When to refinance your private student loans

If you struggle with your student loan payments, you may be considering refinancing a private student loan for a better rate and lower payment. Refinancing student loans may be a good idea if you can save money in interest, secure a lower monthly payment – or both – or if you’re simply not happy with your current lender.

1. When you have high interest rates

Interest on some federal student loans may be subsidized, meaning it doesn’t accumulate while you’re in school. With private student loans, on the other hand, interest accrues while you’re in school and is eventually capitalized. In other words, any unpaid interest becomes part of the principal balance. This can add years to your repayment timeline, in addition to increasing the overall cost of the loan.

Interest rates on private loans can be fixed or variable and currently fall between about 5 percent and 18 percent. The rates you’re given are based on your creditworthiness and overall financial health.

If your current student loans’ interest rates are on the higher side, it may be a good idea to consider refinancing. This is particularly true if both your credit score and income have improved since you took out the loans, as you could secure a lower rate.

When rates are rising, it can be smart to refinance variable-rate loans to lock in a lower fixed rate. However, private student loan rates are generally falling as we enter 2025 and the Fed continues cutting the federal funds rate.

If saving on interest is your main goal, consider prequalifying with multiple lenders. This will allow you to see realistic student loan refinance rates without impacting your credit, so you can decide if refinancing is right for you.

2. When you want to switch lenders

Maybe your lender’s customer support is lacking, or you have run into multiple difficult situations with its systems that weren’t resolved well. If that’s the case, refinancing is definitely worth looking into.

The new loan will be used to pay off your existing balance with your current lender. Then, that account will be closed, and you will begin making payments with your new lender, according to the terms specified in your contract.

Before switching lenders, research your options carefully. Take into account perks, like automatic payment and loyalty discounts, in addition to the offered terms and interest rates. Likewise, check the lender’s track record with customers on review websites like Trustpilot and the Better Business Bureau to ensure you’re dealing with a reputable company.

3. When you want to extend your payment timeline

If you’re having trouble making your loan payments, refinancing can help make your monthly payments more manageable by altering the repayment period.

With most lenders, you can choose to lengthen your repayment timeline to lower your monthly payments. While this method provides short-term financial relief, keep in mind that you’ll end up paying more interest over the life of your loan.

Refinancing for a shorter loan term typically isn’t worth it (unless it nets you a lower rate) because student lenders do not charge early payment penalties. If you want to pay your student loan off more quickly to save on interest, you can simply make larger or more frequent payments.

When it may not make sense to refinance your private loans

Though refinancing comes with some benefits, it isn’t the best solution for everyone. There are some times when refinancing may not be right:

• You’re close to your payoff date: Terms for refinancing student loans typically start at 5 years. If you have significantly less time than that left and do not wish to extend your loan term, it might be better to stick with your original loan.
• Your credit score is poor, and you lack a cosigner: Without good credit or a cosigner who has good credit, it will be difficult to find a better rate on your student loans.
• Your debt-to-income ratio is too high: Your debt-to-income ratio tells lenders whether you can afford to take on additional debt. If your ratio is above about 50 percent, lenders may reject you or charge a higher rate.
• Your private loans are in default: Loan defaults show up on your credit report and seriously damage your credit score. This makes lenders hesitant to do business with you.

Bottom line

Refinancing your private student loans can be a great move if it means saving money. It can also be worth it if your current lender provides poor customer service or has made errors while servicing your loan. But make sure you meet lenders’ refinancing requirements and you are current on payments before you start shopping around.