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The Pros And Cons Of Student Loan Refinancing

by Refi.me Staff on June 25 2021

Student loan refinancing is a popular solution for students looking to change the terms of their student loans. Refinancing essentially involves trading in your current loans for a new loan with completely different terms. Borrowers may choose to refinance for several different reasons. The most common reason is to save money by refinancing at a lower interest rate. Others may choose this option to clear off their debt faster by increasing their monthly payments. Still, others may refinance to lower their monthly payments and free up much-needed cash for other essential expenses.

While refinancing offers several benefits, it also has some major downsides. Here’s a breakdown of the pros and cons of student loan refinancing.

Pros Of Student Loan Refinancing

First, let’s go over all the benefits of student loan refinancing.

You may qualify for a lower interest rate

If your credit score has improved since the time you took your current loan, you’ll pay a lower rate on the new loan. Lenders set personalized interest rates based on the borrower’s financial credentials. A high score, steady income, and low credit utilization will qualify you for a lower interest rate. Even a small rate reduction can save you thousands in accrued interest over the loan term.

You may be able to pay off your debt faster

Being debt-free can take a great weight off your shoulders. If you’re earning a higher income, it’s a good idea to put the extra money towards increasing your monthly payments. The higher monthly payments will shorten the loan term and help you clear your loan faster. While you can’t change the terms of your original loan, you can when you refinance.

You can lower your monthly payments and reduce the risk of default

Not everyone can afford the monthly payments associated with the original loans. However, lenders expect their payments to be made on time every month regardless of your financial limitations. If you’re struggling to make the payments, you run the risk of missing payments. This will damage your credit score, causing several other problems down the road. Refinancing with lower monthly payments can free up cash and reduce the risk of delinquency or default.

The payments are streamlined and more manageable

Juggling multiple loans with different payment amounts, due dates, and loan servicers can be overwhelming. Refinancing allows you to combine multiple loans into one new loan with one payment amount and one due date. This helps to streamline the payments and make the loans more manageable. It also reduces the likelihood of missing due dates.

You can negotiate a cosigner release

Getting a cosigner would have allowed you to score a lower interest rate on your student loans. But it puts the co-signer at a disadvantage in many ways. It impacts their credit score and limits their ability to get any other line of credit. In all fairness to your cosigner, you should release them from the responsibility as soon as you can. Most lenders offer a cosigner release option if you qualify for refinancing on your own credentials.

Cons Of Student Loan Refinancing

However, it’s important to keep in mind some of the drawbacks of student loan refinancing too.

You lose all benefits associated with your federal student loans

This is one of the biggest downsides of refinancing federal student loans. You can only refinance with private lenders, which converts your federal student loans to private loans. The new loan doesn’t have any of the protections that you’d otherwise receive with the original loan. You’ll lose access to flexible income-driven repayment plans, and deferment and forbearance options. You’ll also lose access to any Forgiveness programs. This drawback only applies to refinancing federal student loans.

Lowering your monthly payments can have adverse consequences

Lowering your monthly payments may seem like a simple way to ease your financial burden. However, you’ll take longer to pay off your loan as the lower payments will extend your loan term. It will also increase the cost of the loan because of the extra interest that accrues over the longer loan term.

You may need a cosigner to qualify or to get a lower interest rate

The interest rate on your refinanced loan will be based on your credit score, monthly income, and debt-to-income ratio. Lenders will only approve you and offer you a lower interest rate if your financials are strong. If you don’t meet their requirements, you’ll need to apply with a cosigner, which is not always a good move.

Is Student Loan Refinancing The Best Option For You?

Student loan refinancing is an excellent move for some borrowers but not for all. For some, it could end up being an expensive mistake.

Here are a couple of things to think about when deciding whether or not student loan refinancing is right for you:

Refinancing private student loans

If you qualify for better terms, don’t hesitate to refinance your private student loans. These loans don’t come with any special benefits or protections. You have everything to gain and nothing to lose when you refinance private loans at a lower interest rate.

Refinancing federal student loans

When it comes to refinancing federal student loans, the main consideration is whether you’ll need any of the federal protections. Only refinance if you feel confident about your income and job security for the foreseeable future. That too, only if you qualify for a more competitive rate. If you’re unsure about your job or your income is low, it’s advisable not to refinance. Refinancing federal student loans is permanent and non-reversible. Once you refinance with a private lender, you can’t go back to federal.

Refinancing multiple times for maximum savings

You can refinance more than once. Most lenders don’t charge any fees to refinance student loans. With that in mind, it makes sense to refinance even if you get only a marginally lower interest rate. The smallest drop in the rate can add up to sizeable savings over the lifer of the loan. When you qualify for an even lower rate, you can always refinance again for further savings.

 

 

We hoped you enjoyed this article! Remember, you can and potentially lower your monthly student loan payments and save money.

The Refi.me team is always here to help you