If you’re struggling to pay down your student loan, refinancing might help.
The goal of student loan refinancing is to secure a lower rate or better terms to make your loan more affordable. With less to pay, you can pay off your student loan a lot faster or make your payments easier to manage. But student loan refinancing might not always make sense, depending on your outstanding balance, how far along you are in your loan term, and the exact type of student loan you have.
Let’s go into more detail about refinancing student loans to help you decide if it’s right for you.
Key Points:
- Refinancing is the process of replacing an existing loan with a new one, typically to get a lower rate and better terms.
- You may consider refinancing your student loan when you have good credit, stable income, and are able to qualify for a lower interest rate or better repayment terms than your current loan.
- Private student loans may be refinanced much like any other loan type.
- Governments do not provide student loan refinancing options for provincial or federal government-issued student loans, though debt relief services may be available.
- However, personal loans may be used to pay off government-issued student loans, which might make sense if you’re able to secure lower rates to make the loan more affordable.
What Does It Mean To Refinance Your Student Loans?
Refinancing is the process of replacing an existing loan with a new one, ideally with a lower rate or better terms. The idea is to reduce monthly payments, save money in interest, or enjoy a more manageable repayment schedule.
In order to secure a lower rate and more favourable terms through a student loan refinance, you’ll need to meet specific financial and credit requirements.
Can You Refinance Your Government Student Loans?
In general, the government does not offer student loan refinancing for provincial or federal government-backed loans. However, they do offer debt relief services for those who can’t afford their student loans.
You could also use a regular unsecured loan, such as a personal loan or a home equity loan, to refinance your government-backed student loan.
Can You Refinance Your Private Student Loans?
Private student loans are simply loans offered by private financial institutions (not the federal government) to finance your studies. These loans can be refinanced, much like any other type of loan.
You can refinance your private student loan with your current lender or with a new lender. However, be sure to read the contract to ensure there are no fees for breaking your contract early.
With student loan refinancing, you’ll take out a new loan to replace your existing loan, ideally at a lower interest rate and extended term to reduce your monthly payments.
Types Of Loans You Can Use To Refinance Your Student Loans
There are various loan types available that you can use to refinance your student loan (private or government-backed), including the following:
Personal Loans
You can use the funds from a personal loan to cover just about any expense, including your outstanding student loan debt. These types of loans are installment loans, which means you’ll make regular payments over a certain period of time until the entire outstanding balance is repaid.
Personal loans can be secured or unsecured, depending on whether you use collateral to back the loan. Secured personal loans are less risky for lenders. That means you may be more likely to get approved for a higher loan amount and a lower interest rate than an unsecured personal loan.
Guarantor Loans
If your credit profile doesn’t meet the lender’s requirements to get approved for a loan, you may add a guarantor to the loan contract to increase your odds of approval. A guarantor loan involves a good-credit individual signing the loan contract. The guarantor promises to make regular loan payments in the event that the prime borrower defaults on the loan.
Not only will this help boost your odds of loan approval, it can also help lower your interest rate and qualify you for a larger loan amount.
Learn more: How To Get A Guarantor Loan In Canada
Home Equity Loans
If you own a home, you may have enough equity accumulated to secure a home equity loan or home equity line of credit (HELOC). With this type of loan, you borrow against the equity in your home, and your home collateralizes the loan. Since this loan is secured with a valuable asset, it’s less risky for the lender, so you may be able to snag a lower rate.
Plus, you may be eligible to take out a larger loan amount based on how much equity you’ve managed to build up. But if you fail to keep up with repayments, you risk losing your home.
Can You Refinance Your Student Loans With Bad Credit?
While having good credit gives you the best odds of getting approved for a loan, you may still be able to access financing with bad credit. If your credit score is a little low, you may be eligible for a bad credit loan to refinance your private student loan debt.
These loans are easier to qualify for, but they are also more expensive than conventional loans. As such, be mindful of the higher rates you may be charged before applying to refinance your student loan.
Learn more: Guide: Getting Student Loans With Bad Credit
How To Refinance Student Loans
If you’ve decided that refinancing your student loan makes financial sense, here are the steps to follow to get started:
Step 1: Get Pre-Qualified And Comparison Shop
Shop around with different lenders to see what types of interest rates and terms are available to you. To get the most accurate offers, consider getting pre-qualified first.
Pre-qualification involves inputting a few pieces of information about yourself and your financial health. The lender may also conduct a “soft” credit check, which won’t have an effect on your credit score.
Based on this information, you can see what each lender has to offer. See where you can get the lowest interest rate and most ideal terms to ensure your refinance is as affordable as possible.
| Check Your Credit Score First Before applying, see where you stand by checking your credit score. You can get your score for free using Loans Canada’s CompareHub tool. |
Step 2: Submit An Application
Once you’ve chosen the lender to work with, fill out an application. You’ll need to provide more information and documentation at this stage, such as:
- Bank statements
- Pay stubs
- Tax receipts
The lender will verify your identity and more closely assess your financial profile. They’ll also conduct a “hard” credit check to verify your creditworthiness, which will have a temporary effect on your score.
Once you’re approved, go over the contract in detail. If you’re satisfied with the agreement, sign it, and you’ll receive your loan shortly after.
Step 3: Start Making Payments Towards Your New Loan
Verify that your old loan has been formally closed to make sure your debt isn’t still lingering. Continue making payments toward your old loan until the account is officially closed. Then, start making payments towards your new refinanced loan.
Learn more: How To Get Approved For A Loan As A Student
Requirements For Student Loan Refinancing
To qualify for a student loan refinance, you’ll need to meet the following criteria:
- Have good to excellent credit (at least 650 or more)
- Have a steady job
- Earn a sufficient income
Benefits Of Refinancing Your Private Student Loan
There are several perks to refinancing your student loan, including the following:
- Lower Interest Rates: If your credit score has increased since you first took out your private student loan, you may qualify for a lower interest rate on your new loan. This can save you a great deal of money in the long run.
- Longer Loan Terms: If you refinance to extend your loan term, you’ll have more time to repay the loan. In turn, you can reduce your monthly payments, which will make payments easier to fit your budget.
- One Loan Payment: If you consolidate your student loans along with your other debts, you’ll then be left with only one loan payment to manage.
Drawbacks Of Refinancing Your Student Loan
While there are many advantages to refinancing your student loan, there are a handful of drawbacks to consider as well:
- No Financial Assistance: The government offers financial assistance programs to those who qualify, including those with outstanding student loans who are having trouble managing their debt. If you refinance your government student loan to a loan with a private lender, you may no longer be eligible for these financial assistance programs.
- No Tax Breaks: Interest paid on private student loans is not tax-deductible, unlike government student loans. If you make the switch to a private lender through a refinance, you won’t be able to receive the 15% tax credit on the interest you pay on your government student loans.
- Higher Interest Rate: Depending on your creditworthiness, you may be unable to qualify for a lower interest rate. This is particularly true for government student loans. Most government-backed loans have the best rates and terms, so refinancing your government loan with a private loan may lead to higher interest rates.
How Much Can You Save By Refinancing Your Student Loan?
The goal of refinancing is to save money in the long run. But the exact amount you can potentially save depends on many factors, including the interest rate and loan term on both your current loan and your refinanced loan.
Let’s illustrate how much you could possibly save.
Example 1: Changing The Interest Rate
If your goal is to save overall interest paid but are comfortable with slightly higher monthly payments to achieve that, a reduced interest rate can help:
| Current Loan | New Loan | |
| Loan Amount | $30,0000 | $30,000 |
| Interest Rate | 7% | 5% |
| Term | 15 years | 9 years |
| Monthly Payment | ~$270 | ~$346 |
| Total Interest Paid | ~$18,600 | ~$7,368 |
In this example, you’re actually paying $76 more per month, but you’re saving $11,221 in interest over the loan term.
Example 2: Changing The Loan Term
If your immediate goal is to reduce your monthly payments, extending the loan term may help. Here’s an example of how much you could potentially save each month if all of the above figures remained the same, except you went from a 15-year term to a 20-year term:
| Current Loan | New Loan | |
| Monthly Payment | ~$270 | ~$198 |
| Total Interest Paid | ~$18,600 | ~$17,520 |
In this example, you’re saving both in monthly payments and interest, even by extending the term.
Reasons Why You May Need To Refinance Your Student Loan
There are several reasons why you might consider refinancing your student loan:
- To Secure A Lower Interest Rate: If your credit score has improved since you first took out your loan, you may qualify for a lower rate when you refinance. This could save you hundreds or even thousands over the life of the loan.
- To Lower Your Monthly Payments: You can refinance your loan to extend the term, giving you more time to repay it and lowering your monthly payments.
- To Switch Lenders/Loan Types: You might want to switch to a lender with better customer service or flexible terms. Or, you may want to completely change the loan type to better fit your finances, which you can do by refinancing.
- To Pay Off Your Loan Faster: Alternatively, refinancing to a shorter term with a better rate can help you pay off your loan sooner, which might make sense if you’re earning more and can cover bigger monthly payments.
Common Mistakes To Avoid When Refinancing Your Student Loan
Refinancing your student loan can be a good move if done with careful consideration. Here are some common mistakes to avoid so you don’t end up paying more or losing valuable benefits:
- Refinancing Federal Loans Without Understanding The Trade-Offs: As noted, refinancing federal student loans could mean losing access to perks, like loan forgiveness options and certain repayment plans.
- Not Shopping Around For The Best Rate: Accepting the first refinancing offer you receive could mean missing out on lower interest rates or better terms from another lender. Comparison shopping can help you find the most competitive deal, which you can do quickly and easily using an online loan comparison site like Loans Canada.
- Not Understanding Fees & Penalties: Some lenders charge fees like origination costs or early prepayment penalties. Always ask about any additional charges before agreeing to a refinance.
- Not Estimating Your New Monthly Payment: Lower interest rates don’t always mean lower monthly payments. Similarly, if you extend your loan term, you might pay less every month, but you might pay more overall. Use an online loan calculator to find out what your loan will cost you.
Does It Make Sense To Refinance Your Student Loans?
Refinancing your student loans may or may not be suitable, depending on your situation:
| When Refinancing Your Student Loan Makes Sense | When Refinancing Your Student Loan Doesn’t Make Sense |
| You have a good credit score | You don’t want to lose access to government-issued student loan perks |
| You earn more than what you owe on your loans | Your credit score isn’t high enough |
| You have a steady job | You’re close to paying off your loans |
| You have private student loans (not government loans) | You need flexible repayment options |
Alternatives To Refinancing
Refinancing your student loan may not always be the right option. Fortunately, there are several alternatives available to help you manage repayment more effectively, including the following:
Debt Consolidation
Debt consolidation is the process of combining multiple debts into a single loan with one monthly payment. This can simplify your finances and potentially lower your interest rate, if you qualify, making repayment more affordable and manageable.
| Note: Don’t confuse ‘consolidation’ with ‘refinancing’, as they are slightly different, though refinancing loans are often used to consolidate debt. |
Repayment Assistance Program (RAP)
If you’re having trouble repaying your student loan, there are support programs available to help, like the Repayment Assistance Plan (RAP). This government program is administered by the National Student Loan Service Centre (NSLSC) and is available to those holding federal or provincial student loans.
RAP is designed to ease the burden of student loan repayment by offering reduced or even zero monthly payments to eligible borrowers. The amount of financial relief provided is based on your gross family income. The lower your income, the more you may be able to qualify for.
Learn more: Student Loan Repayment Assistance Plan (RAP)
Support For Borrowers With Permanent Disabilities (RAP-PD)
If you live with a permanent disability, you may qualify for RAP-PD, a specialized version of the program that offers similar benefits with additional reductions to help cover disability-related expenses.
If your disability prevents you from working at all, you may be eligible for the Severe Permanent Disability Benefit, which may fully cancel your student loan debt.
Student Loan Forgiveness In Canada
If your student loans are part of a more significant and permanent debt issue, you may be eligible to have your loan forgiven. Canada’s student loan forgiveness program reduces or cancels a borrower’s remaining student loan balance (federal portion only). This means you’d no longer be obligated to repay some or all of your debt.
Various provincial governments also offer specific student loan forgiveness programs to help eliminate the provincial portion of student loan debts.
Learn more: Student Loan Forgiveness In Canada
Final Thoughts
It can take years and even decades to pay off student loans. If you continue to drown in your student loan debt, look into refinancing. Depending on your situation, you may be able to secure a lower rate and better loan terms to help you whittle down your loan faster, or at least make your monthly payments more affordable.
If you choose this route, be sure to do some thorough comparison shopping to find the best lender to work with.
