Refinancing your student loans could come with a big payoff, but it also comes with big changes: a new lender, new repayment term and new interest rate. Refinancing federal loans also means losing certain benefits.
NerdWallet is here to help you consider the pros and cons, and navigate the process if you decide to go for it. Use this infographic to determine if refinancing is a good option for you, and then read on to learn more.
Refinancing: The basics
When you refinance student loans -- whether federal, private or both -- a new lender pays them off and issues you a new private loan for the combined balance of the old loans.
Your credit score is one of the main factors that will determine the interest rate you'll get. If you don't have good or excellent credit, you can ask someone you trust -- like a parent or sibling -- to be a co-signer. A creditworthy co-signer can help you qualify for refinancing and get a better rate.
Most lenders will offer you a repayment term between five and 20 years. Keep in mind that a shorter repayment timeline will save you money in interest.
You'll also be able to choose between a fixed and variable interest rate. Variable rates often start out lower than fixed rates, but they'll likely go up in the future.
Consider refinancing if:
Your loans have high interest rates
The most compelling reason to refinance is to pay less in interest.
If you took out a federal student loan in 2007, for instance, you'd be paying 6.8% of your loan balance each year in interest. That rate has since dropped to 4.29%, but the government doesn't offer refinancing at current, lower interest rates. Interest rates for private student loans can be even higher than those for federal loans.
But private refinancing companies can give you a lower rate on loans if you've developed strong credit history. That could mean thousands of dollars in savings on both federal and private student loans over time.
You have great credit or a co-signer
In general, refinancing is best for borrowers who have job security, responsible financial habits and a clean credit history.
Most lenders use your credit score to determine how risky it is to lend you money. A credit score in the 700s or 800s shows that you're trustworthy, and will get you the lowest interest rates. It's also important to show lenders you have a steady income and stable job history. If you don't meet these requirements, you can get a refinanced loan with a co-signer who does.
Consider alternatives to refinancing if:
You're on an income-driven repayment plan
You'll likely pay more per month by refinancing than by choosing an income-driven student loan repayment plans.
These plans cap your monthly federal loan payments at 10% or 15% of your discretionary income, and are best for borrowers who have high debt loads compared to their incomes. If you wouldn't be able to afford your federal loan payments without an income-driven plan, consider refinancing your private loans only.
You'll rely on federal loan forgiveness, deferment or forbearance
Only loans you repay through the federal government will be forgiven under Public Service Loan Forgiveness or Perkins loan cancellation.
These programs will forgive your remaining loan balance after you've worked in qualifying public service jobs for a certain period of time. Federal income-driven repayment plans also come with loan forgiveness after 20 or 25 years of repayment. Plus, if you're unemployed or go back to school, you can defer federal loans for six months at a time for a total of three years.
Refinancing your federal loans may not be right for you if you'll take advantage of forgiveness or payment postponement through one of these programs in the future.
The bottom line
For those who qualify for refinancing, the benefits can be substantial. Do the research before you apply to find out if you meet the credit, loan balance and income requirements. And when you're ready to start the process, check out NerdWallet's partner Credible, a marketplace that lets you compare refinancing offers from up to eight lenders with one application.