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What happens when you refinance your student loans?

When you refinance your student loans, you are essentially getting one new loan from a new lender and using that loan to pay off your outstanding student loan debts. 

If you have multiple student loans with varying interest rates, you might consider refinancing your student loans. But what really happens with a student loan refi — and how can you qualify?

When you refinance your student loans, you are essentially getting one new loan from a new lender and using that loan to pay off your outstanding student loan debts. When all's said and done, you’ll be left with just one new loan to deal with and, importantly, one (hopefully) lower interest rate.

The whole point of refinancing your student debt should be to save money. If your interest rates are low enough that you won’t actually save much money by refinancing your debt, then it probably doesn't make sense to go through the trouble.

You can use calculators to find out how much you can save by refinancing your student loans like this one from Student Loan Hero and this one from MagnifyMoney.

It’s crucial that you shop around with various lenders to find the best and lowest rate. You don’t have to worry about taking a hit to your credit score by shopping around either — just be sure to do all of your comparison shopping within the same 14-day period and you should be fine. Why? Because if you have multiple credit inquiries in a short period of time, it’ll count as one hard inquiry on your credit report.

The easiest way to compare rates for student loan refis is to use comparison shopping websites that can help, or you can always go to lender websites directly. Some great places to start are sites like LendingTree, MagnifyMoney and Student Loan Hero. For example, this comparison page on Student Loan Hero makes it easy to compare offerings from the top lenders.

If you prefer to shop directly with lenders, you can start with some of the top refi lenders in the market right now, like SoFi, Earnest, CommonBond or LendKey.

The great thing about these four lenders is that they allow you to check your rate without impacting your score, and they also have the most competitive rates right now.

What does it take to get approved?

The better your credit score, the better your chances will be of getting a great rate on your refi loan. At a minimum, you’ll need a score in the mid to high 600s. Your income matters, too, and lenders will favor borrowers with higher income and lower debt levels because they have a better chance of staying on top of their payments. Most refi lenders want to see consistent proof of income and employment, as well as a record of on-time debt payments.

What if I’ve missed a bunch of student loan payments already?

Likely, you’ll have a hard time qualifying for a refi loan through a private lender. If you have federal student loans, you should look into the Direct Consolidation Loan program or the Loan Rehabilitation program.

Should I refinance if I have federal student loans?

You should be really careful before you decide to refinance federal student loans with a private lender. That’s because you are going to lose all of the flexible repayment options and protections that come with federal loans, such as income-driven repayment plans and the ability to qualify for loan forgiveness under programs like Public Service Loan Forgiveness. If you want to see if you qualify for PSLF, check out this guide.

You should be very confident that you’ll be able to make all your payments on time because private lenders won’t be as flexible as federal lenders. That being said, some of the top student loan refi lenders do work with borrowers struggling to make their payments so long as they communicate with the lender right away.

Before you decide whether or not to refinance federal student debt, run your numbers through the federal loan repayment estimator tool.

Pro tips

Fees: When you shop for the best rates, always factor in the cost of fees as well. Some lenders charge origination fees, which can add to the cost of your loan.

Fixed rate vs. variable rate: Variable-rate loans often have lower rates than fixed-rate loans; however, you assume the risk that those rates can fluctuate at any time. Variable rates make sense if you’re sure you can pay down the loan in quick fashion and you aren’t leaving yourself exposed to the risk of rising rates for too long. If you think you’ll need 10 to 20 years to pay off your loan, a variable-rate loan probably isn’t the best option.

MagnifyMoney is a price comparison and financial education website, founded by former bankers who use their knowledge of how the system works to help you save money.