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How Does Student Loan Refinancing Work?

Victoria Love


Refinancing is the process of taking out a new loan to pay off existing debt. Most people who refinance student loans do so to take advantage of lower interest rates as well as several other benefits that come with refinancing. 

While refinancing private education loans may be relatively easy, refinancing federal education loans like Federal Stafford Loans and Federal PLUS Loans can require a more complicated application process due to stricter requirements from the Department of Education.

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How Does Student Loan Refinancing Work?

Student loan refinancing works by applying for a new loan to pay off your previous direct or federal loans under better terms. This entails getting a new interest rate and reducing monthly payments on your existing student debt. As an added benefit, you'll extend the length of your repayment period which can cut down on the total cost of your loan.

The process of refinancing a student loan is similar to applying for a mortgage or car loan–you go under contract with a lender and sign a promissory note that stipulates all conditions of the exchange. In effect, you have to qualify for this new debt just as if you were getting an entirely new loan from scratch.

To be eligible for refinancing, you must fulfill certain criteria such as being current on your payments and having verifiable income via W-2 forms, payroll statements or tax returns. You may also need to have strong credit scores, abide by certain debt-to-income ratios and make there are no major delinquencies in your recent credit past.

It's also possible for someone to refinance their Parent PLUS Loans if they are able to show that they can independently meet the credit requirements needed to qualify for refinancing while showing that they have the income necessary to afford monthly payments.

Depending on which type of institution you're refinancing, there may be additional stipulations at play too. For instance, refinancing Federal Stafford Loans requires full enrollment in an undergraduate or graduate degree program working towards a degree or certificate with at least half-time status. You may also need to show proof of your ability to cover living expenses since loans are not disbursed until at least 6 months after you apply and get accepted.

Required Information

You will need to submit an application with all the necessary information to the prospective lenders who may ask for any of the following documents before they can grant you a new loan:

• Copies of your federal income tax return(s) and W-2 forms. 

• Proof that you're enrolled in school at least half-time.  

• Your credit score and history. 

• Your current debt and monthly repayment amounts on your existing loans (including balances, interest rates, and monthly payments required)

• Your current employment status and employer's contact information 

Benefits of Refinancing Student Loans

What Are The Benefits Of Refinancing? By refinancing student loans, borrowers can feasibly lower their monthly payments as well as increase the total amount they payback thanks to fixed interest rates. On top of this, refinancing can help lessen the financial burden of education loans over time by extending repayment periods. It can also protect you from drastic fluctuations in interest rates on new federal student loans and consolidate all your federal education debt into a single monthly payment.

In addition, refinancing is usually done without affecting any of the borrower's terms including deferment status, forbearance or forgiveness programs–meaning that someone would still be eligible for Public Service Loan Forgiveness (PSLF) regardless of their credit terms if they still meet the program requirements after refinancing.

There are several other benefits to refinancing too such as increasingly lower fixed interest rates thanks to lower overall loan supply plus much more transparency in lender policies when it comes to things like late fees and missed payments.

How to Refinance With a (Secured) Student Loan 

Since the financial crisis, several companies have emerged to help reduce student debt–offering a wide range of refinancing plans and rates to prospective clients using their own capital resources. In the broader sense, this is known as peer-to-peer or person-to-person lending which tries to mimic aspects of traditional consumer banking without going through an actual bank or credit union.

In order to qualify for refinancing with a private company, you must prove that you're employed at least part-time and get accepted into one of their loan programs. You can then compare offers from multiple lenders on individual websites. Just keep in mind that some lenders may not be willing to refinance existing debt with you if it's older than 18 or 24 months.

Some common companies that do student loan refinancing are SoFi, CommonBond, BigFuture and ScholarFi. All four use alternative data points like monthly income, credit history and academic history to determine eligibility because they're not beholden to federal guidelines the way federal loans are. This can mean much higher borrowing limits for those who have excellent credit scores as well as lower interest rates on education debt relative to what borrowers are paying now.

Student Refinancing Costs

On average, refinanced loans will cost anywhere from 0.25% - 2% more each year than their original loan terms which may be a small price to pay for the chance to consolidate and reduce your monthly payments. Variable rates can go as low as prime - 0.49% and fixed rates as low as prime + 1.49%, but APR ranges vary widely from lender to lender so it's crucial for those looking into getting refinanced loans to compare interest rates, fees and repayment terms before deciding on a company they want to work with.

Other than this, the actual process of refinancing student loans is pretty straightforward:

1. You fill out an application –normally requiring you to upload an electronic version of your credit report or assessment–and then receive a rate quote based on what you entered. You can then choose to accept this quote or keep shopping around.

2. If you accept a rate offer, you sign a new promissory note and begin paying off your student loans with the company that's refinancing them. For those applying for federal loan consolidation, no need to worry because the government will still receive their monthly payments as usual.

3. Your application is either accepted or rejected based on the information you provided and your repayment terms are finalized–with any applicable fees discussed beforehand too.

All told, there's not much variation between what private companies charge compared to one another so prospective clients should definitely do their homework before settling on who they want to work with (especially since annual percentage rates (APRs) can vary. Once you accept the new rate quote, the company that's refinancing your loans will tell the Department of Education what new rate and repayment terms they're offering so everything can be finalized from their end.

You will have to pay off your student loans with the company you chose because it now owns your loan contract. The government will still receive their monthly payments as usual, but you'll only have to deal with one lender.

What Changes to Expect

After refinancing, you should expect to see the following changes:

Lower monthly payments; - A single, fixed payment schedule; and better customer service (especially if something goes wrong!) Of course, there are a couple of caveats: Refinancing your federal loans into private ones means surrendering all protections and benefits you've built up over time.

If you have direct subsidized loans, for instance, being approved for private refinancing may mean you lose your right to have the government pay your interest while you're in school or during grace periods. Plus, if you default on your student loans after refinancing into a private loan, then lenders are allowed to garnish wages without first suing borrowers. This can be pretty dangerous because there are no limitations on how much an employer can deduct from one's paycheck before they receive advance notice.

You also need to know that refinancing student loans come with the added risk of having to transfer federal loan servicing rights when moving loans from one servicer to another. This means you will likely have at least three different servicers throughout your lifetime: The federal department (for your subsidized loans), your original student loan company (like Sallie Mae, Nelnet, or FedLoan Servicing), and the company that refinanced your federal loans into private ones.

Last but not least, you need to be aware of when it makes sense to refinance your student loans. While it's always smart to look at all of one's options whenever they're considering consolidating or refinancing their loans, experts recommend waiting until after finishing college before signing up for any new debt repayment plans. By doing so, you'll have at least six months' worth of post-graduation income data on hand which lenders will want to see in order to extend better terms.


Paying just one company for your student loans may seem like a good idea in the short term, but it can be a real hassle when you want to switch lenders or consolidate down the line. However, if you're looking for faster processing times, then refinancing into private loans might be something worth considering.