Do you want to refinance federal or private student loans you already have? You should carefully weigh the pros and cons of refinancing your student loans, even though there are some good reasons to do so. Remember that refinancing private student loans is different from consolidating federal loans. You’ll see why in a minute:
Refinancing student loans has some benefits:
Lower your monthly bill: It makes sense to refinance your loan if you can lower the amount you have to pay each month. This will give you the budget flexibility you need. You can choose a new loan term when you refinance your loans. Most refinancing lenders have options that range from five to twenty years. You’ll pay more in interest over time if you choose a longer term, but your monthly payments will be lower. You can use the student loan refinance calculator to figure out how refinancing will change your payments and the total amount you will pay back.
You can also lower the total cost of the loan, which will save you money over time. In some situations, you can lower both your monthly payment and the total cost of the loan. If you refinance, you might be able to get a lower interest rate than what you’re paying now. This can save you money over time.
Your interest rate can go down even more if you sign up with your refinancing lender for automatic payments. The best thing about refinancing private student loans is that it can help you save money. If you have good credit and a steady source of income, you might be able to get a lower rate than what you’re paying now.
Refinancing helps you get your bills in order by letting you combine payments. If you took out loans for more than one year while you were in college, you probably have more than one loan to pay for your degree. Saving for College said that the average college student with student loans had as many as a dozen. It can be hard to keep track of 12 different loans, payments, and due dates. You can combine all of your student loan payments into one easy monthly payment, no matter how many lenders you have or how many loans you have.
Cosigner release: When you refinance, your original student loans are paid off, and your cosigner is no longer responsible for those loans. The Consumer Financial Protection Bureau says that cosigners are needed for more than 90% of private student loans. Having a cosigner makes it more likely that you can get a loan, but it also means that the cosigner is just as responsible for paying back the loan as you are. Any payments that are missed or paid late can also hurt the cosigner’s credit. You can refinance your loans in your own name if you meet the lender’s requirements.
Student Loan Refinancing Downsides
No change to the interest rate: Know that you might not be able to get a better interest rate or better terms than what you have now. Some borrowers can get lower rates, which can save them a lot of money, but not everyone will get a lower rate. If you have bad credit or don’t make enough money, you might not be able to get a lower rate or you might need a cosigner to get one.
Loss of federal benefits: If you have federal student loans, you could lose some of the benefits you have now. For instance, the government stopped making payments on student loans (see the CARES Act). There are options like deferment and forbearance that let you stop making loan payments if you are out of work, in school, or in the military.
A borrower of a federal student loan may be eligible for loan forgiveness programs, such as the Public Service Loan Forgiveness program (PSLF). They also have payment plans based on how much money you make.
You Can’t Get Out of a Payment Plan: Refinancing private student loans: Is there anything bad about it? When you refinance, you choose a new loan term and payment, and you’re stuck with that plan until the loan is paid off in full – unless you refinance your loans again.
It could make your loan term longer. If you refinance your loans and choose a longer loan term to lower your monthly payments, you could be in debt for several more years. If you have student loan debt for a long time, it might be hard to balance your other financial needs in the future.
One more thing to think about: to get a refinancing loan with a lower interest rate, you need to be in good financial shape, which is not always easy for recent college graduates who are just starting out.
Bottom line: Refinancing your student loan can be a good idea in some situations, but it can also lead to problems. Your finances and budget are unique, so before you refinance, you should do some research.
Should you get a new loan?
Now that you know the pros and cons of refinancing private student loans, you can decide if it’s the best financial move for you. Whether or not it makes sense depends on how much you owe, how much interest you pay, and how good your credit is.