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Upon graduating, the average student loan borrower has just over $37,000 in student loan debt. Meanwhile, the average graduate student holds significantly more — sometimes up to hundreds of thousands of dollars.

If you’re tired of paying hundreds or even thousands of dollars toward student loan debt, there’s some good news: You can apply for student loan refinancing. Refinancing through a private lender could give you the opportunity to lower the interest rates on your loans and save money over the life of the loan. However, you do lose access to federal benefits, so make sure you fully understand how refinancing works before moving forward.

How Student Loan Refinancing Works

Student loan refinancing is the process of paying off your existing loan loans with a new loan. Ideally, the new loan would have a better interest rate or better terms. For example, the borrower may want to switch from a fixed rate to a variable rate or extend the term in order to lower their monthly payments. (Note: You may pay more interest over the life of the loan if you refinance with an extended term.)

To understand why a borrower might refinance, it helps to first understand the major parts of a student loan. Every student loan is comprised of the following variables:

1.    The value of the loan (the “principal”)

2.    The interest rate on the loan

3.    The repayment period (also known as the loan’s term)

When a borrower refinances their student loan(s), they are typically looking to change either the second or third list item, or both. Keep in mind that refinancing means forfeiting federal loan benefits such as income-based repayment plans, deferment, and forbearance.

How to Refinance Student Loans in 7 Steps

If you’re considering refinancing your student loans, you’ll want to compare lenders and select the loan with the best interest rate and term. Once you choose a lender, you’ll apply for the loan and start making payments to the new lender. Here’s a more in-depth look at how to refinance your student loans in seven steps.

1. Should You Refinance Student Loans?

The first question you need to ask yourself is, “Should I refinance my student loans?” To answer the question, you need to understand more about student loans and the specific types of student loans you have. Student loans come in two main varieties: federal and private.

Federal student loans are backed by the U.S. government’s Department of Education. These are the loans that borrowers apply for using the Free Application for Federal Student Aid (FAFSA®) form. Private loans, on the other hand, are obtained through a bank, credit union, or other lender, and they are not backed by the U.S. government.

Determine which types of loans you have and which ones you’re wanting to refinance. Federal student loans, for example, can be consolidated into one loan with one monthly payment, known as a Direct Consolidation Loan. If you’re planning on using federal benefits, this option could be the best. If you want to refinance private loans only or federal and private loans, a traditional student loan refinance is what you’ll need. Keep in mind, though, that you will lose access to federal benefits when refinancing with a private lender.

Recommended: Consolidate vs Refinance Student Loans

Always be sure to ask whether a student loan refinancing company can refinance the types of loans that you currently have. Next, use that information to ask yourself the following questions:

1. Am I planning on using a student loan forgiveness program?

Because refinancing is the process of paying off your existing loans with a new, private loan, you will lose any access to the programs offered by federal loan programs, such as student loan forgiveness or income-driven repayment.

If you are currently working towards student loan forgiveness, you’ll probably want to think twice before refinancing your federal student loans.

2. Am I currently using an income-driven repayment plan?

Flexible repayment plans, such as one of the income-driven repayment plans, are another offering by the federal government on federal student loans. Private loans don’t generally offer any such programs. If you need to keep your monthly payments low and have exclusively federal student loans, refinancing might not be right for you. Refinancing with a private lender forfeits your access to the government’s income-based repayment plans.

3. Am I planning on using a forbearance or deferment program?

Both forbearance and deferment allow the borrower to suspend their payments for a period of time and for a variety of reasons, such as economic hardship or military service. Student loan forbearance and deferment are for federal student loans only. If you think you may need this benefit in the future, it may not be best to refinance with a private lender.

4. Do I have a good or great financial history?

When you refinance your student loans, your lender will base your interest rate off of your credit score, credit profile, debt-to-income ratio, payment history, and other financial data. If your credit score is less than ideal, you may not qualify for a lower interest rate, which could defeat the purpose of refinancing. It’s best to be aware of where you stand credit-wise before moving forward with a refinance.

2. Prepare Your Personal Financial Information

If you decide that refinancing is right for you, it’s a good idea to shop around at different lenders to check their rates. Before you do that, you’ll want to have your basic personal financial information ready. In general, potential lenders need some combination of the following information to give you a quote:

•   Name

•   Address

•   University

•   Degree

•   Total student loan debt

•   Debt-to-income ratio

•   Credit score estimate

The information a borrower needs to provide varies from lender to lender, but this is the basic idea.

3. Compare Lenders

Because student loan refinancing companies set their own rates and terms, it is important to do some shopping around. Not only will you want to get rate quotes, but you may also want to ask questions, such as:

•   Are there other fees, such as origination fees?

•   Is there a prepayment penalty if I want to pay my loan off early?

•   Can the lender refinance both federal and private loans?

•   Is there a forbearance program if I am laid off from my job?

•   How do I access customer service?

•   What is the loan application timeline?

If a company interests you, you can submit the information you gathered from Step 2. With this information, the lender will likely run a soft credit check. This should not affect your credit score, but make sure the lender guarantees it won’t.

If you meet a lender’s eligibility requirements, they’ll generally provide you with multiple offers, including offers with different term lengths and interest rates (both fixed and variable rates).

4. Choose a Lender and Loan

After you’ve had the chance to review both the loan offers and the lenders themselves, it’s time to decide.

While many borrowers gravitate toward the loan with the lowest interest rate, it is worth remembering that the lowest rate might not amount to the lowest amount of total interest paid on a loan.

The longer the loan’s term, the more interest a borrower will pay. For example, if you have a loan term of 10 years, you’ll have to pay off the entire loan balance plus the interest that was accrued over the 10 years. But, if you extend your loan term 20 years, that means 10 more years of interest accruing on your loan.

Also, a loan that charges an origination fee could end up costing more than a loan with a higher rate of interest that does not charge an origination fee. Often, an origination fee is added to the balance of the loan, with the interest rate calculated on top of this new figure.

5. Gather Necessary Documents

Once you’ve chosen a lender and a loan, you’ll submit documentation that supports the information you provided during the initial rate check, as well as identifying information.

Although it will vary by lender, you’ll likely need some combination of the following:

•   Proof of citizenship

•   Valid ID number

•   Paystubs, tax returns, or other income verification

•   Statements for all of the loans you are planning to refinance

If you are applying for a refinance with a cosigner, they will need to provide this information, as well.

6. Apply

Once you’ve gathered all your documentation, it’s time to apply for your new refinance loan. Upon turning this information into the lender, they typically run a hard credit check and send the application through a final approval process.

A lender should inform you if any of your documentation is missing, but you may want to check back in after a few days if you haven’t heard from a customer service representative.

7. Waiting for Approval

Once you’ve applied for the loan and submitted all your documentation, all that’s left to do is wait for your approval. How long this process takes will depend on the lender, but it could be as short as 24 hours and as long as a couple of weeks. Check with each lender to be sure.

Once your loan is approved, consider signing up for autopay (if they offer it and you haven’t already). Many lenders offer a discounted rate for borrowers who allow payments to be automatically deducted from their accounts.

Pros and Cons of Refinancing Student Loans

As with anything, there are both pros and cons of refinancing student loans. While you could receive a lower interest rate and lower monthly payment, you will lose access to federal benefits and programs.

Refinancing Student Loans With SoFi

And there, you’ve done it. You’ve learned how to refinance your student loans in seven steps. If you decide that refinancing is right for you, SoFi offers an easy online application, competitive rates, no fees, and other member benefits such as career coaching and financial advice.

FAQ

Does refinancing student loans mean the same thing as consolidating student loans?

Refinancing and consolidating student loans are similar and often used interchangeably, but they do mean different things. A student loan refinance is done through a private lender and combines multiple federal and/or private loans into one loan with one monthly payment. With this type of financing, you lose access to federal benefits. A student loan consolidation, on the other hand, is done through the U.S. Department of Education and combines multiple federal loans into one. Your payment does not typically decrease, but you do keep access to federal benefits and streamline your monthly payments into one.

Can refinancing a student loan help to pay off debt faster?

Yes, refinancing student loans can help you pay off your student loan debt quicker. Ideally, you’ll reduce your interest payment and shorten the length of your loan. This allows you to pay less money in interest overall and get rid of your debt as soon as possible.

What are the downsides of refinancing student loans?

The biggest downside to refinancing student loans is losing access to federal benefits, repayment plans, and forgiveness programs. However, if you are in a field that’s not eligible for forgiveness and you don’t plan on needing a deferment or forbearance, it could be worth the savings to move forward with a refinance. As always, it’s best to heavily weigh the pros and cons for your specific situation before moving forward.

To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
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.

Federal student loans could be either Direct Loans or “indirect loans” until 2010, when Congress voted to eliminate the latter. Yet many borrowers of indirect loans, also known as Federal Family Education Loans (FFELs), continue to struggle with repayment.

The big difference between the loan types — and point of contention — was the source of the funding.

Indirect vs Direct Student Loans

Indirect Student Loans

The Federal Family Education Loan Program was funded by private lenders (banks, credit unions, etc.), but guaranteed by the federal government. The program ended in 2010, and loans are now made through the Federal Direct Loan Program.

The government didn’t directly insure FFEL Program loans. Instead, it acted through a guarantor, which paid the lender if the borrower defaulted. Then, the government reimbursed the guarantor.

When it came to questions about payment, borrowers dealt with the lender, the guarantor, the servicer, or a collection agency — not the government.

Direct Student Loans

With a Direct Loan, made through the William D. Ford Federal Direct Loan Program, the funds come directly from the U.S. Department of Education, which gets the money from the U.S. Treasury. The loans are made by the Department of Education and backed by the federal government.

Direct Loans consist of Direct Subsidized and Direct Unsubsidized Loans (also called Stafford Loans), Direct PLUS Loans, and Direct Consolidation Loans.

Recommended: Types of Federal Student Loans

Before 2010, every school made its own decision about whether to participate in a direct or indirect loan program, or possibly both. But there were some differences in interest rates, fees, and repayment options.

What Kind of Loans Do You Have?

If you’re thinking about how to best address your student loan debt, it’s important to know what kind of loan or loans you have, including whether they are Direct Loans or FFELs. You want to see who your loan servicers are, your loan amounts, your interest rates, your terms, and your monthly payments. Getting a baseline is crucial for determining next steps.

Repaying FFEL Program Loans

Even though indirect student loans ended on June 30, 2010, there are still 3.55 million borrowers who hold $94.8 billion in FFEL loans as of 2023.

Borrowers must consolidate their FFEL loans before they can apply for one of the four common income-driven repayment plans, which forgive any loan balance after 20 or 25 years of payments.

They also must consolidate loans to apply for Public Service Loan Forgiveness (PSLF), which allows some members of the military, classroom teachers, social workers, and nonprofit and government employees to have certain loan balances eliminated after 120 on-time payments.

Here’s more on repayment options, including the only income-driven repayment plan tailored to FFEL borrowers.

Income-Sensitive Repayment Plan

Only borrowers with a high debt-to-income ratio will qualify for this FFEL repayment plan. The lender determines the monthly payment based on your total gross income, not adjusted gross.

Consolidating Your Loans

Consolidating loans with a federal Direct Consolidation Loan can increase the amount of interest that is paid over the life of the loan. If you decide to lengthen your payment period (for example, from 10 to 20 or even 30 years), your monthly payment may be lower, but the total interest you’ll pay over the life of the loan will most likely be higher.

Consolidation isn’t necessarily a money-saving option over an extended time period. And the interest rate on a Direct Consolidation Loan is the weighted average of the borrower’s current federal loans, rounded up to the nearest one-eighth of a percentage point. So, the rate actually might rise slightly.

If you don’t have any indirect loans, you still can consider consolidating your Direct Student Loans. (Note that only federal student loans, not private student loans, are eligible for consolidation into a Direct Consolidation Loan.)

Refinancing Your Loans

Another option is to apply to refinance your student loans — federal, private, or both — into one new loan through a private lender.

Before deciding to refinance, it’s important to note that you lose access to federal benefits. This includes the ability to delay payments if you run into certain hardships and apply for federal loan forgiveness programs. But, if you don’t plan on using those, you could gain a chance at a lower interest rate with a refinance.

If you have a solid debt-to-income ratio after graduation and have built your credit profile since you first took out your student loans — and you don’t foresee a need for PSLF or an income-based repayment program — refinancing might help lower your payment without extending the length of your loan via a lower interest rate.

You can see exactly if and how much you could save with SoFi’s student loan refinancing calculator.

The Takeaway

More than 3.5 million borrowers are repaying FFEL Program loans as of 2023. The last of these “indirect loans” were issued in 2010, when federal Direct Loans largely took over. Whether you’re repaying an FFEL loan, Direct Loan, or private loan, it’s a good idea to learn your options and figure out which makes the most sense for your situation.

If you decide to refinance your student loans, SoFi offers an easy online application, no origination fees, and competitive fixed or variable rates.

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.

Student loans are a significant issue in the United States, where consumers have more than $1.7 trillion in total student loan debt. In 2021, the average federal student loan debt per borrower was just over $37,000. And 20 years after students enter college, half of borrowers still owe $20,000 in student loans.

Broken down by degree levels, the debt increases. Graduate students who receive a degree leave school with an average of nearly $70,000 in debt. Law students are saddled with an average of $180,000; and medical students owe $250,000 on average for total student loan debt.

With so many borrowers and so much debt, it begs the question, “Should all student loan debt be forgiven?”

Who’s in Favor?

By a 2-to-1 margin, voters do support at least some student loans being forgiven, according to a poll from Politico and Morning Consult. And 53% of voters from the same poll support Biden’s extension of student loan payments through August.

Proponents of canceling student loan debt point out that the government is partially responsible for this debt crisis. Because many states slashed higher education funding after the 2008 recession, tuition at both public and private colleges has gone up steeply, and many students have been forced to take out even more in loans.

Unfortunately, the increase in student loan balances hasn’t gone hand in hand with a bump in post-college salary. The result is a national situation where borrowers owe increasingly more in student loans but don’t have the paycheck to aggressively tackle their balances.

Although the government has created income-driven repayment options that seek to keep monthly student loan payments affordable, signing up isn’t without its downsides.

Since these income-driven plans often lengthen loan terms, borrowers may pay significantly more interest on their loans over time. Also, any forgiven balance at the end of their loan term is typically treated as taxable income.

Why Forgiving Student Loan Debt a Isn’t a Slam-Dunk

There are several reasons why forgiving student loan debt may not be a straightforward positive. The first is that, according to U.S. tax laws, debt that’s forgiven is a taxable event. Under income-driven student loan repayment plans, for instance, if you make consistent, on-time payments for the life of the loan (20 or 25 years, depending on when you borrowed), any balance remaining at the end of your loan term is forgiven — but whatever’s forgiven is considered taxable income.

The second issue pundits raise with this plan is that it’s being sold as a stimulus: If the government forgives people’s student loan debt, they’ll put money back into the economy, the thinking goes. But forgiving debt isn’t the same as handing people a check.

And finally, the federal government so far isn’t planning to forgive student loans that borrowers hold with private lenders, which average over $54,000 per borrower.

Alternative Options to Canceling Student Loan Debt

Instead of targeting only student loan borrowers who qualify for relief, the government could provide a stimulus check to all Americans, and Americans could decide for themselves how to use it.

If someone has $10,000 in outstanding student loans, for example, they might prefer to use a check to put a down payment on a house or pay off high-interest credit card debt.

Then there’s the higher education system itself. Canceling or forgiving student loan debt may provide only temporary relief as long as tuition levels continue to rise. As it stands, future generations will be saddled with just as much, if not more, student debt than Americans currently have today.

Tackling Your Student Loan Debt

There’s no telling when or if some form of more long-term relief might appear for student loan borrowers. If you’re struggling under the weight of your student debt, there are strategies that might help:

•   Alternative payment plans: Federal student loans come with a variety of repayment options, one of which might suit your situation.

•   Direction of overpayments: If you make extra payments on your student loans, you may instruct your servicer to apply them to your principal, rather than the next month’s payment plus interest. This will help pay off your loans faster.

•   “Found” money: If you receive a work bonus or tax refund, applying it to your student loans can help reduce your balance faster.

•   Refinancing: Refinancing student loans (private and/or federal) into one new loan with a private lender could lower your monthly payment and interest rate, and make it easier to manage payments. Just know that refinancing federal student loans with a private lender means losing access to federal repayment and forgiveness programs.

Recommended: Can Refinanced Student Loans Still Be Forgiven?

The Takeaway

There is no quick fix for student loan debt, which will take further discussion from stakeholders on all sides.

If you are struggling with your own student loan debt, there are options to consider. You can apply for an income-driven repayment plan, apply for student loan deferment or forbearance on your federal student loans, or refinance your loans with a private lender. Keep in mind, though, that refinancing disqualifies you from federal benefits you may otherwise be eligible for.

If you do decide to refinance, consider SoFi. SoFi has a quick online application process, competitive rates, and no origination fees or prepayment penalties.

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.