If you’re considering refinancing some or all of your student loans, you may wonder what comes next on your financial to-do list.
Refinancing student loans could result in a lower monthly student debt payment, either due to a lower interest rate, a longer loan term, or both.
Lower payments can free up some of your income for other key financial goals. Read on to learn how refinancing your student loans could help make your financial future more secure.
Key Points
• Refinancing student loans may lower a borrower’s interest rates and reduce monthly payments, freeing up income for other financial goals.
• Money saved by refinancing may be directed toward other goals like paying off high-interest debt, building an emergency fund, or increasing retirement savings.
• Paying off loans ahead of schedule could also help borrowers get free from student debt faster and start saving for other goals.
• Refinancing federal loans results in the loss of federal benefits such as forgiveness and deferment.
• Spending the money saved by refinancing rather than directing it toward other financial objectives could derail borrowers’ goals.
What Happens When You Refi Student Loans?
Understanding what happens after student loan refinancing is key to planning your next steps.
As mentioned above, when you refinance, you get a new loan to replace your existing loans. Ideally, the new loan will have a more favorable interest rate or more flexible loan terms that will help reduce your monthly payment. SoFi’s student loan refinancing calculator can help determine how much refinancing could save you. You could then put those savings toward other goals.
Keep in mind, when you refinance a federal student loan into a private loan, you lose the benefits and protections that come with a federal loan, like deferment, forgiveness, and income-driven repayment plans.
What Is Your Next Financial Goal?
As you consider refinancing, it’s a good idea to keep your other financial goals in mind. How can refinancing student debt — and perhaps lowering the percentage of income dedicated to repayment — help you achieve those goals? Take a look at the following scenarios that might apply to you.
1. Pay Down High Interest Debt
Once your student loan debt is under control, turn your attention to any high-interest debt you may be carrying on credit cards. There are two common ways people approach paying down debt. Which one you choose depends on your financial situation.
• The Debt Avalanche. With this system, you start by paying your debt with the highest interest rate first, by making payments above the monthly minimum. You do this while still keeping up with minimum payments on any other debt. Once that debt is paid off, you move to the debt with the next highest interest rate and do the same thing. When you eliminate your highest rate debt with the debt avalanche method, you can more quickly lower your overall debt picture.
• The Debt Snowball. In this scenario, you pay off your debt in order of the smallest to the largest balances, regardless of interest rate. This way you see some of your smallest debts paid off quickly and get a psychological boost from doing so. As you pay off each debt, you assign the amount of the payment you were making on that balance to the next debt. Your debt repayment builds momentum, known as “the snowball effect.”
Recommended: Which Debt to Pay Off First: Student Loan or Credit Card?
2. Start an Emergency Fund
Having money saved for unexpected expenses is a vital part of financial wellness.
But saving for emergencies is a challenge for many Americans. According to a 2025 survey by U.S. News, 42% of Americans don’t have an emergency savings fund, and 40% don’t have enough cash or savings to cover a $1,000 emergency expense.
Starting or boosting your emergency fund with money saved on student loan payments is a great way to help keep your budget intact and stay out of debt.
To determine how much you should have in your emergency fund, the rule of thumb is that the amount should be equal to at least three to six months of living expenses (or take-home pay). That way, if you lose your job, have an accident, or get sick, you’re likely to have enough to see you through until your situation improves.
3. Increase Retirement Contributions
Are you putting away as much as you can for retirement? Starting early can pay off big down the line, thanks to the magic of compounding returns over time — and the fact that earnings grow tax-deferred in retirement accounts such as traditional IRAs and 401(k)s, and tax-free in Roth IRAs.
If your employer offers a matching 401(k) contribution benefit, upping your game may be even more important. This is free money. Whenever possible, contribute the amount necessary to qualify for the full match so you take the best advantage of this key benefit.
4. Save for the Next Stage of Life
With less student debt, you’re probably looking at what’s next. That may mean buying a car, saving for a down payment on a home, starting a family, or expanding a business. You can use what you save by refinancing your student loans to help achieve these other important life goals.
Careful budgeting means you can put the difference between your old student loan payment and your new one toward other important life goals.
Once you establish the goal you’re saving for, consider opening a high-yield savings account dedicated to that purpose. You’ll earn interest while your nest egg accumulates but still have liquidity so your money is available when you’re ready to pursue your goal.
5. Invest
Starting an investment account outside of retirement savings can be an important financial goal in and of itself. The reason? Long-term stock market returns consistently outperform many other types of investments. Over the past decade through December 2024, the average annual return for the Standard & Poor’s 500 Stock Index was 11.0%.
Returns vary, of course, depending on the years you are invested and the economic environment. But over the long haul, investing in stocks early — even small amounts — can pay off in the future.
To get started, two investment vehicles you may want to consider are mutual funds and exchange traded funds (ETFs). A mutual fund is a collective investment which pools funds from many investors to invest in stocks, bonds or other securities. ETFs work much the same way but unlike mutual funds, ETFs can be bought and sold like a stock as the price goes up or down during the day.
How to Pay Off Student Loans Ahead of Schedule
As we’ve seen, a refinance can help lower your monthly payments and perhaps bring some much-needed wiggle room to the rest of your finances.
That may motivate you to keep the momentum going and look at ways you can repay your remaining student debt faster. Here are two tried and true strategies.
Pay More Than the Monthly Amount
Your monthly payment amount isn’t set in stone. You can always pay more than the minimum amount. Payments over the minimum monthly amount owed are applied directly to the principal. So even a little bit extra can lower the amount of your loan and help you save on interest over the life of the loan.
Dedicate a Windfall to Student Loans
Another strategy for paying student debt faster: Whenever you get a windfall, use some or all of it to make a lump sum payment toward your student loan principal. Think tax refunds, cash gifts, work bonuses, or income from a side gig or inheritance.
What to Avoid After Refinancing Student Loans
After refinancing student loans, be careful not to fall into a common trap: It’s called “lifestyle creep,” and it happens when you spend all of your discretionary income instead of directing some of it to financial goals.
To avoid lifestyle creep, mindfully adjust your budget to account for any increase in income — such as lower student loan payments. That way the money will be put to good use instead of being frittered away.
Recommended: Living Below Your Means: Tips and Benefits
The Takeaway
Refinancing your student loans may help you lower your monthly payments, freeing up funds to put toward other financial goals. You might choose to pay down high-interest credit card debt, boost your emergency fund or retirement account, or even pay off your student loans faster. Just remember that refinancing federal student loans makes them ineligible for federal benefits.
Photo credit: iStock/RossHelen
FAQ
What are the benefits of refinancing student loans?
The benefits of refinancing student loans include potentially lowering your monthly payments if you qualify for a lower interest rate, replacing your old loans with one new loan that’s easier to manage, and possibly getting more flexible repayment terms.
It’s important to note, however, that refinancing federal student loans means you’ll lose access to federal programs and protections like income-driven repayment and deferment.
How can student loans affect your future?
Paying off student loans can make it more difficult to achieve other financial goals, such as setting up an emergency savings fund, saving for a house, and investing for your future. Paying off your loans ahead of schedule, if possible, or refinancing them if you can qualify for a lower interest rate, could save you money that you can put toward reaching your other goals.
Does refinancing student loans hurt your credit?
When you apply to refinance, a lender does a hard credit inquiry to check your credit. The hard inquiry can cause your credit score to temporarily drop a few points. However, over the long term, refinancing might help your credit if you consistently make your monthly payments on time because it improves your payment history.
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