Refinancing student loan debt means you essentially trade your current loans for a brand new loan. Borrowers refinance student loans with lenders like SoFi and Earnest to get a lower interest rate, which helps save money and pay off your student loan debt faster. But, whether you should refinance your student loans depends on your particular situation. Here are some pros and cons of student loan refinancing.
Pros and Cons of Refinancing Student Loans
A common motivation behind student loan refinancing is saving money, either through reduced interest rates or monthly payments. But what happens when you refinance a student loan, apart from saving money?
Here’s a quick reference for the pros and cons of student loan refinancing. We’ll dive deeper into each advantage and disadvantage throughout this article.
|Pros and Cons of Student Loan Refinancing|
|Reduce your interest rate||1. You lose the option for student loan forgiveness|
|Pay off your student loans faster||2. Private student loans do not offer income-driven repayment plans|
|Simplify managing your student loans||3. Deferment periods are not as generous as with federal loans|
|Reduce your monthly payment||4. Variable interest rates could increase|
|Release a cosigner from the student loan||5. You will lose your grace period for federal student loans|
|6. You may not qualify for refinancing|
Benefits of Student Loan Refinancing
Reduce your interest rate
Refinancing student loans can potentially lower your interest rate. This could save you thousands of dollars, depending on your loan amount and the new loan terms. For example, say you have $50,000 in student loan debt at 7% interest on a 10-year term. If you were able to refinance that amount at a lower rate of 4% for the same term, you would save $8,918. Keep in mind that you may not have access to lower interest rates if your credit history is poor. Try your best to improve your credit score and debt-to-income ratio so that you can access lower interest rates.
Use our Student Loan Refinancing Calculator to estimate how much you could lower your total and monthly loan payments by refinancing your student loans.
Pay off your student loans faster
If you successfully obtain a lower interest rate on your loan, you may have room in your budget to pay more towards the principal loan balance.
Simplify managing your student loans
Refinancing is a form of student loan consolidation. Your original student loans might be a combination of loans from multiple lenders. When you refinance student loans, the new lender streamlines your several loans into one loan. This means you’ll have a single monthly payment and one due date each month, which may reduce your chances of missing payments and paying late fees.
Reduce your monthly payment
Some private lenders offer flexible repayment terms. If you choose a longer repayment term, you may have lower monthly payments. However, keep in mind that the longer your term, the more interest you’ll pay throughout your loan.
Get a new loan servicer
If you are unhappy with the service you receive with your current student loan servicer, refinancing can fix that. Research lenders with high rankings for customer service.
Release a cosigner
If you have a cosigner on any of your current private student loans, refinancing those loans generally releases your cosigner from any future liability.
Cons of Student Loan Refinancing
You lose the option for student loan forgiveness
If you refinance a federal loan into a private loan, you can no longer qualify for Public Service Loan Forgiveness (PSLF) by working as a teacher, nurse, lawyer and more. This also includes if there is ever widespread forgiveness of federal student loans, which has been proposed. Private student loans aren’t eligible for student loan forgiveness through the Department of Education.
Private student loans do not offer income-driven repayment plans
If you have federal student loans, you could qualify to have your loans put on an income-driven repayment plan. This ties your monthly payment to a percentage of your income. Private student loans aren’t eligible for income-driven repayment plans. If you refinance a federal loan into a new private loan, you no longer have this option.
Deferments on private student loans are not as generous as they are with federal loans
With federal student loans, you have options to defer student loan payments. These protections allow you to temporarily postpone payments due to economic hardship or if you become unemployed (for up to three years). If you refinance your federal loans, depending on your lender, your options for deferment and forbearance are limited.
Variable interest rates could increase
When refinancing your student loans, you can choose a variable or fixed interest rate. If you opt for a variable rate instead of a fixed rate on your new loan, that interest rate could increase over time. Variable rates are appealing because they start lower than fixed interest rates. We recommend opting for a variable rate loan only if you are confident you will be able to pay off the student loans quickly.
You will lose your grace period for federal student loans
Federal student loans usually offer a six-month grace period before they require you to start making loan payments after graduation. If you are just graduating and decide to refinance your federal student loans, you will lose this grace period.
You may not qualify for refinancing
Specific requirements for refinancing student loans vary by lender. However, lenders will usually require a steady job, degree completion, a minimum amount to refinance, a credit score of 650, and a debt-to-income ratio under 50% before agreeing to refinance your student loans.
Once you’ve read the pros and cons, it’s time to decide if student loan refinancing is right for you. If you decide to refinance, be sure to compare student loan refinancing lenders to make sure you get the best student loan refinancing rate.