Pros and Cons of Student Loan Refinance

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By Kristen Kuchar

March 29, 2021

Refinancing student loan debt means you essentially trade your current student loans for a brand new loan. People refinance student loans 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 an interest 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 balance. 

Simplify managing your student loans

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, this could lower your monthly payment. 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 quality 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.

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 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.

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 bases 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 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. You could temporarily postpone payments due to an 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 deferments 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 interest rates are appealing, since they start off lower than the equivalent fixed interest rates. It’s best if you only opt for a variable interest rate 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 refinance 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 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 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 interest rate. 

A good place to start:

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