If your debt burden is big enough, you’ve probably considered the prospect of doing a student loan refinance.
After all, people refinance their homes and business loans all the time. Why should student loans be any different?
The truth is, student loan refinancing is different for myriad reasons. Still, that doesn’t mean you shouldn’t consider refinancing your loans anyway. The key to figuring it out is considering everything you’ll gain – along with everything you’ll lose.
This post will explain all of the pros and cons of refinancing your student loans. Once you see the big picture, you’ll be in a better position to decide.
Student Loan Refinancing: What to Watch Out For
Refinancing into a loan with better terms might sound like a dream come true, but if you have federal loans, you might also have to give something up. Namely, federal student loans come with certain protections that can help you if you’re in default, reduce your monthly payments indefinitely, or defer repayment until a later date.
Students with federal loans may qualify for public service loan forgiveness as well as income-driven repayment plans like Pay As You Earn (PAYE) and Income-Based Repayment (IBR). These plans let you pay a certain percentage of your discretionary income towards your loans for 20-25 years before doling out 100 percent forgiveness of any remaining balances.
Other federal programs that help student with federal loans include medical and economic forbearance that can give you a break from repayment for up to 24 months, military benefits that will repay your federal student loans if you or a spouse serves active duty, and federal help rehabilitating federal loans that were formerly in default.
Once you refinance federal loans with a private lender, you lose access to federally-supported student loan forgiveness, deferment, or forbearance programs. And that includes any student loan programs for federal loans that may be offered in the future.
Further, refinancing and consolidating your student loans can extend the time it takes to pay them off. If you’re already years into paying your student loans down, this is certainly something to consider.
Student Loan Refinancing: Benefits You Might Enjoy
If you don’t plan to take advantage of any federally-supported student loan programs, student loan refinancing is one option to consider. Benefits of refinancing can include, but are not limited to:
A lower interest rate – Some, but not all, federal student loans can be refinanced or consolidated into a private loan with a lower interest rate. While this will generally extend your timeline for full repayment, the savings you accrue by paying a lower interest rate can seriously add up over time. Estimate your savings by visiting SoFi HERE.
One easy payment – If you’ve got several student loan bills to contend with, refinancing can help you achieve one low monthly payment. Going from several payments down to one won’t save you money by itself, but it will save you time and hassle.
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A lower monthly payment – If you secure a lower interest rate – or extend the repayment timeline on your loan, you’ll end up with a monthly payment that is much easier to manage. Scoring a lower month payment can give your budget a little bit of breathing room while also making it easier to throw extra money straight towards the principal of your loan.
Lock in a fixed rate or choose a variable rate – Some private loans come with variable rates that cause payments to fluctuate over time. In many cases, you can refinance these loans into a product with a fixed rate and a predictable monthly payment. If you refinance into a loan with a variable rate, however, it’s important to understand that your payment will rise as interest rates rise. Always consider the consequences of the type of loan you choose before pulling the trigger. And if you want to lock in a monthly payment that will never change, go with a loan that offers a fixed rate.
Better rates with a co-signer – If you have private personal loans with a high interest rate, securing a co-signer with good credit might help you get a loan with better terms. These better terms could include a lower interest rate or a better repayment horizon – both perks that could help you save money and pay your student loans off faster. Refinancing student loans without a cosigner and no credit is probably not going to happen
5 Signs it Might Make Sense to Refinance Your Student Loans
Confused yet? You’re not alone. The many rules, benefits, and drawbacks that arise when considering this option make this decision a difficult one.
Still, student loan refinancing really is the best option for borrowers in certain situations. Here are five scenarios where you might just fall into that category:
- You’ll earn too much to qualify for income-driven repayment plans anyway, and you have no desire to work in public service. Many people who enter high-paying fields earn too much to qualify for income-driven repayment plans, and some have no desire to work in the public sector at all. If the shoe fits, estimating how much you would save by refinancing your federal student loans is a smart idea.
- Your loans are fixed at a high interest rate, and you think you could do better. If your student loans are a fixed at a high interest rate, it might be worth exploring your refinancing options. Depending on your loan details and financial situation, you may qualify for a loan with a lower interest rate that will help you save money.
- You are making multiple loan payments at various interest rates every month. If you’re sending in multiple payments every month, refinancing into a solid loan with excellent terms is one way to simplify your life and save money in one fell swoop. Find out how much you could save with this calculator.
- You want to pay down your loans as quickly as possible. If you’re like many young people, the idea of enduring income-driven repayment for the next 20-25 years of your life is troubling. In certain situations, refinancing is the best way to kill your loans off for good.
- You want independence from your co-signer. If your old loans involve a third party and you want to break off on your own, refinancing is one way to make it happen. And if your credit score is good enough, you’ll hopefully qualify for new loan with a low interest rate and terms you can live with.
The Bottom Line
In the perfect world, we would blink and our student loans would disappear. But in the real world, it’s on us to pay them back – even it takes a decade or longer.
Fortunately, plenty of businesses have stepped in to offer new products that can make paying off your loans easier. But before you take the plunge, you should perform due diligence to make sure refinancing actually makes sense.