When should you refinance your student loans? Up-to-date info on the changing landscape

It’s not just the younger generations carrying student loan debt. While baby boomers are less likely to carry an education loan balance, those that do owe the second-highest average balance among the generations. Even members of the silent generation — those born between 1928 and 1945 — carry an average of $31,100 in student loan debt. And Gen X carries a higher average balance than any other generation at $44,420.

If you still owe money on your student loans, you might be wondering whether refinancing is a good idea — especially amid the changing landscape of loan repayments and wage garnishments. But whether you should refinance depends on a wide range of factors. If you have a steady, full-time job in a high-paying industry, for example, refinancing could help you save on interest and get out of debt more quickly. But if interest rates are high or your credit score needs work, you might want to hold off.

If you have federal student loans, you might want to stick with what you have. Even with a radical shake-up of federal student loans in the works, keeping your current loan still can be a better option than working with a private lender for most borrowers.

When it makes sense to refinance federal student loans

Under normal circumstances, refinancing federal student loans makes sense when you meet each of the five following criteria:

• You can qualify for a lower rate than you’re currently paying

• You have airtight job security

• You don’t want to go back to school before you’ve paid off your loans

• You aren’t eligible for student loan forgiveness

• You don’t plan on taking advantage of any of the benefits that come with federal loans

So what does this actually look like? In 2015, I met a lawyer who had just refinanced his federal student loans. He worked in a high-paying industry with a job that wasn’t vulnerable to layoffs during a recession and had no plans to go back to school or apply for loan forgiveness. The Fed rate was at 0%, so he was able to score a 2% interest rate on his new loan — 4 percentage points lower than his current rate of 6%.

The savings were so significant that he was confident he’d be able to pay off his balance within five years. The shorter term meant that there was less risk that something would happen in his career — or the world — that could change his financial circumstances. It also meant that he’d be able to qualify for a mortgage more easily when he was ready to buy a home.

Learn more: 6 smart money moves to make before and after the Fed’s rate decision

When to avoid refinancing federal student loans

While my lawyer friend was lucky, most borrowers will want to avoid refinancing their federal student loans. That’s because private student loan interest rates are generally higher than federal loan rates, and repayment options are far less flexible.

Federal loans come with a range of fixed, graduated and income-driven repayment plans, while private student loan providers usually only offer fixed repayments. And if you lose your job, go back to school or face other financial roadblocks, you have access to deferment and forbearance options that private lenders aren’t able to match and make a profit.

Dealing with federal servicers has been particularly frustrating and confusing over the past few years, which might make refinancing for the stability sound attractive. Proposed changes to the federal student loan programs — not to mention the potential closure of the Department of Education — certainly don’t help. But even if these changes come to be, you will likely benefit more by keeping your current loans than refinancing with a private lender.

Learn more: How the Federal Reserve and Fed rate affects your student loans

How your federal loans might change in 2025

There are a few changes coming to federal student loans this year, mainly around default and income-driven repayment plans. First, the federal government is set to resume collections on loans that are in default after a five-year pause. The Treasury Department was set to start garnishing wages, Social Security and federal tax refunds in June, yet has paused Social Security offsets as of our publishing date. If you’re in default, you can avoid garnishment by applying for loan rehabilitation with your lender or enrolling in an income-driven repayment plan.

In the summer, Congress is gearing up to pass the Student Success Taxpayer Savings Plan as a part of the budget reconciliation bill. This would slash benefits available to new federal student loan borrowers, but has little impact on current borrowers. Those who are in default or enrolled in an income-driven repayment plan will be impacted the most. This legislation would allow you to apply for loan rehabilitation twice, meaning that if you’re facing collections and already went through federal loan rehabilitation, you have another shot.

Some income-driven repayment options are also changing. Depending on where you live, how much you earn and the size of your family, this could either increase or decrease your monthly payments. Even if you’d prefer the previous options, the new plan is still more flexible than the options available from private lenders.

Impact on income-driven repayment plans

If the Student Success Taxpayer Savings Plan passes, anyone on an Income-Contingent Repayment Plan (ICR) or administrative forbearance will be transferred to a new repayment plan called the Repayment Assistance Program (RAP). This will happen within six months after the legislation is signed into law.

The Income Based Repayment (IBR) plan will remain untouched, but it’s unclear how other income-driven repayment plans will be affected by the current administration — like the Savings on Valuable Education (SAVE) or Pay as You Earn (PAYE) plans. Presidents Obama and Biden created these plans through executive order, meaning that they can be eliminated through the courts. They’ve been tied up in lawsuits since 2023, and it’s possible that one or both will be discontinued this year.

If you’re enrolled in SAVE or PAYE — or considering enrolling in either — stay on top of the news coming from the Department of Education and your servicer for updates on the status of the programs. While it might be tempting to switch to another income-driven plan, hold off on that for now. Any unpaid interest you owe capitalizes — which means it gets added to your principal — when you switch between income-driven plans. This will increase the total cost of your loan and keep you in debt for longer.

How the new Repayment Assistance Program works

RAP is a new income-driven repayment program that gives you monthly payments between 1% and 10% of your adjusted gross income (AGI). There’s also a minimum monthly payment of $10, regardless of how much you earn.

In contrast, under the one income-driven repayment program that we know will remain unchanged — the IBR — borrowers pay 10% to 15% of their income 150% above the poverty line, depending on when they took out their loan. Payments are also capped at the equivalent of a standard repayment with a 10-year term. IBR also waives the monthly payment for those who qualify for a payment less than $5.

Let’s take a look at how RAP and IBR payments compare. Since IBR payments vary depending on where you live and the terms of your loan, we’ll look at a single borrower with a $40,000 loan at 6% interest who lives in Texas, where the poverty line is $15,650. We’ll also assume they took out the loan after 2014 — meaning that they’d pay 10% of their discretionary income on an IBR plan.

Here’s how much they might pay by income level:

As this table shows, RAP may be more affordable for this borrower if they have a midlevel income, but otherwise IBR would have less of an impact on their budget. So, if lowering the monthly cost is their main priority, they may want to stick with IBR if they expect their salary to increase above $80,000 in the next 30 years. But if getting out of debt quickly is the priority, RAP could be the better option.

In fact, when you take into account additional benefits of the RAP program, this new program could be worth the potentially higher payments. If signed into law, there would be a $50 discount on monthly payment amounts per child you claim on your tax returns. There would also be a guarantee that your balance will decrease over time, because the federal government would forgive any remaining unpaid interest after each payment and contribute up to $50 toward your principal each month if your payment doesn’t cover that amount. This eliminates the problem of owing more than you originally borrowed after years of making payments.

One drawback is that RAP loans are forgiven after 30 years of eligible payments, whereas other income-driven repayment loans are forgiven after 20 to 25 years, depending on the program and when you first took out the loan. But with small amounts of forgiveness on principal and interest payments, there’s a chance you’ll pay off your loan before those 30 years are up.

If this borrower were enrolled in ICR instead of IBR, they would likely save by switching over to RAP at most income levels. ICR payments are more than twice as high as the IBR payment: 20% of any income over the poverty line, with no cap.

Learn more: When’s the next Federal Reserve meeting? What to expect — and how it affects your money

When it makes sense to refinance private student loans

If you currently have private student loans, refinancing makes sense in several situations. It means you might be able to swap out your current loan for a better deal under these circumstances.

Your credit score and income have gone up

If your credit score and income have increased since you took out your current loan, you’re in a good position to refinance. Your higher income and creditworthiness could make you eligible for lower interest rates and more favorable loan terms. The only situations where this might not help your rates get a better rate is if interest rates have significantly increased or you previously applied with a cosigner.

Interest rates have gone down

If the Federal Reserve has lowered the federal funds rate since you took out your private student loan, this might be a good time to look into refinancing — especially if you have a variable interest rate. Even if your income and credit score haven’t changed, you could qualify for a lower rate. Lenders also tend to loosen their eligibility requirements in low-rate environments, giving you more options to choose from.

You want to remove a cosigner from your loan

While some lenders offer cosigner release, many don’t. If that’s the case, refinancing is the only way to take a cosigner off your loan. While it’s not guaranteed that you’ll get a lower rate or more favorable terms, you may need to refinance if your cosigner plans on buying a home, new car or applying for another type of credit.

You need to lower your monthly payments

While federal student loans come with generous deferment and forbearance options and income-driven repayment plans, private loans are a lot less flexible. If you’re planning on going back to school, having a child or otherwise expect a long-term drop in your monthly income, refinancing for a longer term can help ease the strain on your monthly budget.

But a longer term will increase the total cost of your loan. Some lenders also charge higher interest rates on long-term loans. Before you take on a student loan refinance, call your servicer to discuss the options available to borrowers in your situation.

Learn more: 8 money lessons from the 2008 Great Recession that apply today

When to avoid refinancing private student loans

Refinancing private loans could sometimes backfire if it’s timed poorly. Hold off on refinancing for now if you find yourself in one of these situations.

Your income has taken a hit

While refinancing before an expected dip in income can help you reduce your monthly payments, refinancing after is generally not a good idea. While you might qualify for a longer term, your rate will also likely be higher.

Instead of refinancing, talk to your lender about changing the terms of your current loan. If you’ve lost your job, you may be able to pause repayments for around three months while you apply for a new position. Or if you’ve lost long-term income but are otherwise in good standing, your lender may be willing to extend the term while keeping your current rate.

Your credit score is less than ideal

Lenders generally prefer to work with people who have a credit score in the mid-600s or higher — though you’ll need to shoot for 100 points higher if you want to score a low interest rate.

If you’ve defaulted on your loans or declared bankruptcy in the past 7 to 10 years, your credit score likely isn’t high enough to qualify for refinancing. But even if you’ve never missed a payment, you might have a lower credit score than you think. This could be for several reasons:

• You’re carrying a lot of debt — especially compared to the amount of credit available to you. You can reduce this by paying down your high-interest credit card balances or opening a no-fee credit card that you never use.

• Your credit history is too short. Generally, you need at least seven years of repayment history to have excellent credit. The only solution to this is to wait.

• You’ve opened too many credit accounts in the past year. This lowers your average account age and also means you’ll have multiple credit inquiries on your report — both of which lower your score.

• You only have student loans. Having a mix of different types of credit, like term loans, credit cards or other lines of credit will boost your credit score.

That’s why it’s worth ordering copies of your credit reports and confirming your credit score before you apply for refinancing. If it’s lower than you expected, check your credit report for errors and take steps to boost your score before you apply for refinancing.

Interest rates have gone up

Private student loan interest rates are generally tied to the federal funds rate — also called the Fed rate. This means that if the Fed rate has increased since you signed your promissory note, you might not get a better deal than you already have. Even if your credit score and income have increased, you might want to hold off on refinancing until rates come down.

This also applies to anyone who wants to refinance for a lower rate or a lower payment. That’s because a higher interest rate could cancel out any savings you’d earn by extending your term. If you need a lower monthly repayment while rates are high, talk to your lender about extending your term instead.

You haven’t graduated

Most lenders require proof of graduation before you can refinance a student loan. So if you dropped out of school or are still working on your degree, you probably won’t be able to refinance your student loans.

If you decided to leave your program before graduation, you still may be able to refinance with a personal loan. But it’s probably not a good idea. Even private student loans tend to have lower rates and more flexible terms than personal loan providers offer. Also, many lenders won’t allow you to use a personal loan for educational expenses.

You don’t work full-time

Lenders prefer to work with full-time employees. Even if you earn a high income, the unpredictability of your next paycheck is enough to disqualify you with some lenders. And since rates are based on your perceived risk, you likely won’t be able to save much on interest.

You might be able to get around this by bringing on a cosigner who has a steady income. But unless they’re someone you already share finances with, like a spouse, adding a cosigner isn’t always a great idea. It can limit their credit options while you’re repaying the loan and potentially strain your relationship.

Learn more: Should you cosign a loan for a loved one? A guide to risks and rewards

How student loans refinancing works: 4 steps

Refinancing works by taking out a new loan to pay off the balance of your current loan. Typically it follows these four general steps:

1. Compare lenders. Look at the rates and terms available, requirements and other features that you might need, like cosigner release.

2. Prequalify with your top choices. This gives you an estimate of the rates and terms you’d receive if you applied, based on a soft credit check that doesn’t affect your credit.

3. Complete the application. After you’ve picked your lender, follow their instructions to complete the application. You’ll need details from your current loan, including the amount you’d owe on the day you plan on transferring the loan to your new lender.

4. Start making payments on your new loan. After your new lender sends the funds to your old servicer, you’ll send payments to your new lender. Consider setting up automatic payments — most lenders offer an autopay discount of around 0.25%.

How to choose the best refinancing lender

Comparing the following information can help you choose the best refinancing lender:

• Annual percentage rate. The APR includes both interest and fees. Comparing APR rather than interest is the best way to make an apples-to-apples comparison between lenders. If choosing a variable rate, also compare the maximum variable rate the lender will charge.

• Requirements. Most lenders require a credit score over 660, an undergraduate or graduate degree and a high enough income to support repayment terms. Check the requirements for each lender before you consider applying.

• Terms and repayment options. Typically terms range from 5 to 20 years. Most lenders only offer standard repayment periods, though there may be some flexibility on how you make repayments.

• Fees. Most lenders don’t charge any closing fees — for example, none of Credible’s refinancing partners charge fees — though there may be a fee for late or bounced payments. Avoid lenders that do.

• Minimum loan amounts. Some lenders require you to have at least $10,000 in debt, though you may be able to qualify with a balance as low as $5,000. Typically, the maximum is more than $200,000 — if there is one.

• Deferment and forbearance. Some lenders will allow you to defer payments if you decide to go back to school, and an option to pause or reduce payments during financial hardship. This helps protect you against default.

Alternatives to refinancing your student loans

Refinancing isn’t the only way to make changes to your student loan, though your options depend if you have federal or private student loans. Here are some of the alternatives to consider:

• Switch to a different repayment plan if you want to permanently change the terms of your repayment plan. This includes changing to a graduated repayment plan that increases over time, a standard plan or an income-driven plan.

• Apply for deferment or forbearance for short-term relief. You can pause payments for up to three months on private loans and years on federal loans, depending on the situation. Beware in most cases, interest will continue to accrue during deferment, increasing the cost of your loan.

• Consolidate your federal loans. This includes taking out a federal consolidation loan and may be a requirement to qualify for an income-driven plan. Consolidation won’t lower your interest but it can extend your term.

• Apply for repayment assistance. Some states and employers offer repayment assistance. Ask your state’s department of education and company’s HR department if this is available to you.

• Look into forgiveness and discharge. Federal loans may be eligible for forgiveness or discharge depending on your career, where you went to school and your health.

• Negotiate with your lender. If you have private loans, you may be able to negotiate a lower rate or longer term with your lender without having to refinance.

Other stories in our money and savings series

• Biggest winners and losers after latest Fed rate pause

• How to recession-proof your retirement: 7 smart strategies to fortify your nest egg

• 5 moves you shouldn’t take during a recession: Expert tips for weathering economic storms

• 5 smart moves after you’ve hit $10,000 in savings: It’s time to supercharge your money’s power

• 9 practical ways to save for college (even if you’re starting late)

FAQs: Your student loan repayments and refinancing

Get answers to common questions about student loan refinancing. And take a look at our growing library of personal finance guides that can help you save money, earn money and grow your wealth.

How early is too early to refinance a student loan?

Generally, it’s too early to refinance if you’re still in school. Most lenders require you to have a degree before you can refinance a student loan. You also likely aren’t working full-time, and if you are, you likely aren’t earning as much as you would be after you graduate. Wait until you have your diploma before you look into better deals.

Should I wait for the Fed rate to decrease before refinancing?

If the Fed rate is high, then you should wait for the Fed rate to decrease before refinancing a private student loan. If you need to refinance now, you may want to consider a variable-rate loan, which will decrease when the Fed rate decreases.

However, if the Fed rate is near 0%, then there’s no need to wait for it to decrease further. If that’s the case, then make sure to refinance for a fixed rate to protect you against future rate hikes. Learn more in our guide to the Fed rate and its impact on your finances.

What happens if you never pay off your student loans?

What happens if you never pay off student loans depends on the lender. Generally, your loans will go into default and the total balance becomes due immediately. If you don’t pay, the loan is sent to collections. If you have federal loans, the government has power to garnish your wages, tax refunds and any other money you receive from the federal government, like Social Security. Private lenders can generally only garnish your wages after they receive a court order. If you have any cosigners, private lenders can also come for their wages.

Refusing to pay your student loans will damage your credit score for seven years after you go into default. Unless you qualify for student loan discharge, the only way you can get away without paying your federal student loans is to sign up for an income-driven repayment plan and earn an income that is so low that your required monthly payment is $0 until your loan is forgiven. There is no way to avoid paying off a private student loan.

Why does the Federal Reserve change interest rates?

The Federal Reserve’s job is to help balance out the economy. One of its tools to do this is the ability to set a target for the interest rate that banks and credit unions charge one another to lend money — called the federal funds rate (or Fed rate). The Fed meets eight times a year to discuss economic policy. When the Fed changes the target Fed rate, this affects the amount that banks are able to charge in interest on new loans and current loans with variable interest rates. Credit cards, car loans and other types of consumer credit — including new and variable-rate private student loans — are affected by changes to the Fed rate. Learn more in our guide to the Fed rates and its impact on student loans.

Sources

• Student Loan Debt by Generation, Education Data Initiative. Accessed June 5, 2025.

• U.S. Department of Education Reminds Colleges and Universities of Their Obligations to Help Struggling Borrowers, U.S. Department of Education. Accessed June 5, 2025.

About the writer

Anna Serio-Ali is a trusted lending expert who specializes in consumer and business financing. A former certified commercial loan officer, Anna’s written and edited more than a thousand articles to help Americans strengthen their financial literacy. Her expertise and analysis on personal, student, business and car loans has been featured in Business Insider, CNBC, Nasdaq and ValueWalk, among other publications, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.

Article edited by Kelly Suzan Waggoner

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