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6 Major Pros and Cons of Refinancing Student Loans
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If you’re looking to lower your interest rates and save money on payments, student loan refinancing could be the solution for you. But refinancing isn’t the best idea in every situation. Before making a decision, consider these six pros and cons of refinancing student loans:
- 1. Pro: A lower interest rate could lead to major savings
- 2. Pro: You’ll have a single monthly payment with the lender of your choice
- 3. Pro: You can apply with a cosigner to access lower interest rates
- 4. Con: You lose federal repayment protections
- 5. Con: You (or your cosigner) need to meet lofty eligibility requirements
- 6. Con: You’re locked into a repayment plan
- Plus: Consider the pros and cons of refinancing student loans
Pros and cons of refinancing student loans
Before you decide if refinancing is the right course for you, it’s key to understand how student loan refinancing works. Refinancing means lumping your existing federal and private loans into a new loan with a private lender.
Through refinancing, you could score a better interest rate but also lose access to federal loan protections. Read on to determine if any of the following pros and cons of refinancing student loans speak to your particular situation.
Whether you benefit from a cosigner or have built up your own strong credit history, refinancing will award you accordingly. It’s a merit-based system; the more qualified you are for refinancing, the lower your interest rate will likely be.
That’s a big deal because a lower interest rate means paying less overall. Say you refinance $40,000 worth of loans at a 6.00% interest rate — over 10 years, you’d shell out $13,290 in interest. But if your rate was 4.00%, you’d pay $8,598 in interest, saving close to $5,000.
Once you improve your credit score and debt-to-income ratio, or find a cosigner, you don’t have to settle for the first interest rate you’re offered. A benefit of refinancing is that you can choose your lender, comparing offers until you find the best one for you.
Also, consider that refinancing gives you access to variable interest rates, which increase or decrease during your repayment according to market influences. The option of variable rates isn’t a pro for every borrower, but it could be if you’re looking to repay your refinanced loan over a shorter period.
Each time you took out a federal loan for college or grad school, you were assigned to one of nine federal loan servicers. You could have ended up with federal loans that were all from different servicers. Add private loans to the mix, and keeping tabs on your debt could have proven to be difficult.
One advantage of refinancing is that you can end up making a single monthly payment to the loan servicer of your choice.
A federal Direct consolidation loan achieves the same thing with federal student loans. However, you won’t score a lower interest rate. And you can’t lump your private loans into the new loan.
Refinancing, on the other hand, gives you the power to group all your loans together. You could even transfer a Parent PLUS Loan from your parent’s name to your own with top lenders such as SoFi or CommonBond.
Refinancing requirements can be hard to meet. But you could enlist the help of a cosigner.
Although you’re not required to apply for refinancing with a cosigner, many top lenders give you the option to do so.
Say you don’t have the credit history or income to benefit from refinancing on your own. Consider asking a relative or other creditworthy adult to cosign so you can get a lower rate.
If you’re concerned about being joined at the hip to your cosigner, remember that many top lenders offer clear pathways to cosigner release. At Laurel Road, for example, you can remove a cosigner from your loan agreement once you make 36 consecutive timely payments.
Many top refinancing companies offer you the ability to pause your payments if you lose your job or suffer another money-related setback. CommonBond, for example, gives its refinancing borrowers up to 24 months of unemployment protection.
Still, deferment and forbearance options offered by some of the best refinancing companies are likely to fall short of what’s offered by the federal government.
The Department of Education lists several ways you could qualify for up to three years of mandatory forbearance. If your monthly loan payments account for 20% or more of your monthly income, for example, your servicer would be required to award you forbearance.
So if you see yourself potentially needing to pause your student loan payments, ask private lenders about their deferment and forbearance options. If you’re unimpressed, you might be wise to stick with your federal loan protections.
It’s also safer to keep your federal loans if you have a path to loan forgiveness. Refinancing companies don’t offer forgiveness options. If you work in public service, for example, check out Public Service Loan Forgiveness before opting to refinance.
When you applied for student loans, you needed to meet specific requirements, such as being enrolled at least half-time at an eligible school.
Similarly, most of the top lenders offering student loan refinancing have requirements. Basic criteria include being a legal resident and holding an undergraduate or graduate degree.
But refinancing companies also require borrowers to be creditworthy. And you’ll need to have solid credit if you want to score your best rates. Some of the best private student loan companies often require you to have a good or excellent credit score (typically 660 or above) to qualify.
As mentioned, if you don’t meet these requirements on your own, you could apply with a cosigner who does.
One benefit of federal loans, including Direct consolidation loans, is that you can alter your repayment plan. You could switch from a 10-year standard repayment plan to a 20-year income-based repayment plan, for example. The latter would set your payment based on a percentage of your discretionary income.
Refinancing offers no such flexibility. Once you’ve taken out your new refinanced loan, you have the same repayment plan until your debt is paid off — unless you choose to refinance for a second time.
Still, you should have a strong degree of choice at the outset. Earnest, a top refinancing company, offers student loan repayment terms as short as five years or as long as 20 years.
But remember that the lower your monthly payment, the longer your repayment term. That means you’ll pay more over time to cover your debt.
As with any decision you make regarding your student loans, refinancing should be considered with care. If you’re a qualified borrower, refinancing could help you repay your debt faster. But refinancing isn’t right for everyone.
To avoid making the wrong choice, consider all the pros and cons of refinancing student loans. One other potential pro: It’s relatively easy to apply for refinancing.