The word refinance written on a chalkboard

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Many college graduates come away with a pile of student debt with their degrees. If you're grappling with student loans, you may be wondering if it pays to refinance them.

And the answer is ... it depends.

What is refinancing?

Refinancing is swapping an existing loan for a new one. Under a refinancing agreement, a lender pays off your existing loan and issues you a new one to replace it.

The key is that the interest rate attached to your new loan will be lower than the one on your previous loan. This lowers your monthly payments and saves you money.

Imagine you owe $30,000 in loans at an interest rate of 12% with a 10-year repayment period. That leaves you with a monthly payment of $430. If you refinanced to a 7% interest rate, you'd shrink your monthly payments to $348, putting less strain on your budget.

You'll commonly hear about refinancing in the context of a mortgage, but you can refinance student debt, too. This holds true whether you took out federal loans for college or borrowed privately.

And if these situations apply to you, it makes sense to consider refinancing.

1. Your loan has a high interest rate

One good thing about federal student loans is that their interest rates are regulated and capped at a reasonable level. Private lenders, on the other hand, can charge whatever interest they want. If you got a private loan, you may have an interest rate that's twice as high as the top rate attached to federal loans.

For federal student loans issued between July 1, 2018 and July 1, 2019, interest rates range from 5.05% to 7.6%, depending on the specific type of loan at hand. If you borrowed privately, you could be sitting on a loan with a 15% interest rate. If that’s the case, it makes sense to look into refinancing.

2. Your loan's interest rate is variable

Federal loans come with fixed interest rates, so you pay a single interest rate over the life of your loan. Private loans often come with variable interest rates that climb over time. For example, you might start out with an interest rate around 8% that gradually rises to 13%. As that rate increases, your monthly payments go up as well, making them less affordable.

If you have a variable-rate loan, look into refinancing before that rate climbs. The only exception is if you expect to pay off your debt quickly. If your current rate is low, just pay it off as fast as you can.

3. Your credit score has improved since you took out your loan

Your credit score doesn’t come into play when applying for federal student loans, but it does matter when you take out private loans. If your credit score is mediocre when you apply for any sort of financing, you’re not going to snag a great rate.

Was your credit score not great when you applied for private student loans? Has it gone up since then (maybe because you’ve established a more robust credit history)? If so, it pays to look into refinancing and see the interest rate you now qualify for.

Chances are it’ll be lower than the rate you’re currently paying. If it is, you stand to save money by swapping your old loan for a new one.

Refinancing student debt isn't always ideal. But, in many cases, it can save you money and make your monthly loan payments easier to keep up with. Just be aware that refinancing often means extending the life of your loan. You'll make payments for a longer period of time. If the idea of that bothers you, explore other options for managing your student debt.