Refinancing your student loans involves replacing your existing loans with a new private loan. Student Loan Refinancing benefits many students balance the many loans they may have. More importantly, is refinancing the right choice for you? Knowing the pros and cons will help you make the right decision.
Pros Of Refinancing Student Loans
Lower rate of interest: This is one of the primary reasons to refinance loans. Interest rates fluctuate constantly. Students take advantage of this by keeping an eye on the fluctuating rates of interest. Additionally, students apply for refinancing when the rates are low. Locking into lower rates of interest only helps reduce monthly payments. however, lower rates of interest reduces your overall cost of borrowing.
Lower monthly payments: Sometimes, students struggle to make monthly payments under the standard repayment plan. To solve the issue, students can lower your monthly payments by extending the repayment term when you refinance. When you extend the life of your loan, your debt is spread over a longer period of time. This automatically reduces the amount students have to pay back every month.
Lesser risk of delays or default: Making multiple payments with different deadlines can get overwhelming. Combining multiple loans into a single loan when refinancing simplifies your monthly payments. Additionally, combining loans reduces the chances of missing a deadline or getting a default.
Opportunity to release cosigner: Most lenders require students with no credit history to get a cosigner before they approve of any loan requests. The cosigner is takes on the loan responsibility till such time that the loan is fully paid off. The cosigner will not be released of that responsibility for any reason whatsoever. Refinancing your student loans is the only way you can release your cosigner or replace your existing cosigner with a new one if necessary.
Cons Of Refinancing Student Loans
Higher cost of borrowing: While extending the length of the borrowing period helps to ease your financial commitments in the short-term, it will increase your overall cost of borrowing. This is because the interest on the unpaid amount keeps on accruing and will add a substantial amount to the loan. Unless no other options are available, students should choose to refinance their student loans only if they are getting a new loan at a lower rate of interest. Refinancing solely for the purpose of lowering the monthly payments, with no thought given to interest rates and other factors can add thousands of dollars to your loan.
Loss of federal benefits: When refinancing federal student loans, students will lose out on all the federal loan benefits that they are eligible for with the original loan. This includes your eligibility for federal student loan forgiveness programs.
Refinancing student loans is not necessarily the best option for every student. It depends on your current financial situation as well as your long-term goals. It is advisable to give some thought to the pros and cons. Additionally, consider personal circumstances before making the decision to refinance your student loans.