If you’re a student loan borrower, chances are you may have heard about refinancing your student loans. Some of you may have been told that no one should ever consider student loan refinancing. On the other hand, maybe someone has told you that you should.
There’s no arguing that student loan debt is becoming one of the biggest financial crises in this country. As a result, many are seeking solutions to ease the burden of their high loan balances.
It’s downright annoying and frustrating to make payments on your loans and have over half of it go towards interest every month. This makes it harder to make any real progress on your balance.
Regardless of what you’ve been led to believe about refinancing your student loans, it’s best to educate yourself on the process before making any final decisions. In this article, we will discuss the pros and cons of refinancing student loans, questions you should consider, and how to proceed if you decide this is the best option for you.
If you have landed here and you already know that you want to refinance your student loans, I recommend checking out LendEdu to answer a 3-minute questionnaire. There you can compare competitive interest rates for up to 12 different lenders.
The Pros and Cons of Refinancing Your Student Loans
Student loan refinancing is the process of combining student loans into a new loan. If you graduated with multiple lenders and varying interest rates, this new loan would provide you with a single interest rate.
This type of refinancing is provided by private companies and the interest rates vary based on the market rate and your credit profile. Therefore, there are some particular pros and cons you should consider if you want to refinance your student loans.
- Low market rates and an excellent credit score would allow you to obtain a better interest rate.
- With a lower interest rate and the same repayment period, your monthly payment could actually decrease.
- If you have private and federal loans, you may be able to refinance all loans into a single loan.
- You may be able to release a co-signer (for example if a parent co-signed on a Parent Plus loan).
- You’ll no longer be eligible for federal programs such as Income-Based Repayment or Public Service Student Loan Forgiveness.
- You will lose federal student loan forgiveness in the event that you die.
- You may incur a fee to refinance your loans.
- Sometimes the repayment period is shorter than the period established on a federal consolidated loan.
- In some cases, your payment may be higher than what it was before refinancing.
- Requires a credit check and a low debt-to-income ratio.
Further Reading: 8 Ways to Pay Off Your Student Loans Faster
Questions to Ask Yourself When Considering Refinancing Your Student Loans
1) Do you have a healthy, solid income? If your job is dependable and your finances are solid (emergency fund, fully insured, etc) refinancing your student loans may help you save money and pay your debt off quicker.
2) Do you have a disability and medical insurance? Despite having a solid income and dependable job, your finances should be protected in the event of a sickness or physical disability. This ensures you would have the money to pay your loans if you were hurt or sick.
3) Do you have a low debt ratio? Ideally, you would want to have little to no other type of debt (like credit cards) before refinancing. Why? Well, the interest is higher on this type of debt. If you’re struggling to pay those, lenders will assume you’re not an ideal candidate. Focus on getting rid of those debts first so you can get a good interest rate.
4) Do you have a cosigner you would like to release? If your parents or another family member cosigned on your student loans, you may feel better if your loans were only in your name. This could protect all parties because many loans require payment due in full if the co-signer passes away.
5) Are your interest rates on your student loans higher than 6.5 percent? Or are you paying to multiple lenders with varying interest rates? Many lenders can help you get a lower rate. If you’re paying over 6 percent in student loan interest, it probably seems like you’ll never pay off your loans. That’s because most of your payment is going towards interest and not the principal balance.
6) How much money will you save by refinancing? Think in terms of saving. If you are able to save money by lowering interest, how will those savings help your overall financial picture? Will you have more to contribute to retirement? Could you invest more?
7) Can you handle the new terms of your loans? If you are on an income based repayment plan for your federal loans, how would you manage? What if your loan payments increased, would you be able to afford the new amount? If you lost your job, could you manage without federal benefits, such as forbearance?
It’s important to weigh all the aforementioned questions when making a decision to refinance your student loans. Refinancing your student loans can either make your life better or turn it into a financial living hell if you’re not careful.
Further Reading: How to Create a Plan of Attack on Student Loan Interest
How to Find the Lowest Interest Rates for Student Loans
The information on the internet can seem overwhelming when trying to find the best interest rates and terms. This is why I recommend using one single website for your student loan refinancing needs – LendEdu.
Basically, you’re able to compare interest rates and terms for various different lenders all at the same time. LendEdu is very simple to use and only asks 10 questions. The entire process is usually around 3 minutes and you’ll be able to see what interest rates and terms are available.
I recommend LendEdu because:
- Your information is safe and secure
- The application process is easy
- There are no hard pulls on your credit report
- You can compare multiple offers (up to 12)
- It’s completely free
If you would like to know what lower interest rates you qualify for, answer LendEdu’s 3-minute questionnaire using this link or simply click the picture below.
Wrapping Thangs Up
The decision to refinance your student loans shouldn’t be taken lightly. Of course, the benefits to refinancing are obvious and quite alluring to many stuck with insane amounts of student debt. It’s also quite obvious that refinancing private student loans would benefit many if it means securing a better interest rate.
However, this isn’t the only thing that should be considered, especially if you’re a federal student loan borrower. Remember, federal borrowers have perks that private borrowers don’t have such as repayment plans and forgiveness programs.
So what would I do?
Well, I’m traveling the road to financial independence; however, I have quite a long trip ahead of me. My finances aren’t completely solid and with my income, I greatly benefit from the income-based repayment plan.
With that said, I’m not comfortable refinancing my student loans until I’m A) making a considerably higher income and B) I have a completely funded emergency fund.
If you have recently graduated college, are in between jobs, or underemployed, I would recommend keeping your federal student loans until your situation is more stable. Likewise, if you have good credit, stable income, and you’re ready to kill your debt – you may want to consider student loan refinancing. Refinancing your loans could be the first step in helping you to achieve a debt-free lifestyle.
Whatever decision you make, remember to weigh the pros and cons carefully. Don’t come to a conclusion based solely on the opinion of someone else because you truly know your situation better than anyone else. With that said, refinancing your student loans may be the best financial decision you’ve ever made.
Further Reading: How to Tackle Your Student Loan Debt
Is it time for you to refinance? Have you considered refinancing and decided not to do it? Any other thoughts?