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Private lenders that refinance student loans base rates they offer on the loan term, the borrower’s risk profile, and a rate index. Typically, the most financially stable applicants get the lowest rates.

When the goal is a lower rate, lower monthly payments, or both, the fixed or variable rate you qualify for makes all the difference. (You can also get a lower rate by refinancing with an extended term, but if you do so you may pay more interest over the life of the loan.)

Here’s a look at what you need to know about how interest rates for student loan refinances work.

Student Loan Refinancing, Explained

When you refinance, you take out a new private loan and use it to pay off your existing federal or private student loans. The new loan will have a new repayment term and interest rate, which hopefully will be better.

Most refinancing lenders offer fixed or variable interest rates and terms of five to 20 years. Shortening or lengthening your existing student loan term or terms can affect your monthly payment and the total cost of your new loan. The two key ways to save money by refinancing are:

•   A shorter repayment term

•   A lower rate

Then again, someone wanting lower monthly payments might choose a longer term, but that may result in more interest paid over the life of the loan.

There are no fees to refinance student loans. Nor is there any limit to the number of times you can refinance. Lenders will want to see a decent credit score, a stable income, and manageable debt. Adding a cosigner may strengthen your profile.

Refinancing federal student loans into a private student loan renders federal benefits moot.

Is Consolidation the Same as Refinancing?

Student loan consolidation and refinancing are terms that are often used interchangeably, but they are not technically the same thing. In general, consolidation means combining multiple loans to create one simplified payment. However, student loan consolidation most often refers to a federal program that allows you to combine multiple types of federal student loans into a single loan. The new loan will have a new term of up to 30 years, but the new rate will not be lower.

Refinancing of student loans is offered by private lenders, such as banks and credit unions. Federal and/or private student loans are refinanced into a new loan that ideally has a better rate; you can refinance a single loan, or consolidate multiple loans into a single new loan through this refinancing process.


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

What Are Interest Rates?

Interest rates are the amount lenders charge individuals to borrow money. When you take out a loan, you must pay back the amount you borrowed, plus interest, usually represented by a certain percentage of the loan principal (the amount you have remaining to pay off).

When interest rates are high, borrowing money is more expensive. And when interest rates are low, borrowing can be cheaper.

Interest rates can be fixed, variable, or a hybrid. For fixed interest rates, lenders set the rate at the beginning of the loan, and that rate will not change over the life of the loan.

A variable interest rate is indexed to a benchmark interest rate. As that benchmark rises or falls, so too will the variable rate on your loan. Variable-rate loans may be best for short-term loans that you can pay off before interest rates have a chance to rise.

Hybrid rates may start out with a fixed interest rate for a period of time, which then switches to a variable rate.

How Is Interest Rate Different From APR?

While interest rates refers to the monthly amount you’ll need to pay to borrow money, annual percentage rate (APR) represents your interest rate for an entire year and any other costs and fees associated with the loan.

As a result, APR gives you a better sense of exactly how expensive a loan might be, and helps when comparing loan options.

What Factors Influence Student Loan Interest Rates?

Interest rates for federal student loans are set by Congress each year. Federal loans use the 10-year Treasury note as an index for interest rates. These rates apply to all borrowers.

Private lenders, on the other hand, will look at other factors when determining interest rates, such as credit score and credit history. Their interest rates are not governed by legislation so rates can be higher or lower than the federal one, depending on the type of loan and terms. Prevailing interest rates, however, still play a big factor since they change annually.

Typically, lenders see those with higher scores as more likely to pay off their loans on time, and may reward this with lower interest rates. Lenders see borrowers with lower scores as being at greater risk of defaulting on their loans. To offset the risk, they tend to offer higher interest rates.

Some lenders offer a rate discount if you sign up for their autopay program.

What Drives Student Loan Refinancing Rates?

Student loan refinancing rates are driven by many of the same factors that drive rates on your initial loan, such as credit score and credit history. You may want to consider refinancing during this era of low rates or if your financial situation has improved. For example, if you’ve increased your income or you’ve paid off other debts and your credit score received a boost, you may look into refinancing your loans at a lower interest rate.

Many graduates haven’t had much time to build a credit history. A cosigner with good credit may help an individual qualify for a refinance at a lower rate. Cosigners share responsibility for loan payments, of course. So if you miss a payment, they’ll be on the hook.

Refinance Student Loans With SoFi

You might choose to refinance student loans when interest rates are relatively low or your financial situation has improved, potentially providing access to a new private student loan at a lower rate.

Refinancing may be a good move for borrowers with higher-interest private student loans and those with federal student loans who don’t plan to use federal programs like income-driven repayment, Public Service Loan Forgiveness, or forbearance.

A student loan refinancing calculator can help you determine how much you might save by refinancing your student 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.

FAQ

How are student loan refinancing rates calculated?

Lenders base interest rates largely on factors like an applicant’s credit history, income, debt, and prevailing interest rates which change annually.

Does refinancing save you money?

When you refinance your student loans with a new loan at a lower interest rate, you will pay less interest over the life of the loan, given the same or similar loan terms.

What is an average interest rate for student loans?

The average interest rate among all student loans, federal and private, is 5.8%, according to Education Data Initiative researchers. Private student loan rates have a wide range for fixed- and variable-rate loans and generally range from 4% to 15%.

For the 2023-2024 school year, the interest rate on Direct Subsidized or Unsubsidized loans for undergraduates is 5.50%, the rate on Direct Unsubsidized loans for graduate and professional students is 7.05%, and the rate on Direct PLUS loans for graduate students, professional students, and parents is 8.05%. The interest rates on federal student loans are fixed and are set annually by Congress.

Photo credit: iStock/Kateryna Onyshchuk
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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.

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.

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While the principal of a student loan isn’t tax deductible, the interest you pay on it can be — and that includes refinanced student loans. If you’re eligible, you may be able to deduct up to $2,500 from your taxable income.

The amount you can deduct is dependent on your income; as you earn more, the amount you can deduct is decreased and eventually eliminated. You also must have paid interest on a qualified student loan – that is, one taken out to pay for qualified higher education expenses, such as tuition, books, or room and board.

Here’s what to know about refinanced student loans and tax returns, including when interest on student loans is tax deductible, how tax deductions differ from tax credits, and how refinancing can affect taxes.

What Is a Tax Deduction?

For starters, it’s helpful to review what a tax deduction is: A tax deduction lowers your taxable income by reducing the amount of your income before you or a tax professional calculates the tax you owe.

For example, a $100 exemption or deduction reduces your taxable income by $100. So it would reduce the taxes you owe by a maximum of $100 multiplied by your tax rate, which can range from 0% to 37%. So your deduction could reduce your taxes between $0 to $37.

And before considering how refinancing affects your taxes, it’s helpful to review what happens when you refinance a student loan: Your lender “swaps out” (or “pays off”) your existing loans and gives you a new loan with new terms. A student loan refinance may be beneficial if you get a lower interest rate and/or a lower monthly payment, which can save you money in the long run. (Note: You may pay more interest over the life of the loan if you refinance with an extended term.)

If you’re considering refinancing federal student loans, however, it’s important to understand that you would lose access to certain federal benefits and protections, such as Public Service Loan Forgiveness, federal deferment and forbearance as well as income-driven repayment options.


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

The Difference Between a Tax Deduction and a Tax Credit

Keep in mind that a tax deduction is not the same as a tax credit. While a tax deduction reduces your taxable income, a tax credit directly reduces your taxes.

Tax credits give you a dollar-for-dollar reduction on your taxes. In other words, if you qualify for a $2,000 tax credit, the tax credit lowers your tax bill by that exact amount — $2,000.

Recommended: Tax Season 2022: A Guide to Understanding Your Taxes

How Does Paying Student Loans Affect Taxes?

If you paid qualified student loans during the year, you may be eligible for the student loan interest tax deduction. This deduction can reduce your taxable income by the amount of student loan interest you paid during the year — up to $2,500.

Note that the interest on student loans is tax deductible, not your total payment amount (which includes the principal). You can claim it without having to itemize deductions on your tax return because it’s taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Form 1040.

Who Is Eligible for the Student Loan Interest Deduction?

The student loan interest deduction is an “above the line” deduction, which means that it is deducted to calculate your adjusted gross income (AGI).

As mentioned earlier, the interest paid must be for a qualified student loan that you take out for yourself, your spouse, or a dependent for qualified undergraduate or graduate education expenses, such as tuition, books, or room and board. In addition, the expenses must have been incurred within “a reasonable period of time” prior to or after taking out the loan, according to the IRS.

For taxable years beginning in 2023, your modified adjusted gross income (MAGI) must also amount to less than $80,000 ($160,000 if filing a joint return). Your amount will be phased out (reduced) if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return).

You cannot claim the deduction at all if your MAGI is $90,000 or more ($180,000 or more if you file a joint return). You also will not qualify for the deduction if you are married and filing separately.

Recommended: How Income Tax Withholding Works

Are Refinanced Student Loans Tax Deductible?

Yes, you can get a tax deduction on the interest you’ve paid on refinanced or consolidated student loans as long as the new loan refinanced qualified student loans.

Refinancing affects your taxes only insofar as the refinancing might change how much interest you pay in a given year – and thus, how much you can deduct. For instance, if refinancing lowers the amount of interest you pay below the $2,500 deduction amount, then that would mean you can’t deduct as much on your taxes. Still, refinancing may save you more money in the long run than a student loan interest deduction because it’s a deduction, not a tax credit. It’s important to do the math or consult a tax professional before you make a final decision.

Recommended: Where Is My Tax Refund?

Refinance Qualifications

It’s also worth taking a look at common eligibility requirements for a refinance. For most borrowers, the soonest you can refinance is usually after graduating. In addition to a degree, you often need to have:

•   A debt-to-income (DTI) ratio under 50%: Your DTI refers to how much of your income goes toward debt and how much goes toward your regular income. It’s best to keep your DTI under 50%, but being over doesn’t necessarily mean you won’t qualify for a student loan refinance.

•   Minimum credit score of 650: Your credit score is a three-digit number that shows how well you pay back debt. It’s best to have a minimum credit score of at least 650 to be eligible for student loan financing. Again, your personal situation will be considered before determining whether you qualify for a refinance.

•   A steady job and/or consistent income: You may need to prove that you have a steady job and have enough savings to be able to pay for at least two months’ worth of regular expenses.

•   A certain balance amount: In most cases, lenders will require you to have a certain minimum balance on your student loans in order to qualify for a refinance.

Refinancing Your Student Loans With SoFi

If you’re thinking about refinancing your student loans, SoFi offers flexible terms with fixed or variable rates. You can apply online, and there aren’t any fees.

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.

FAQ

What refinance costs are tax deductible?

When it comes to refinancing and taxes, lenders usually don’t charge any upfront fees to refinance your student loans, which means that there aren’t any refinance costs to deduct.

When you make payments on a qualified student loan — including refinanced student loans — you may be eligible for the student loan interest deduction.

Is it worth it to claim student loan interest?

Yes, when it comes to student loans and tax returns, you may be able to deduct up to $2,500 from your taxable income if you’re eligible.

To be able to claim the deduction, your modified adjusted gross income (MAGI) must be less than $80,000 ($160,000 if filing a joint return). You’ll also experience a phased-out deduction if your MAGI is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return). It disappears entirely at MAGIs above $90,000 and $180,000 for joint filers.

Are student loan payments tax deductible?

Only the interest you pay on your student loans is tax deductible. Whole student loan payments (which include principal) are not tax deductible.

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.

Photo credit: iStock/Drazen Zigic
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