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If you’re trying to pay down debt and you own a home, you may be wondering whether it makes sense to use a cash-out refinance to pay off debt.

There are pros and cons to going this route, and it’s important to understand how the process works to help decide if it’s the right option for you.

Read on to find out how to use a cash-out refinance to pay off debt, the costs involved, the benefits and drawbacks, and other options for repaying debt you owe.

Using a Cash-Out Refi to Pay Off Debt

In mid 2023, household debt (not including mortgages) in the U.S. exceeded $4.7 trillion dollars, according to a report released by the Federal Reserve Bank of New York. It’s no wonder then that individuals are looking for ways to get out from under the debt they owe.

A cash-out refinance for debt consolidation allows you to use the equity in your home to pay off debt by taking on a new mortgage. The new mortgage pays off your old mortgage and it comes with new terms, including a new interest rate that’s potentially lower, and length of time to repay the loan. The new mortgage terms may be better than your original mortgage, but it’s also possible they may not be as favorable.

Here’s a quick course in cash-out refinancing 101 and how it works:

Determine How Much Cash You Need

When you’re considering a cash-out refinance to pay off debt, first figure out how much money you’ll need. To do this, add up all the debts you want to pay off. Include things like credit card and personal loan debt and medical bills.

Determine How Much You Can Borrow

The amount you can borrow with a cash-out refinance depends on how much equity you have in your home. Equity is how much your home is worth compared to how much you owe. Typically, you can borrow up to 80% of your home’s market value.

Here’s an example of how cash-out refinancing works: Let’s say your home is worth $500,000 and you owe $300,000 on your current mortgage. That means your home equity is $200,000. With a cash-out refinance loan, a lender might let you borrow up to 80% of your equity (as long as you qualify for that amount), which is $400,000.

You’ll need to use that $400,000 to pay off the $300,000 you owe on your mortgage and also closing costs. That leaves you with about $100,000 in a cash out refinance for debt consolidation.

Prepare Your Cash-Out Refinance Application

Your cash-out refinance application is much like the mortgage application you filled out when you bought your house. Lenders will look at and evaluate such factors as your:

•   Credit score: Many lenders look for a minimum credit score of 620 for a cash-out refinance

•   Debt-to-income (DTI) Ratio: DTI compares your monthly debts to your gross monthly income. In order to qualify for a cash-out refinance, lenders typically look for a DTI of less than 50%.

•   Home equity: As mentioned above, you’ll likely need at least 80% equity in your home.

You may need to provide the lender with documents such as bank statements and W-2s.


💡 Quick Tip: Thinking of using a mortgage broker? That person will try to help you save money by finding the best loan offers you are eligible for. But if you deal directly with an online mortgage lender, you won’t have to pay a mortgage broker’s commission, which is usually based on the mortgage amount.

Complete the Closing and Pay Closing Costs

If the cost to refinance a mortgage makes sense for you, and you qualify with a lender, you’ll pay closing costs to cover such fees as credit reports and appraisals. Closing costs may be wrapped into the refinanced loan amount. After you close on the loan you’ll receive your funds.

If You’re Consolidating Debts, Let The Lender Know

It’s possible that your debts may be high enough to preclude you from qualifying for a cash-out refinance. However, if the lender knows you’ll be consolidating debts, they can include those debts in your loan amount for consolidation.

That way you’ll be paying off the debts in one payment with the new interest rate (ideally, a lower one) you received with your cash-out refinance.

Benefits of Cash-Out Refinancing to Pay Off Debt

When you consolidate debts with a cash-out refi, you have just one monthly payment to make. That’s usually more manageable than trying to pay multiple bills all at once.

There are other potential benefits as well.

Consolidating Debts Can Lead to Savings

High-interest debt can be difficult to pay back. Credit card APRs can reach 29.99% or higher, which adds to the amount you need to pay each month. When you consolidate debt with a cash-out refinance, you may save money on interest costs.

Cash-Out Refinancing Can Pay Debts Quickly

When you take out a cash-out refi to tackle the debt you owe, you may be able to pay off certain debts faster than you would have otherwise. You’ll likely be paying less in interest, which could allow you to put more money toward the debt balance.

Impact On Credit Score

Paying off high-interest debts with a cash-out refi could lower your credit utilization rate, which is the amount of credit you’re using. Credit utilization is an important factor in your credit score.

Should You Use a Cash-Out Refinance to Pay Off Credit Card Debt?

Interest rates on credit cards are typically high, and can be more than 30%. The interest rate on a mortgage tends to be much lower. If you can get a lower interest rate to repay your debt, a cash-out refinance could be worth it. However, if you choose this method, be careful to avoid overspending and running up credit card debt again. Changing your spending habits can be critical to staying out of debt.

Drawbacks of Using a Cash-Out Refinance to Pay Off Debt

A cash-out refinance also has some significant disadvantages to consider. These include:

Increased Monthly Mortgage Payment

When you take out a bigger loan amount, you may also end up with a higher monthly mortgage payment. You’ll be responsible for paying that higher amount each month.

Turning Unsecured Debt Into Secured Debt

Another factor to consider is that if you can’t pay back everything you borrow with a cash-out refinance, you could be in danger of losing your home. That’s because a mortgage is secured debt, and your home is collateral for the loan. While that’s true with any mortgage, with a cash-out refinance you are likely borrowing even more money since you’re using the extra cash to tackle debt, which means there’s more for you to repay.

Closing Costs

When you refinance a mortgage, including a cash-out refinance, you need to pay closing costs. These costs can be around $5,000 according to Freddie Mac. However, the size of your loan and where you live can affect how much your closing costs may be.

Cash-Out Refinance vs. Debt Consolidation

With a cash-out refinance, you take out a new mortgage to repay your old mortgage and also get cash you can use for a variety of purposes, including paying debt. With debt consolidation, you combine all your debts into one loan. A debt consolidation loan is not secured by your home; a cash-out refinance loan is.


💡 Quick Tip: Because a cash-out refi is a refinance, you’ll be dealing with one loan payment per month. Other ways of leveraging home equity (such as a home equity loan) require a second mortgage.

Alternatives to Cash-Out Refinance Loans

A cash-out refi isn’t your only option for paying off debt. Here are some other methods to consider.

Home Equity Line of Credit (HELOC)

A home equity line of credit is secured by the equity in your house. It’s similar to a line of credit, so you borrow just what you need when you need it, and you only pay interest on what you borrow. However, if you don’t pay off a HELOC you may be in danger of foreclosure.

Home Equity Loan

With a home equity loan, you receive a lump sum of money and make regular fixed payments. Interest rates tend to be higher than they are for a cash-out refinance, and you will need to pay closing costs.

Personal Loan

A personal loan is an unsecured loan that you can use for almost any purpose, including debt consolidation. These loans generally come with higher interest rates than a cash-out refinance, HELOC, or home equity loan. They also have a shorter term, which means you’ll need to make higher monthly payments. But that also means the loan will be paid off sooner.

Balance Transfer Credit Card

A balance transfer credit card typically offers a 0% introductory rate for a number of months (up to about 21 months) on debt you transfer from another source, which is usually another credit card. There is a balance transfer fee of around 3%, but you won’t won’t owe interest on the balance you transfer. If you have a lower debt amount that you can pay off in a relatively short amount of time, this option might make sense. However, to qualify for the 0% rate, you’ll typically need a strong credit score.

The Takeaway

If you need to pay off high-interest debt and you have sufficient equity in your home, a cash-out refinance can be an option worth exploring. It can give you a lower interest rate, as long as you qualify, which could help you save money. However, keep in mind that you will need to pay closing costs when refinancing, and the terms of the loan, including the length of the loan, will change.

Turn your home equity into cash with a cash-out refi. Pay down high-interest debt, or increase your home’s value with a remodel. Get your rate in a matter of minutes, without affecting your credit score.*

Our Mortgage Loan Officers are ready to guide you through the cash-out refinance process step by step.

FAQ

Can I use a cash-out refinance to pay off both secured and unsecured debts?

Yes. A cash-out refinance can be used to pay off a variety of debts, including secured debts as well as unsecured debts, like credit cards.

Are there any tax implications of using a cash-out refinance for debt repayment?

If you use a cash-out refinance for debt repayment, you won’t owe taxes on the money you receive from the cash-out refi. That’s because the money is considered a loan that needs to be paid back, and not income. At the same time, per IRS guidelines, you typically can’t deduct the interest on a cash-out refinance if you use the money to pay off debt.

What factors should I consider when deciding whether to use a cash-out refinance for debt repayment?

If you have high-interest credit card debt, and you can get a lower interest rate to repay your debt with a cash-out refinance, it may be worth it for you. But first make sure you can change your spending habits to avoid overspending and running up credit card debt all over again.

Also, consider the fact that your monthly mortgage payment will likely be higher with a cash-out refinance. Can you afford that higher amount? And you’ll also have to pay closing costs. Calculate to be sure that the amount of cash you’ll get from the cash-out refi is sufficiently more than what you’ll spend on closing costs.

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Photo credit: iStock/fizkes

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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If you’re having trouble making your student loan payments or just want to know if you can make a change to your payments, it’s worth looking into the options, such as refinancing student loans or an income-driven repayment plan.

Student loan refinancing is available for both private and federal student loans, while income-driven repayment plans are an option only for federal student loans. Recent changes to income-driven repayment lower monthly payments and curtail interest accrual, making the plans a better deal for borrowers. Here’s what to know about both options as well as the pros and cons of each.

What Is Student Loan Refinancing?

When you refinance a student loan, a private lender pays off your student loans and gives you a new loan with new terms. For example, the interest rate and/or the loan term may change. You can’t refinance loans through the federal government, however. You can only refinance federal student loans (or private student loans) through a private lender.

If you’re a graduate with high-interest Direct Unsubsidized Loans, Graduate PLUS loans, and/or private loans, a refinance can change how quickly you pay off your loans and/or the amount you pay each month.


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

Pros of Student Loan Refinancing

When considering refinancing your student loans, there are several benefits. You can:

•   Lower your monthly payments: Lowering your monthly payment means you can save money or spend more in other areas of your life instead of putting that cash toward paying student loans. (Depending on the length of the loan term, however, you may end up paying more in total interest.)

•   Get a lower interest rate than your federal student loan interest rates: This can result in paying less interest over the life of the loan (as long as you don’t extend your loan to a longer term). A student loan refinance calculator can show you the interest rate you qualify for.

•   Decrease your debt-to-income ratio (DTI): Your DTI compares your debt payments to your income. So if you lower your monthly payments, you could be lowering your DTI ratio — and a lower DTI can help when applying for a mortgage or other type of loan.

•   Remove a cosigner. Many borrowers who took out undergraduate loans did so with a parent or other cosigner. Refinancing without a cosigner allows you to regain some financial independence and privacy, provided you have a strong credit history.

Recommended: What’s the Average Student Loan Interest Rate?

Cons of Student Loan Refinancing

That said, refinancing federal loans can have some drawbacks as well. They include:

•   No longer being able to take advantage of federal forbearance: When you refinance your student loans through a private lender, you no longer qualify for federal student loan forbearance, such as the Covid-19-related payment holiday. However, it’s worth noting that some private lenders offer their own benefits and protections after you refinance.

•   No longer being able to tap into income-driven repayment plans, forgiveness programs, or other federal benefits: Refinancing federal student loans means replacing them with private loans — and forfeiting the protections and programs that come with them.

•   Possibly seeing your credit score get dinged: Your lender may do a hard credit history inquiry (or pull), which can affect your credit score.

For a deeper dive into the topic, check out our Student Loan Refinancing Guide.

What Are Income Driven Repayment Plans?

Editor's Note: The SAVE Plan is still in limbo after being blocked in federal court. SAVE enrollees are in interest-free forbearance until at least April 2025. Two closed repayment plans — Income-Contingent Repayment (ICR) and PayAs You Earn (PAYE) — are reopened to those who want to leave forbearance. We will update this page as information becomes available.

Put simply, income-driven repayment plans are plans that base your monthly payment amount on what you can afford to pay. Under the Standard Repayment Plan, you’ll pay fixed monthly payments of at least $50 per month for up to 10 years. On the other hand, an income-driven repayment plan considers your income and family size and allows you to pay accordingly based on those factors — for longer than 10 years and with smaller loan payments. Income-driven repayment plans are based on a percentage of your discretionary income.

You can only use an income-driven repayment plan for federal student loans. If you qualify, you could take advantage of four types of income-driven repayment plans:

•   Saving on a Valuable Education (SAVE) Plan: You typically pay 5% of your discretionary income over the course of 20 years (on loans for undergraduate study) or 10% of your discretionary income for 25 years (on loans for graduate or professional school).

•   Income-Based Repayment Plan (IBR Plan): As a new borrower, you typically pay 10% of your discretionary but never more than the 10-year Standard Repayment Plan amount over the course of 20 years. If you’re not a new borrower, you’ll pay 15% of your discretionary income but never more than the 10-year Standard Repayment Plan amount over the course of 25 years.

Two other plans, PAYE and Income-Contingent Repayment, stopped accepting new enrollments as of July 1, 2024.

How do you know which option fits your needs? Your loan servicer can give you a rundown of the program that may fit your circumstances. You must apply for an income-driven repayment plan through a free application from the U.S. Department of Education.

Note: Every income-driven plan payment counts toward the Public Service Loan Forgiveness Program (PSLF). So if you qualify for this program, you may want to choose the plan that offers you the smallest payment.

Recommended: How Is Income-Based Repayment Calculated?

Pros of Income Driven Repayment Plans

The benefits of income-driven repayment plans include the following:

•   Affordable student loan payments: If you can’t make your loan payments under the Standard Repayment Plan, an income-driven repayment plan allows you to make a lower monthly loan payment.

•   Potential for forgiveness: Making payments through an income-driven repayment plan and working through loan forgiveness under the PSLF program means you may qualify for forgiveness of your remaining loan balance after you’ve made 10 years of qualifying payments instead of 20 or 25 years.

•   Won’t affect your credit score: This may be one question you’re wondering, whether income-based repayment affects your credit score? The answer is: no. Since you’re not changing your total loan balance or opening another credit account, lenders have no reason to check your credit score.

Cons of Income Driven Repayment Plans

Now, let’s take a look at the potential downsides to income-driven repayment plans:

•   Payment could change later: The Department of Education asks you to recertify your annual income and family size for payment, which is recalculated every 12 months. If your income changes, your payments would also change.

•   Balance may increase: Borrowers under the IBR plan receive a three-year interest subsidy from the government. However, after the subsidy expires, borrowers are responsible for paying the interest that accrues on subsidized and unsubsidized loans.

•   There are many eligibility factors: Your eligibility could be affected by several things, including when your loans were disbursed, your marital status, year-to-year changing income, and more.

Refinancing vs Income Driven Repayment Plans

Here are the factors related to refinancing and income-driven repayment plans in a side-by-side comparison.

	Refinancing	Income-Driven Repayment Plan
Lowers your monthly payments	Possibly	Possibly
Changes your loan term	Possibly	Yes
Increases your balance	Possibly	Possibly
Is eventually forgiven if you still haven’t paid off your loan after the repayment term	No	Yes
Requires an application	Yes	Yes
Requires yearly repayment calculations	No	Yes

Choosing What Is Right for You

When you’re considering whether to refinance or choose an income-driven repayment plan, it’s important to take into account the interest you’ll be paying over time. It could be that you will pay more interest because you lengthened your loan term. If that’s the case, just make sure you are comfortable with this before making any changes. Many people who refinance their student loans do so because they want to decrease the amount of interest they pay over time — and many want to pay off their loans sooner.

That said, if you’re wondering whether you should refinance your federal student loans, you’ll also want to make sure you are comfortable forfeiting your access to federal student loan benefits and protections.

Refinancing Student Loans With SoFi

Refinancing your student loans with SoFi means getting a competitive interest rate. You can choose between a fixed or variable rate — and you won’t pay origination fees or prepayment penalties.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

Is income-contingent repayment a good idea?

This plan may be a good idea for some borrowers because the repayment terms are based on the lesser of these two: 20% of your discretionary income or a fixed payment over the course of 12 years, adjusted according to your income over the course of 25 years. Any remaining balance will be forgiven if you haven’t repaid your loan in full after 25 years. Because of the longer repayment timeline, the drawback is borrowers may pay more over time. It also won’t provide payments as low as the SAVE Plan.

What are the disadvantages of income based repayment?

The biggest disadvantage of income-based repayment is that you stretch out your loan term from the standard repayment plan of 10 years to longer — up to 25 years. This means that more interest will accrue on your loans and you could end up paying more on your loan before your loan term ends.

Does income based repayment get forgiven?

Yes! Through the Public Service Loan Forgiveness (PSLF) program, student loans can be forgiven after making 10 years of qualifying, consecutive payments. Additionally, borrowers with an income-driven repayment plan may have the remaining balances on their loans forgiven after 20 or 25 years.

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Photo credit: iStock/m-imagephotography

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Income-contingent payment (ICR) plans are one kind of Income-driven repayment plan, which can help make federal student loan payments more affordable. The income-contingent repayment plan allows you to extend your loan repayment period while reducing monthly payments to help them better align with your income. Any remaining loan amounts due at the end of your ICR plan term may be forgiven.

An ICR may be a good fit if you’re just starting your career and aren’t earning a lot of money. You may also consider an income-contingent repayment plan if you’re hoping to qualify for federal Public Service Loan Forgiveness (PSLF).

But is an ICR plan right for you? And what are the pros and cons of income-contingent repayment? Weighing the benefits alongside the potential downsides can help you decide if it’s an option worth pursuing managing your student loan debt.

What Is Income-Contingent Repayment (ICR)?

Income-driven repayment plans, including ICR, determine your monthly payment amount based on your household size and income. Depending on how much you make and how many people there are in your household, it’s possible that you could have no monthly payment at all.

Like other income-driven repayment plans offered by the Department of Education (DOE), an ICR plan aims to make it easier to keep up with federal student loan payments.

With income-contingent repayment, your monthly payments are capped at the lesser of:

•   20% of your discretionary income

•   What you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted for your income

Of the four income-driven repayment options, income-contingent repayment is the oldest plan, and it is the only one that sets the payment cap at 20% of a borrower’s discretionary income. With income-based repayment (IBR) and Pay as You Earn (PAYE), monthly student loan payments max out at 10% of your discretionary income. The Department of Education recently introduced a new IDR plan called Saving on a Valuable Education (SAVE), and starting in July 2024, borrowers on the SAVE plan could see their payments reduced from 10% to 5% of income above 225% of the poverty line.

The interest rate for an ICR plan stays the same for the entire repayment term. The rate would be whatever you’re currently paying for any loans you’ve consolidated or the weighted average of all loans you haven’t consolidated.


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

How an ICR Plan Works

Income-contingent repayment can reduce your federal student loan payments, allowing you to pay 20% of your discretionary income each month or commit to making fixed payments based on a 12-year loan term.

You have up to 25 years to repay all loans enrolled in the plan. If you still have remaining payments after 25 years of monthly payments, the DOE will forgive the balance. But while you may not owe any more payments on the loan, the IRS considers student loan debts forgiven through ICR or another income-driven repayment plan to be taxable income, so you may owe taxes on it.

Income-contingent repayment plans base your monthly payment on your income and family size. This means that if your income, or your family size, changes over time, your monthly payments could change as well. With all of the federal IDR plans, borrowers must recertify their loan every year to show any changes to your income or family size.

If you’re enrolled in the 10-year Standard Repayment Plan, your monthly payments would be the same for the entire repayment term, and you never have to recertify your loan.

Here’s an example of what your payments might look like on an ICR plan versus a Standard Repayment plan, assuming you’re single, make $50,000 a year, get 3.5% annual raises, and owe $35,000 in federal loans at a weighted interest rate of 5.7%.

	Standard	ICR Plan	Savings
First month’s payment	$383	$319	$64
Last month’s payment	$383	$336	$47
Total payments	$45,960	$49,092	-$3,132
Repayment term	10 years	12.4 years	-2.4 years

As you can see, an income-contingent repayment plan would lower your monthly payments. But it will take you longer to pay your loans off and you pay more than $3,000 in additional interest charges over the life of the loan. If you start earning more while you’re on the ICR plan, your payments could also increase.

If you get married, and you and your spouse file your taxes jointly, your loan servicer will use your joint income to determine your loan payment. If you file separately or are separated from your spouse, you’ll only owe based on your individual income.

Recommended: How is Income Based Repayment Calculated?

Who Is Eligible for an Income-Contingent Repayment Plan?

Anyone with an eligible federal student loan can apply for the income-contingent repayment plan. Eligible loans include:

•   Direct student loans (subsidized or unsubsidized)

•   Direct consolidation loans

•   Direct PLUS loans made to graduate or professional students

Other types of federal student loans may also be enrolled in income-contingent repayment plans if you consolidate them into a Direct loan first. For example, you could use an ICR plan to repay consolidated:

•   Federal Stafford loans (subsidized or unsubsidized)

•   Federal Perkins loans

•   Federal Family Education Loan (FFEL) PLUS loans

•   FFEL consolidation loans

•   Direct PLUS loans for parents

The income-contingent repayment is the only income-driven repayment plan option that includes loans taken out by parents. So if you borrowed federal loans to help your child pay for college, you could enroll in an ICR plan (after consolidating your loans) to make the payments more manageable.

Two types of loans are not eligible for income-contingent repayment or any other income-driven repayment plan:

•   Private student loans

•   Federal student loans in default

If you’ve defaulted on your federal student loans you must first get them out of default before you can enroll in an income-driven repayment plan. The DOE allows you to do this through loan consolidation and/or loan rehabilitation. Either one can help you get caught up with loan payments and loan rehabilitation will also remove the default from your credit history.

Pros and Cons of ICR Plans

Income-contingent repayment is just one option for paying off student loans, and it may not be right for everyone. It’s important to look at both the advantages and potential disadvantages before enrolling in an ICR plan.

Pros of income-contingent repayment:

•   Can lower your monthly payments

•   Parent loans are eligible for income-contingent repayment, after consolidation

•   Extends the loan term to 25 years to repay student loans

•   Remaining loan balances are forgivable

•   Qualifying repayment plan for PSLF

Cons of income-contingent repayment:

•   Other income-driven repayment plans like PAYE or SAVE base monthly payments on 5 to 10% of your discretionary income

•   Taking longer to repay loans means paying more in interest

•   If your income changes, your payments could increase

•   Enrolling certain loans requires consolidation first

•   Forgiven loan amounts are taxable

If you’re interested in an income-driven repayment plan, it may be helpful to do the math first to see how much you might pay with different plans. An income-based repayment option, for example, might lower your payments even more than ICR so it’s worth running the numbers through a student loan repayment calculator.

The Takeaway

Income-contingent repayment plans are something you might consider if you have federal student loans. With an ICR plan, your monthly payments may be lower than they are with the Standard Loan Repayment Plan, allowing you more money for other bills.

You won’t receive a lower interest rate when you sign up for an income-driven repayment plan. The only way to change your interest rate is through student loan refinancing. But if you refinance your federal loans, you will lose access to benefits like ICR and other income-driven repayment plans.

When you refinance student loans, you take out a new loan to pay off your existing ones. If you’re able to secure a lower interest rate on the new loan and don’t extend the term length of the loan, you could pay less in total interest over the life of the loan while having lower monthly payments. This could give you more breathing room in your budget. If you have both federal and private loans, you may choose to place the federal loans in an income-driven repayment plan and then refinance the private loans.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

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SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Whether you’re a new grad who wants to get a grip on how much you owe and set up a payment plan or a working professional who wants to find out how much you’ve paid off of your total balance, keeping tabs on your student loan numbers is an important part of financial wellbeing. But for something that is so important, it can be surprisingly confusing to locate all your student loan information.

Student loan holders can view their federal student loans via the Federal Student Aid website (FSA), which is run by the Office of the U.S. Department of Education. It offers a convenient option for getting a comprehensive picture of all federal loans.

The FSA website can show you information on your federal student loans like:

•  The number and types of loans you have

•  The initial amount of your loans

•  Your current loan balances

•  The interest rates on your loans

•  If any of your loans are in default

•  The name of your loan service provider and their contact information

Using the Federal Student Aid website

In order to see your loan information on FSA, borrowers will need to create a new account; current registrants can log in with their email, phone number, or FSA ID username and password. In addition to student loans, the site also has valuable resources including repayment plans and loan counseling.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

Where Do I Pay My Student Loans?

Even though you can obtain all the information about your student loans through the FSA website, that is not actually where you pay your student loans. Once you’re logged in, borrowers should be able to see the name and contact information for their student loan service provider. The student loan service provider is the entity charged with collecting loan payments.

Once you know who your student loan servicer is, you should be able to set up an online account directly with the loan servicer. Some student loan servicers also offer the option to set up automatic bill pay.

If you’d rather go old school, don’t worry, your student loan servicer’s website should also have information about making payments in other ways, like check or bank transfer.

How Do I Pay My Student Loans?

Once you know how to view your federal student loans, you may still be wondering how exactly to pay them off. Viewing your federal loans is just the first step; next, you need to strategize your student loan repayment. One of the first things you may want to do is consider your different repayment plan options. As a note, you can use our student loan calculator to get estimates of what your monthly payments could look like under the various plans.

The federal government offers a handful of options when it comes to federal student loan repayment. These repayment plans are designed for people with different types of financial situations and priorities, from those who want a straightforward way to pay off their loans in a 10-year period to those looking for income-driven repayment plans.
Here’s a quick rundown of the repayment options offered for federal student loans:

•   The Standard Repayment plan is the default loan repayment plan for federal student loans. Borrowers pay a fixed amount every month within 10 years in order to pay off their loan(s).

•   The Extended Repayment is similar to the Standard Repayment plan but instead of making payments over 10 years, the payments are extended up to 25 years.

•   The Graduated Repayment Plan also offers a 10-year repayment option. Under this plan, monthly loan payments start at a lower amount and are then increased every two years for up to 30 years.

There are also four income-driven repayment plans–— Pay As You Earn (PAYE), Saving on a Valuable Education (SAVE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR). Under these plans, monthly payments are determined as a percentage of the borrower’s monthly income. Depending on the plan, borrowers have up to 25 years to repay their loans.

If you’re just starting to pay back your student loans after graduation, you’ll likely be automatically assigned to the Standard Repayment plan. You can change the repayment plan you are enrolled in at any time.

The federal government may also have options for you to consolidate your student loans into a Direct Consolidation Loan, which would allow you to group all your loans together into a single loan from the government, with an interest rate that’s the weighted average of all your loans’ interest rates, rounded up to the nearest eighth of a percent.

In addition to the repayment plans offered by the federal government, you might also consider refinancing your student loans with a private company. Loan refinancing pays off your current federal and private student loans with a new loan from a private lender.

The private lender will review factors like your credit history and income potential to determine your new terms. For some borrowers, student loan refinancing may result in a lower interest rate, lower monthly payments, or even a shorter repayment term—which could mean you spend less money in interest over the life of the loan. Conversely, if you refinance with an extended term, you may pay more interest over the life of the loan.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

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SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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As you prepare for life after graduation, one important step is figuring out whether you’re required to make monthly student loan payments right away or you have what’s called a “grace period.” The same question applies to students taking a break from going to school full time.

Below, we’ll explain what a grace period is, when it starts, and how you might extend yours. You’ll also find a simple financial to-do list to tackle before you start making student loan payments.

What Is a Grace Period for Student Loans?

A student loan grace period is a window of time after a student graduates and before they must begin making loan payments. The intent of a grace period is to give new graduates a chance to get a job, get settled, select a repayment plan, and start saving a bit before their loan repayment kicks in. Most federal student loans have a grace period, as well as some private student loans.

Grace periods also apply when a student leaves school or drops below half-time enrollment. Active members of the military who are deployed for more than 30 days during their grace period may receive the full grace period upon their return.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

How Long Is the Grace Period for Student Loans?

The grace period for federal student loans is typically six months. Some Perkins loans can have a nine-month grace period. When private lenders offer a grace period on student loans, it’s usually six months, too.

Keep in mind that, as noted above, not all student loans have grace periods.

Does My Student Loan Have a Grace Period?

Whether you have a grace period depends on what kind of loans you have. Student loans fall into two main buckets: federal and private student loans.

Federal Student Loans

Most federal student loans have grace periods.

•   Direct Subsidized Loans and Direct Unsubsidized Loans have a six-month grace period.

•   Grad PLUS loans technically don’t have a grace period. But graduate or professional students get an automatic six-month deferment after they graduate, leave school, or drop below half-time enrollment.

•   Parent Plus loans also don’t have a grace period. However, parents can request a six-month deferment after their child graduates, leaves school, or drops below half-time.

Keep in mind: Borrowers who consolidate their federal loans lose their grace period. Once your Direct Consolidation Loan is disbursed, repayment begins approximately two months later. And if you refinance, any grace period is determined by your new private lender.

Private Student Loans

The terms of private student loans vary by lender. Some private loans require that you make payments while you’re still in school. When private lenders do offer a grace period, it’s usually six months for undergraduates and nine months for graduate and professional students.

Here at SoFi, qualified private student loan borrowers can take advantage of a six-month grace period before payments are due. SoFi also honors existing grace periods on refinanced student loans.

If you’re not sure whether your private student loan has a grace period, check your loan documents or call your student loan servicer.

Recommended: Student Loan Forgiveness for Current Students

Does Interest Accrue During the Grace Period?

During the student loan payment pause, which lasted from March 2020 to September 1, 2023, interest did not accrue on federal student loans. However, that’s not the way it usually works.

For most federal and private student loans, interest is charged during the grace period — even though you aren’t making payments on the loan. In some cases, this interest is then added to your total loan balance (a process called “capitalization”), effectively leaving you to pay interest on your interest.

In July 2023, federal regulations changed so that the interest that accrues during a borrower’s grace period is not capitalized. According to the federal student aid website, “the interest that accrues during your grace period will be added to the outstanding balance of your loan, but it will not be capitalized.”

How to Make the Most of Your Student Loan Grace Period

If you are in a financially tight spot after you graduate or during your break from school, a student loan grace period can offer much-needed breathing room. Here’s how you can put your grace period to good use:

Get Your Finances in Order

Take this time to create a new post-grad budget. Which approach you use is up to you: the 70-20-10 Rule, the Kakeibo method, zero-based budgeting. The important thing is to determine your monthly income and expenses, setting aside enough to pay down debts and save a little.

Set Up Autopay

Missed loan payments can incur penalties and hurt your credit score. Setting up autopay means one less thing you have to remember. Some student loan lenders will even discount your interest rate for setting up automatic payments (like SoFi!).

Consider Making Payments Ahead of Time

Just because you don’t have to make payments toward student loans during a grace period doesn’t mean you can’t. If you are in a financial position to make payments — even interest-only payments — during a grace period, you should. It can help keep your loan’s principal balance from growing if you have private loans and the accruing interest is capitalizing during your grace period. (Learn more in our take on making minimum student loans payments.)

Look into Alternative Repayment Plans

Once your grace period is over for your federal loan, you’ll be automatically enrolled in the Standard Repayment plan. However, if you’re concerned about making your payments, several income-driven repayment plans are available. These plans reduce your payment to a small percentage of your discretionary income. The Department of Education introduced a new IDR plan recently called the Saving on a Valuable Education (SAVE). With SAVE, borrowers get the lowest monthly payments of all the IDR plans — sometimes as low as $0. (Note that the lowest payments will arrive in July 2024, when the minimum payment for SAVE participants drops from 10% to 5% of discretionary income.)

Consider Consolidating or Refinancing Your Student Loans

These two terms are often used interchangeably, but there are important differences between them. Both consolidation and refinancing combine and replace existing student loans with a single new loan.

A Direct Consolidation Loan allows you to combine several federal student loans into one new federal loan. The resulting interest rate is the weighted average of prior loan rates, rounded up to the nearest ⅛ of a percent. However, as noted above, borrowers who consolidate their federal loans lose their grace period.

Student loan refinancing is when you consolidate your student loans with a private lender and receive new rates and terms. Your interest rate — which is hopefully lower — is determined by your credit history.

Can You Extend Your Student Loan Grace Period?

If your loan doesn’t qualify for a grace period or you want to extend your grace period, you have options. You may still delay your federal student-loan repayment through deferment and forbearance.

What’s the difference? Both are similar to a grace period in that you won’t be responsible for student loan payments for a length of time. The difference is in the interest.

When a loan is in forbearance, loan payments are temporarily paused, but interest will accrue during the forbearance period. This can lead to substantial increases in what you’ll pay for your federal loans over time. You’ll want to consider forbearance very carefully, and look into other options that might be available to you, like income-driven repayment plans. (The good news is that the interest that accrues during forbearance no longer capitalizes.)

During deferment, by contrast, interest will not accrue – at least, not for Direct Subsidized Loans, Subsidized Federal Stafford Loans, Federal Perkins Loans, and subsidized portions of Direct Consolidation Loans or Federal Family Education Loan Program (FFEL) Consolidation Loans. Other types of federal loans may still accrue interest during deferment, and that interest will capitalize upon exiting deferment unless you were enrolled in an income-driven repayment plan.

While grace periods are automatic, you’ll need to request a student loan deferment or forbearance and meet certain eligibility requirements. In some cases — during a medical residency or National Guard activation, for example — a lender is required to grant forbearance.

The Takeaway

Federal student loan grace periods are typically six months from your date of graduation, during which you don’t have to make payments. Most federal student loans have grace periods (though sometimes they’re dubbed “deferments” instead). Private student loan terms vary by lender. However, some lenders, like SoFi, match federal grace periods for undergrad loans.

During your grace period, you may want to make payments anyway, even interest-only payments, to prevent your balance from growing. The grace period is a good time to create a new budget, choose a repayment plan, and set up autopay. Student loan payments and interest were on pause between March 2020 and September 2023, but they have resumed.
If you have trouble making your payments, you have options, from income-driven repayment to consolidation to refinancing.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

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SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOSL09230676

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