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Student Loan Refinancing: Is It Worth It?

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Student loans have become a huge problem and a topic of much debate in our nation lately. In fact, 7 out of 10 graduates are graduating with a diploma in one hand and a bag of student loan debt in the other. If you are one of these people and have been looking for ways to save money on your repayment, you may come across refinancing. Before you jump in, make sure that you have considered the pros, cons, and other options that are available. The following sections will go over what student loan refinancing is, the pros, and the cons.

What Is Refinancing?

Refinancing your student loan is just like refinancing your house or car. In short, a private lender and gives you a new one with different terms. Typically, the new loan will have either a lower interest rate or lower monthly payments. Eligibility for refinancing is based on credit worthiness, and lenders typically have strict requirements. Most require at least a minimum FICO credit score of 660, but many are higher.

Pros of Student Loan Refinancing

Lower Interest Rates

When you refinance your student loans, you often receive a lower interest rate than the one you are currently paying. After you graduate and have secured a well-paying job, you are seen as more financially trustworthy to the lenders, so they are able to offer appealing rates. Though your rate may only drop by a few percentage points, when you are dealing with tens of thousands of dollars, the savings add up fast.

Shorter Repayment Terms

Though you may end up paying more per month, you can also refinance to shorten the repayment length. This means that instead of being on a 10-year plan, you may be on a 2-year or 5-year repayment plan. If you have the finances to do it and it makes sense for you, it is a great option. If you pay off your loans faster, less interest accrues overtime and less will capitalize, saving you a considerable amount of money in the long run.

Reduction in the Monthly Payment

While you can choose to shorten the length of the loan, refinancing sometimes allows you to lengthen the repayment period, resulting in a lower monthly payment. Some people may find themselves struggling to meet the minimum monthly payments and desire to pay less. It is important to note that extending your repayment over a longer period of time will usually result in paying more over the life of the loan.

Switch to a Fixed Interest Rate

When you refinance your student loans, you have the option to decide between variable and fixed interest rates. Because fixed rates are guaranteed to stay the same over the life of the loan, many people prefer them to variable rates. Refinancing is a smart option for those who fear that they will end up paying more with their variable rates, especially with the Federal Reserve’s recent announcement that they would be raising interest rates for the first time in nearly a decade.

Consolidate Multiple Loans Into One

Another great benefit of refinancing student loans is the opportunity to consolidate multiple loans into one. Private lenders will refinance both federal and private loans into one new private loan. This not only saves you money, but also makes repayment much more manageable.

Cons of Student Loan Refinancing

Losing Eligibility for Forgiveness

When you refinance your student loans, you are no longer eligible for the government’s forgiveness programs. In these programs, people working in certain occupations can have their loans forgiven after a certain amount of qualifying payments are made. If you are working toward forgiveness, you may be better off remaining where you are and working with your federal loan servicer to work out a better payment plan. The reason behind this is because you usually need to make 120 payments before forgiveness kicks in and if you refinance, you automatically disqualify yourself. It should be noted, however, that many of these programs have very strict eligibility requirements and most borrowers will not qualify.

Losing Federal Protections

The next thing to consider when it comes to refinancing is that there is not much protection for you and your family in the event of unexpected disability of discharge. The government will discharge your debt in these cases, but not all private lenders offer the same protections.

Losing Eligibility for Federal Repayment Plans

When you refinance with a private lender, you also are no longer able to switch to the federal repayment plans designed to help those struggling with debt. These Income-Driven Repayment Plans base your monthly payments on your discretionary income, ensuring that you have enough to meet the minimum standard of living. Many private lenders do, however, have similar programs in place to help those struggling with repayment.

Final Thoughts on Student Loan Refinancing

Before you refinance your student loans, you want to make sure that you are consider your financial situation and think about what you may be giving up. It is also important to shop around with different lenders to see where you can get the cheapest rate. Many people are unaware that they can refinance their student loans and are, in turn, leaving thousands of dollars on the table. If you have a solid credit history and a secure job, refinancing may be a great option for you!

Last updated on February 10, 2016.

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