancing specifically refers to interest rate reduction. When you refinance a loan, you basically reduce the interest rate. For instance, when you refinance your mortgage, you take out a new mortgage for the same amount at a lower rate.

By contrast, consolidation involves rolling multiple debts into a single loan or repayment plan. Consolidation also generally lowers the interest rate applied to the debt, so it can do the same thing as refinancing.

However, in the case of federal repayment plans, consolidation doesn’t always provide the interest rate reduction you typically want when you refinance. That only relates to private consolidation. In this case, consolidation and refinancing can go hand in hand.

Can you refinance federal student loans?

If you are willing to switch federal student loan debt to private, then the answer is often yes. A private consolidation loan for student debt may offer a lower interest rate. You can consolidate and refinance your loans with one solution. Just bear in mind you won’t be eligible for any federal student loan relief.

Outside of private consolidation, federal loan consolidation may lower some of your student loan interest rates. However, that’s not the goal of any federal consolidation loan or repayment plan. These solutions always take a weighted average of the loans you already have. So, even if rates are lower now than when you took out the loans, you generally can’t refinance through a federal program to get a better rate.

Can you refinance student loans without a degree?

There is no requirement that you graduate and earn a degree to use any federal or private student loan consolidation or repayment plan. You can use these options regardless of the level of degree earned or even if you failed to graduate. Even Public Service Loan Forgiveness does not base eligibility on degree earned. As long as you work in a qualified public service profession and incurred federal student loan debt doing so, you can use Public Service Loan Forgiveness.

Can you refinance student loans after you consolidate?

In general, you should get an interest rate reduction when you consolidate the first time. But that doesn’t mean you will always achieve the lowest rate possible the first time. If your credit score improves, then you can potentially qualify for an even lower interest rate in the future. In that case, you may choose to refinance your consolidation loan if the lender offers a lower rate.

In addition, you can re-consolidate if you have new student loans that you need to pay off, too. For instance, if you consolidate the student loan debt from your Bachelor’s degree, then go back and get your Master’s before you pay it all off, you can re-consolidate the existing consolidation loan with your new loans. If your credit has improved since the first consolidation, you may also qualify for a lower rate this way.

It’s worth noting that even a Federal Direct Consolidation loan can be re-consolidated with another Federal Direct Consolidation loan. As long as you have at least one new Federal Direct student loan to put with it, you can roll it into a new Federal Direct Consolidation Loan. Just bear in mind that this may not provide the interest rate benefit you’re looking for out of refinancing.

What should you do if you’re not sure what’s the best student loan refinance option for your situation?

If all this information seems overwhelming and you’re still not entirely sure what’s the best option for your situation, you should consult with a professional. A student loan resolution specialist understands federal and private loan solutions. They can help you weigh the benefits, costs and drawbacks of each solution available to you. They can even recommend strategic options, such as using one to two federal repayment plans for part of your debt and a private consolidation loan for the rest.

Also keep in mind that most solutions are not set in stone. Except for converting federal student loan debt to private, most choices can be revisited if your situation changes. For instance, you can change federal repayment plans as often as you like. If you enroll in a fast repayment plan and then lose your job and have a pay cut, you can switch to a hardship plan. The only choice you can’t take back is debt conversion, so consider it carefully!

For professional student loan debt help, visit Debt.com’s Student Loan Debt Solutions Center.