Is Refinancing Student Loans Worth It?

Abigail Eun
Abigail Eun

Abigail Eun is a freelance writer and personal finance expert. Through diligent research and continuous learning, she has honed her knowledge in budgeting, saving, investing, and debt management. Abigail is passionate about helping people get their finances in order. She believes that everyone should have access to the information they need to make sound financial decisions. Her goal is to provide clear and concise information that is easy to understand.

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December 5, 2022

As a borrower, refinancing your student loans can be beneficial. For example, borrowers who use Sparrow to refinance save, on average, $17,000 over the life of their loan. 

That said, the savings can vary greatly depending on the borrower. With that in mind, you might be wondering, “Is refinancing student loans worth it?.”

It’s always a good choice to explore your options to make a financially sound decision for yourself. To determine whether refinancing is worth it for you, here’s what you should know.

How Student Loan Refinancing Works

Loan refinancing is the process of taking out a new loan to pay for your current debt. The new loan should have more favorable terms, such as a lower interest rate or monthly loan payment.

For example, let’s say you currently have a student loan of $80,000 with an 8% interest rate and a 10-year repayment plan. You decide to refinance and qualify for a new loan of $80,000 with a 5% interest rate, with a 15-year repayment plan.

Through refinancing, you have a new loan with a lower interest and longer repayment period.

To refinance your student loans, you need to submit a formal application to the lender of your choice. Generally, lenders are looking for borrowers who have a strong credit history and a low debt-to-income (DTI) ratio.

The Pros and Cons of Refinancing

To better understand if refinancing student loans is worth it for you, consider the pros and cons:

Pros of Refinancing

You Can Have Lower Monthly Payments

If your student loan payments are too high, refinancing can help relieve the financial strain. You can extend your repayment plan to reduce monthly payments and pay the loan over a longer period of time.

You Can Save More Money

By refinancing to a lower interest rate, you can save more money in the long run.

For example, let’s say you currently have a student loan of $80,000 with an 8% interest rate and a 10-year repayment plan. You decide to refinance and qualify for a new loan of $80,000 with a 5% interest rate.

After refinancing, instead of paying $36,474.49 in interest with a 8% interest rate, you’d only need to pay $21,822.89, saving you roughly $15,000.

You Can Pay Off The Loan Quicker

Just like you can extend your repayment period through refinancing, you can shorten it if you want to pay off the loan quicker. This will mean that your monthly payments will be higher, but if your financial situation allows for this increase, it may be desirable for some borrowers.

You Don’t Qualify for Student Loan Forgiveness

Refinancing may be the way to go if:

  • You have private student loans, which do not qualify for loan forgiveness.
  • You do not have an income-driven repayment plan for your federal loans.
  • You do not work in a qualifying public service position for Public Service Loan Forgiveness. 

Refinancing is done through private student loans. If you opt to refinance a federal student loan into a private student loan, you will lose the benefits that come with federal student loans. However, if you plan to refinance a private student loan, these benefits are not at risk.

Cons of Refinancing

You Can Lose Federal Borrower Protections

If you refinance your federal student loans, they will become private loans. This means that you’ll lose out on federal borrower protections, including the opportunity for loan forgiveness, more flexible repayment plans, and loan deferment and forbearance options.

You Can’t Get a Lower Interest Rate And/Or Monthly Payment

If you don’t have a high enough credit score or a cosigner with a strong credit history, you may not qualify for a lower interest rate and/or monthly payment. If this is the case, you shouldn’t refinance your student loans because you wouldn’t be gaining anything from doing so. 

You’re Almost Done Paying Off Your Student Loans

If you only have a few more payments left on your student loans, it may be better to not refinance your loans. When you refinance your loans, you have to choose a new repayment plan that can extend the life of the loan, increasing the amount you have to pay.

Instead of refinancing, pay off your loan with your current plan. 

Is Refinancing Student Loans Worth It? It Depends.

You should consider refinancing if:

  • You qualify for a lower interest rate or monthly payment.
  • You do not qualify for federal loan forgiveness.
  • It will save you money in the long run.

You should not consider refinancing if:

  • You are almost done with paying off your loans.
  • You do not qualify for more competitive terms than the ones you already have.
  • You are eligible for federal student loan forgiveness.

Closing Thoughts From the Nest

Consider the pros and cons of student loan refinancing to determine whether the decision is worth it for you in the long run.

If refinancing your student loans is beneficial to you, consider using Sparrow as a tool to see your loan refinancing options. You can compare personalized offers across 15+ different lenders, all for free.

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