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. However, student loan refinancing isn’t for everyone. Here are some pros and cons of student loan 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.
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
Since you are paying less interest on your student loan, you may be able to pay more towards the principal loan balance.
Simplify managing your student loans
Refinancing is a form of student loan consolidation. Refinancing student loans takes multiple loans from potentially several lenders and streamlines into one loan. This means a single monthly payment and one due date. This could reduce your chances of missing payments and late fees.
Reduce your monthly payment
Some private lenders offer you 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 you are paying in interest.
Get a cosigner released from your student loan
If you had a parent or other family member cosign your student loan during college, they may be wanting to cut ties with it. If your current lender doesn’t offer a cosigner release or you don’t qualify for it, refinancing the loans will eliminate the cosigner since it’s a new 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 who have 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 cancellation 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
When you have federal student loans, there are 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, you have more limited options or may not be eligible for any forbearance or deferment at all.
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 interest rate instead of a fixed interest rate on your new loan, the interest rate could increase over time. Variable rates are appealing since they start off lower than the equivalent fixed interest rates. It’s best if you only opt for a variable rate loan if you are confident you will be able to pay off the student loans very quickly.
You will lose your grace period for federal student loans
If you are just graduating and refinancing federal student loans, you will lose the grace period. A grace period is a certain amount of time, usually six months after you leave school or graduate, when you are not expected to make payments.
Not everyone will qualify for refinancing
There are certain eligibility requirements for refinancing student loans. Specific requirements vary by lender, but generally, lenders will require a steady job, degree completion, a minimum amount to refinance, a credit score of 650 and a debt-to-income ratio under 50%.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.