Student loan refinancing: What it is, how it works, and how to get started – The Pros and Cons of Refinancing Student Loans

Student loan refinancing can be a strategic move for borrowers in the UK who are looking to reduce their monthly payments or secure a lower interest rate, particularly for private student loans.¹ While current student loan interest rates vary, the best student loan refinancing companies often offer competitive options for qualified applicants.²

However, it’s crucial to understand that refinancing isn’t ideal for everyone, especially those with loans from the Student Loans Company (SLC), which are the primary “government-backed” student loans in the UK. Choosing to refinance these could mean losing access to significant protections and unique benefits.

What is Student Loan Refinancing?

Student loan refinancing is the process of replacing the terms of your existing loan(s) with new terms, typically by taking out a new loan from a private lender.³ This may involve switching your loan servicer. Borrowers consider refinancing to:

Lower their interest rate: Potentially reducing the total cost of the loan over time.⁴
Reduce monthly payments: By extending the repayment term, though this can increase total interest paid.
Pay off debt faster: By securing a lower rate and/or choosing a shorter repayment term.⁵
Combine multiple loans into a single payment: Simplifying your financial management.

Application and Loan Process

1. Understanding Your Current Loans and Pre-approval:

Before considering refinancing, ensure you fully understand all the terms of your current loans. This includes your existing interest rates (fixed or variable), repayment terms, and any associated benefits or penalties. This knowledge will enable you to effectively compare offers from competing lenders.

Research Different Companies: Look into various private lenders offering student loan refinancing in the UK.
Check Personalized Terms: Many lenders allow you to check your potential interest rates and terms by getting “prequalified.” This typically involves a soft credit pull, which doesn’t affect your credit score.⁶ This is a great way to compare offers without commitment.
Gather Documents and Prepare for Checks: You’ll need documents proving your financial situation and identity, similar to when you first applied for a loan.⁷ This will include income verification, proof of address, and details of your existing student loans.

2. Loan Disbursement:

If you proceed with refinancing, you will generally have a new loan servicer, unless you’re refinancing a private loan with your current private lender. Your new lender will pay off your old loans, and you’ll then make payments to this new servicer, who will have their own payment portal, customer service, and potentially unique perks.8

New Loan Terms: The refinanced loan will come with new terms, which could include a different interest rate (fixed or variable), a new repayment term length, or potentially lower fees.⁹ Make sure you fully understand these new terms to stay on top of your financial obligations.

3. New Terms Take Effect:

After the lender provides their final offer, you’ll officially accept the terms and sign a binding agreement to repay the loan. Your new lender will then pay off your existing lender(s), and your new repayment term will commence.10

Pros and Cons of Refinancing Student Loans

Pros of Refinancing Student Loans

Lower Interest Rates: Whether opting for a variable or fixed-rate loan, you might be able to secure a better interest rate than your current one, leading to overall savings.¹¹
Simplified Repayment: You can consolidate multiple private student loans (and potentially government-backed ones, though with caveats) into a single monthly payment, simplifying your financial management.
Lower Monthly Payments: Choosing a longer repayment term can reduce your monthly outlay, providing more financial flexibility in the short term. However, be mindful that this will likely result in paying more interest over the loan’s lifetime.
Ability to Release a Co-signer: If you had a co-signer on your original private loan, and your credit and income have improved, refinancing in your own name can release them from their obligation.¹²
Access to Better Lender Features: You might find a new private lender that offers customer service, online tools, or specific repayment flexibilities (like the option to skip a payment, if offered) that better suit your needs.

Cons of Refinancing Student Loans

Loss of UK Government-Backed Loan Benefits: This is the most significant downside for those with loans from the Student Loans Company (SLC). Refinancing these with a private lender means losing access to crucial protections, including:
- Income-Contingent Repayment: Your repayments are directly linked to your income. If your income falls below a certain threshold, your repayments automatically stop.¹³
- Loan Write-off: UK government student loans are typically written off after a set period (e.g., 25, 30, or 40 years, depending on your plan), regardless of the outstanding balance. Private loans do not have this feature.
- No Credit Impact for Non-Repayment (below threshold): UK government loans do not negatively impact your credit score if your income is below the repayment threshold and you are therefore not making repayments. Private loans would.
- Generous Deferment and Forbearance: While private lenders may offer some hardship options, government loans generally provide more extensive provisions for pausing payments due to unemployment, illness, or further study.
Interest Rates May Rise (Variable Rates): While variable rates can initially be lower, they fluctuate based on market conditions (like the Bank of England base rate).¹⁴ This means your interest rate, and consequently your monthly payment, could increase over time, potentially becoming higher than your previous fixed rate.¹⁵
Not for Everyone: Refinancing may not be suitable if you have an unstable income, are close to the point where your UK government loan would be written off, or if your credit profile isn’t strong enough to secure a favourable rate.
Potential for Higher Monthly Payments: Although you can choose a longer term to lower payments, some lenders might only offer shorter terms, which could lead to higher monthly payments even if you’re saving on total interest.
Hard Credit Inquiry Impact: While pre-qualification uses a soft credit pull, a full application will involve a hard credit inquiry, which can temporarily lower your credit score.¹⁶

Step-by-Step Student Loan Refinance Process

Check Your Eligibility:
Student loan refinance lenders have specific requirements. The most important is typically your credit score. A higher score generally leads to a lower interest rate.17 You can check your credit score for free through services like Experian, Equifax, or TransUnion.18

Lenders also review your debt-to-income (DTI) ratio, which measures how much of your monthly income goes towards debt payments.19 Lenders generally prefer a DTI ratio below 50%, with some requiring even lower for the best rates.20 Other factors like steady employment, income level, and a history of on-time payments also influence eligibility.21
Compare Lenders:
With your existing loan details and credit score in hand, research and compare the Annual Percentage Rates (APRs) you may qualify for. You can do this by getting prequalified with individual lenders or by using a loan marketplace to compare offers from several providers simultaneously. When comparing, carefully examine the terms, including the interest rate (fixed or variable) and repayment term length. Remember, pre-qualification typically uses a soft credit pull, which won’t affect your score.22
Complete the Application:
Once you’ve selected a preferred lender, complete their full application. This will require providing documents to verify your finances and identity. Be aware that the rates quoted during pre-qualification may not be the final offer. Applying with multiple lenders might be an option, but keep in mind that each full application will involve a hard credit inquiry, which can temporarily lower your credit score.23 After receiving a final offer, you’ll need to formally accept the terms and sign the binding loan agreement. Your new lender will then pay off your existing loans, and your new repayment schedule will begin.24

Cost of Student Loan Refinancing

Refinancing a student loan is usually free. Unlike mortgage refinancing, which often involves significant closing costs, reputable private banks, credit unions, and online lenders typically do not charge application or origination fees for student loan refinancing.²⁵ Most lenders also do not penalize you for early loan payments. However, you could face late fees if you miss a payment.

Conclusion

Student loan refinancing can be a valuable tool if you qualify for a lower interest rate or wish to simplify multiple loans into a single monthly payment. However, if you rely on the unique protections, automatic write-off periods, or flexible income-contingent repayment options of your UK government-backed student loans, refinancing might not be the best choice for you.

Weigh the pros and cons carefully, consider your individual financial situation and future plans, and do not hesitate to seek professional financial guidance before making such a significant decision.