Refinancing your student loans involves replacing your existing loans with a new private loan. It can be a way to better manage your payments and even result in major savings. However, there are downsides to refinancing. Below, we’ve covered the basics plus give you some insight into the pros and cons of refinancing your student loans.
What Is Refinancing Student Loans?
Refinancing is when a private lender, including a bank, credit union, or other financial institution, replaces your existing loan(s) with a brand new private loan. This process consolidates several student loans into one single loan, cutting down on the number of payments you have to make each month. Refinancing could also change payment due dates, interest rates, minimum amount due each month, repayment terms, and more.
Can You Refinance Your Student Loan?
To refinance student loans, you’ll generally need to have a stable income with a good credit score. If your income isn’t high enough or your credit is too low, you’ll likely need a cosigner to qualify.
Both private and federal student loans can be refinanced, but there are some advantages and disadvantages to consider before applying to a financial institution.
Pros Of Refinancing Student Loans
Here are a few advantages of refinancing your student loans:
1. Lower Interest Rate
One of the main reasons individuals refinance student loans is the fact that it usually tends to result in a lower interest rate. Under some loans, interest rates can fluctuate. Borrowers can apply to refinance when interest rates are low and lock in a fixed rate. This could lead to reduced monthly payments and less money owed over the long term.
2. Reduced Monthly Payments
Lower interest rates could mean lower monthly payments. But simply refinancing your loan – even if the interest rate remains similar – could result in lower minimum payment requirements, too. Borrowers still in school or straight out of college can struggle to make the minimum payments each and every month. When you refinance, you might be able to extend the repayment term, lowering the monthly payment.
3. Simplify Bills and Reduce Default Risk
Making multiple payments with different deadlines could 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 defaulting.
4. Potential for Cosigner Release
If your original lender required a cosigner to take out a private student loan, that means the cosigner shares responsibility on that loan with you until the total balance is paid off. This could affect the cosigner’s credit and their ability to get approved for mortgages, credit cards, and other loans. The only way to release your cosigner from this responsibility is to refinance your student loans. You could also replace your existing cosigner with a new one at this point.
Cons Of Refinancing Student Loans
There are two potential downsides to consider before refinancing:
Higher Cost of Borrowing
While extending the length of the borrowing period helps to ease your financial commitments in the short-term, it could increase your overall cost of borrowing. This happens because the interest on the unpaid amount continues to accrue, adding 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 could add thousands of dollars to your loan.
Loss of Federal Benefits
Federal student loan refinancing should only be done in very specific circumstances. When you refinance one of these loans, you work with a private lender rather than the government. You’ll lose out on all of the benefits that come with the loan, including access to federal student loan forgiveness programs, income-driven repayment plans, deferment programs, and more.
You should only refinance your federal student loans if you can get a much lower interest rate or if you don’t qualify for the benefits and absolutely need lower monthly payments.
How To Refinance Your Student Loans
If you want to refinance your student loans, you should always compare lenders and rates. Different financial institutions will give you different repayment terms, required monthly payments, interest rates, and more. By placing each one side-by-side, you can better understand how much you’ll be paying in the long run and how the loan will affect your current finances.
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. Using a student loan calculator can help you determine if refinancing is right for you.
