Quick answer

Refinancing usually lowers long-term cost and can improve monthly cash flow if you qualify for a better rate or term, but it converts federal loans into private debt and can end access to income-driven repayment (IDR) and Public Service Loan Forgiveness (PSLF). Deferment pauses payments and eases short-term cash strain, but interest on most loans keeps growing — raising total cost and possibly increasing future monthly payments.

Cost differences: interest, fees, and total dollars paid

  • Interest accrual: When you refinance into a private loan, interest may be lower and can be fixed — reducing total interest paid over time. During deferment, subsidized federal loans do not accrue interest, but unsubsidized federal and almost all private loans continue to accrue interest and capitalize in many cases after deferment ends (U.S. Dept. of Education, studentaid.gov).
  • Fees and closing costs: Private refinancing sometimes carries origination or closing fees (rare for many student loan refinancers, but possible). Deferment usually has no lender fee.
  • Total cost example: Refinancing $30,000 from 6.5% to 4.0% fixed for 10 years can save several thousand dollars in interest and lower the monthly payment. Contrast that with a six-month deferment on a $30,000 unsubsidized loan at 6.5% — interest accrues ~ $975 and capitalizes, increasing the balance and future interest.

Credit effects: reporting, score, and credit mix

  • Payment history is king: On-time payments on a refinanced loan are reported as a new account; consistent payments help your FICO score over time. A default or delinquency before refinancing or during deferment harms credit (CFPB).
  • Credit inquiries and new account: Refinancing typically requires a hard credit check, causing a small, temporary score dip. Opening a refinanced loan adds installment debt to your credit mix, which can be neutral-to-positive if you manage it (source: CFPB guidance on credit reports).
  • Deferment: Most deferment arrangements leave the account open and in good standing while payments are paused; the loan is not reported as delinquent if the servicer approves the deferment. However, missed payments before a formal deferment negatively affect credit.

Federal benefits and protections lost vs. preserved

  • Refinancing federal loans with a private lender ends eligibility for federal programs: IDR plans, deferment/forbearance options, and PSLF. If you’re pursuing PSLF, refinancing is usually not recommended (U.S. Dept. of Education).
  • Deferment keeps the loan federal status intact and preserves eligibility for federal programs and protections — though long deferments may delay progress toward forgiveness or retirement of the balance.

When refinancing often makes sense

  • You have strong credit (typically a FICO score in the mid-600s or higher), stable income, and can qualify for a materially lower rate or better term.
  • You do not need federal loan protections (no plan for PSLF or reliance on IDR.)
  • You want a fixed payment, a shorter payoff schedule, or to reduce total interest.

In my practice I evaluate debt-to-income ratio, recent payment history, and future career plans before recommending refinancing. For borrowers with high private rates or strong credit profiles, refinancing can be the quickest path to interest savings.

When deferment is the better choice

  • Short-term financial shocks: job loss, serious illness, or temporary caregiving responsibilities make deferment a practical stopgap.
  • If you rely on federal options such as IDR or PSLF, deferment keeps those tracks intact.
  • If your credit is weak now but you expect recovery, deferment prevents delinquencies while you rebuild credit.

Note: Forbearance is related but distinct; it may be easier to qualify for but often does not stop interest accrual and can be used repeatedly. See our comparison on deferment vs. forbearance for details: Deferment vs Forbearance: Impact on Interest and Repayment.

Eligibility and practical steps to refinance

  1. Pull your credit and check your score. Improving a credit score before applying can save hundreds across a refinance. See our guide on how credit mix changes after refinancing: How Credit Mix Changes After Refinancing.
  2. Collect loan documentation and your most recent statements, employment verification, and income details.
  3. Shop multiple lenders and compare APR, fees, fixed vs. variable rates, and repayment terms. Run soft prequalifications where available.
  4. Calculate break-even and long-term cost using an amortization comparison — lower monthly payment doesn’t always mean lower total cost.

Eligibility and practical steps to obtain deferment

  • Contact your loan servicer and request the deferment form or apply online for federal loans. Eligibility categories include economic hardship, unemployment, in-school status, and more (U.S. Dept. of Education).
  • Keep documentation that proves eligibility (e.g., unemployment documentation, school enrollment).
  • Confirm whether interest is accruing and whether the loan is subsidized. If interest accrues, consider making interest-only payments to avoid capitalization at the end of deferment.

Short examples that matter

  • Example A — Refinancing wins: Borrower A has $50,000 private student loans at 7% and qualifies to refinance to 4% fixed for 10 years. Their total interest drops substantially and monthly payment becomes manageable while preserving a firm payoff date.
  • Example B — Deferment wins: Borrower B loses a job and has $20,000 in federal loans with access to unemployment deferment and potential for later IDR. Deferment prevents delinquency without giving up federal benefits.

Common mistakes and misconceptions

  • Mistake: Refinancing always reduces payments. False — extending term can lower payments but increase total interest; compare options.
  • Mistake: Deferment is “free” money. False — interest often accrues and capitalizes, increasing long-term cost.
  • Mistake: Refinancing can be reversed easily. False — once you refinance federal loans into a private loan, federal protections are gone.

Decision checklist

  • Are your loans federal or private? If federal, are you pursuing PSLF or IDR? If yes, avoid refinancing unless you fully understand the trade-offs.
  • Can you qualify for a rate that meaningfully lowers interest or monthly payment? Run quotes.
  • Do you need short-term relief or long-term cost reduction? Deferment solves short-term pain; refinancing addresses long-term cost.
  • Will refinancing improve your cash flow without sacrificing critical protections? If so, consider refinancing with a reputable lender.

Professional tips

  • If you choose deferment but interest accrues, pay the interest monthly if you can; it’s the cheapest way to avoid capitalization.
  • Use a co-signer only after weighing risks: co-signer release options vary and co-signed refinances remain on the cosigner’s credit until released.
  • Track servicer communication in writing and request written confirmation of deferment start and end dates.

Further reading and internal resources

Authoritative sources

Disclaimer

This article is educational and does not constitute personalized financial advice. In my practice I assess each borrower’s credit score, income stability, and long-term career plans before recommending refinancing or deferment. Consult a licensed financial planner or your loan servicer for decisions tailored to your situation.