Student Loan Refinancing: The Pros and Cons
Student loan debt keeps rising, and according to the latest findings, new graduates are leaving school with an average of $35,000 in debt, according to The Wall Street Journal. This figure does not even look at the student loans parents took out to help their child's college costs.
No doubt about it, college is expensive. It is common for graduates to find themselves in a financial hard place when it comes to repaying their loans. One popular option to lower monthly student loan costs is refinancing. In many cases, this is a wise financial move. However, before you refinance your loan, take a better look at the pros and cons of refinancing. (For more, read Top Student Loan Providers.)Student Loan Refinancing: What Is It and Who Is It For?
Student loan refinancing is when a private lender takes on your loan, or loans, and combines them into one loan at a new rate and repayment schedule. When you apply for loan refinancing with a private lender, the private lender is essentially consolidating and refinancing your student loans. Whereas when you consolidate your federal loans with a Direct Consolidation Loan, this only combines your federal loans together without reducing your interest payment.
Student refinancing is an excellent option for individuals with high-interest private loans. If a graduate has a mix of federal and private loans, it is possible just to refinance the private loans. Also, student refinancing is available to parents who have a Direct Plus loan.Pro: Lower Monthly Payments
Refinancing your loan can lower your monthly loan cost because of two factors. Firstly, the refinance can secure you a better interest rate, which in turn gives you a lower monthly payment and even saves you money on the life of the loan. Many graduates can secure better interest rates because their credit scores have improved since they first applied for a loan. Another way a refinancing saves you money is because it can extend the duration of your loan. If you choose to refinance your 10-year student loan into a 20-year loan, you will see a dramatic cut in your monthly payments.Con: Pay More in the Long Run
If you are refinancing to lower your interest rate, then you will be saving money. However, if you are refinancing the loan to obtain a longer loan, then be aware that while your monthly payments decrease, the amount of money you pay for the entire loan increases. You can end up paying tens of thousands of dollars more due to accruing interest. (For more, see The 6 Worst Student Loan Mistakes You Can Make.)Pro: Release a Cosigner from the Loan
Another perk of refinancing your loan is that you might be eligible to refinance the loan on your own. Dropping a cosigner, which is typically your parent or another close family member, releases any extra tension in your relationship. Cosigning for a student loan is a massive undertaking and comes with high risks. Once your cosigner is released from your loan, they will even experience a higher credit score and have the ability to access new lines of credit.Con: Miss Out on Federal Benefits
It is very unwise to consolidate your federal and private loans together. When you do this, you disqualify your federal student loans for loan forgiveness and cancellation programs. Also, federal loans offer Income-Based Repayment (IBR) and Income-Driven Repayment (IDR) plans that base your monthly payments on how much you make or how much you can afford. Refinancing your federal loan with a private lender takes these repayment plan options off the table. There is a way to consolidate just your federal loans together with a Direct Consolidation Loan, but this might also disqualify you for special repayment of forgiveness plans. (Read also, Student Loans: What to Do When You Can't Repay Them.)Pro: One Payment
Keeping track of several different student loan payments, on top of many other bills, can be frustrating. Refinancing will consolidate those loans into one. Many private lenders even offer a discount APR if you enroll in automatic payment withdrawal. This option saves you a small amount of money each month, and it helps you never to forget a payment.Con: Loss of Grace Period
As soon as a new lender approves the refinance, your repayment process begins right away. With many student loans, you can delay payments while you are still in school or when you enter a graduate program. If your current loan has a grace period still intact, wait until that period is over before starting the refinance option.Pro: Flexible Repayment Terms
When you refinance your loan, you can choose how long you want your loan, as well as if you want a fixed or variable rate. Choosing a variable rate for your student loan can be riskier; since rates can go up anytime, but it can also land you a lower interest rate. The private lender, Earnest, even allows borrowers to switch between a fixed and variable rate without incurring any fees.Where to Get Your Student Loan Refinance
You can refinance your student loan through many private lenders, including your local bank or credit union. However, the best rates and benefits for refinancing are with Earnest and SoFi. Both lenders offer lower interest rates, flexible terms and perks. Both lenders take a more modern approach at student loan refinancing. For example, Earnest approves individuals for student loan refinancing by looking at several financial and personal points, not just the applicant's credit score and income.
If you feel more comfortable with private lenders that have actual branches/locations, Citizen's Bank offers competitive interest rates, no fees, and APR discounts. With over 1,100 locations, there is a good possibility that there is a location close to you. LendKey is another option to check into. The company offers low-interest student refinance loans that are funded by local community lenders. (See also, 10 Ways Student Debt Can Destroy Your Life.)The Bottom Line
Refinancing student loans can either benefit you or hurt you financially. If you only have private student loans, then a refinance can help you save money in the long run with a lower interest rate, or it can help you stay afloat financially when your monthly payments are too high. However, if you have federal student loans, it is better to look into the repayment and forgiveness plans available to you before considering refinance.