Do your student loans feel like a boat anchor dragging your finances down into the murky depths? A student loan refinance could be the answer you're looking for. Here are several pros and cons of a student loan refinance that could save you thousands of dollars.
Pros and Cons of Student Loan Refinance Programs
Refinancing is simply the act of taking out a new loan to pay off and replace your existing loan. You can refinance student loans for any number of reasons, including getting a lower interest rate, getting better terms, or simply getting away from an abusive private lender.
Refinancing is Not Debt Consolidation
Refinancing your student loans is different from consolidating your loans. Consolidating your loans is simply combining them into one lump sum with one monthly payment. The interest rate is determined by a weighted average of your total loans. Consolidating can help you simplify your bill-paying process, but it won't necessarily save you money. Your consolidated payment will most likely be the sum of your existing payments.
Most of your federal student loans are eligible for consolidation, including subsided and unsubsidized federal, Stafford, PLUS loans, Perkins loans, Health Education Assistance loans, and more. Be careful when consolidating your Perkins loans, though, as you could lose eligibility for cancellation after consolidating.
When you refinance your student loans, both federal and private, you are essentially taking out a new loan with a new rate and new terms to pay off your existing student loans. If you could receive a better interest rate on the new loan than you have on your current loans, a refinance could save you thousands of dollars over the life of the loan.
It's important to note that if you plan on taking advantage of federal loan forgiveness programs, such as the Public Service Loan Forgiveness Program, you will not want to refinance your federal loans.
Shop Around for Private Student Loans
Banks, credit unions and even crowdfunding programs are beginning to offer student loan refinance programs. These programs rely heavily on your credit score, as they are not insured by the government. The better your credit, the better your chances of getting a lower interest rate. Having excellent credit and managing your money responsibly will work in your favor when it comes to private student loans.
Credit is such an important factor for private student loan refinance programs. If you're already behind on your payments and trying to avoid default, your credit has probably already taken a hit and you may not qualify for private student loan refinancing. This is the risk you face when financing your education with private student loans. Because they are not backed by the government, you will not be able to consolidate them to avoid defaulting, which could have serious financial repercussions and could cost you future employment or even professional licensing.
Student Loan Refinance Options
If you're wanting to save money on your student loans, refinancing can be a great option. Just as you would shop around for a mortgage, you should comparison shop different lenders to find the best student loan refinance program for your needs.
Borrowing money to finance your education can be an expensive and risky proposition. Managing your finances responsibly and developing a plan to pay off your student debt quickly can minimize the risk of paying for your advanced education.