If you have high-interest rate student loans, dealing with your debt can feel like a nightmare. The average college graduate with debt has over $30,000 in student loans, often with high interest rates. Refinancing is one way to save money by cutting down your loans interest rates—but is it right for you? Let’s look at refinancing to see whether refinancing your student loans is a good idea.

What Does Student Loan Refinancing Even Mean?

Refinancing is a slightly deceptive term because it sort of sounds like you’re modifying your existing loan. With refinancing you aren’t actually changing your existing loan’s interest rate, you’re applying for a new loan, with a different lender, which you then use to pay off your old, more expensive loan. Here’s an example:

Say you have 50,000 in student loans at a 7% interest rate from lender X. You look at your finances and realize you are paying too much in interest, so you go to lender Y and ask to borrow 50,000 at 5%. Lender Y looks at your payment history and thinks you can qualify for a new loan. They loan you $50,000 at 5%. You take that $50,000, use it to pay off your old student loans from lender X, and viola! your interest payments have been cut significantly.

You still owe $50,000, but you’ve lowered your interest rate, saving you thousands in the long run.  

Is Student Loan Refinancing Always a Good Idea?

No. A loan with a lower interest rate isn’t always cheaper. If the term of the loan is longer, then you might end up paying more in the end. For example, if you owe $50,000 at 6% with 8 years left, and you move to a loan with 4.9% interest and 10-year term, you’ll actually end up paying more. Even though the rate is much lower, those extra two years of interest payments make the 4.9% interest rate loan more expensive.

refinance student loans

This screenshot is from the Student Loan Hero Student Loan Refinancing Calculator, which is a great tool that helps you see how much money your new loan will save (or cost) you.

The moral of the story? If you think you can pay off a loan on your original schedule (or faster), a lower interest rate is always better. But if the low interest rate lulls you into a sense of complacency and you slow down your payments, it might actually be counterproductive.

Also, not everyone will qualify for student loan refinancing. If you have poor credit or a short history of loan repayment, lenders might be wary of issuing you a new loan with a lower interest rate. If your credit is good, or if you have someone co-sign your loan, your odds of success are higher.

How Student Loan Refinancing Affects Federal Loans

In most cases, if you have a private student loan that can be refinanced at a lower rate, you should do it. There is usually very little difference between different private student loan lenders.

However, things get way trickier with Federal student loans. That’s because Federal loans have special benefits which can make your life easier in case you are in financial trouble or undertake certain career paths.

Federal Student Loan Benefits

Federal loans have special protections that private loans don’t have. These include forbearance, deferment, and loan cancellation. If you refinance your federal loans with a private lender, you’ll lose these valuable protections. As we already covered in this post, some federal loans can be canceled or forgiven for a wide variety of reasons including if you:

  • Volunteer in the Peace Corps
  • Become a teacher
  • Are active duty military in a hostile area
  • A nurse or medical technician
  • Are a child or family services worker
  • Serve in law enforcement or corrections

If you are in one of the many qualifying professions like being a nurse, teacher, soldier or police officer, you should think twice before refinancing your federal loans. But even if you aren’t in a qualifying profession, you should consider the other benefits of federal loans, such as income-driven repayment plans.

What Should You Do?

Everyone’s situation will vary, so you should consult a qualified advisor and do the math before making any decisions. That said, here are some general rules of thumb:

  • If you have a large amount of debt or an unsteady income, you may want to keep your federal student loans in order to keep your options open. This is especially true if you are entering a career which offers forgiveness, such as law enforcement, nursing, or teaching.
  • If you have a steady income and don’t foresee any trouble paying back your federal loans, refinancing them to a lower interest rate will probably save you money.
  • If you have high-interest rate private loans and can get a lower rate, you should generally refinance them. Since private loans don’t offer the extra benefits of federal loans, you usually just want to switch to the lowest rate possible.

Other Ways to Cut Back on Interest

Refinancing your student loans is about saving money, but refinancing isn’t the only way to do it. Many loan servicers will reduce your interest rate if you enroll in autopay. Since you’ll be giving your lender direct access to your bank account, you’ll want to be sure you have the resources to pay off the loans. If that’s not a problem, it’s a great way to lower your interest rates without going through the refinancing process.

Refinancing your student loans can save you thousands of dollars—if you do it right. While getting a lower rate on your private loans is nearly always a good idea, it’s more complicated when it comes to Federal loans. Tools like Student Loan Hero’s Student Loan Refinancing Calculator can help you decide what is right for you.

Have you decided to refinance your student loan? On the fence? Let us know in the comments!

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Alex Webb is a freelance writer and founder of Take Risks Be Happy, an online magazine for creatives and entrepreneurs.