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Refinancing your student loans can be a savvy move if you’ve got high-interest student loans, but it can also mean giving up federal repayment plans. So while refinancing has a bunch of pros, it could also come with some downsides. Here are all the pros and cons of student loan refinancing so you can decide if it’s the right move for you.
- Pros of student loan refinancing
- Cons of student loan refinancing
Pros of student loan refinancing
Let’s start with the benefits of refinancing your student loan debt.
The best benefit of refinancing student loans is saving money on interest, especially if you’re currently dealing with high-interest loans.
The best refinancing providers offer variable rates starting at 1.90% and fixed rates starting at 3.10%.
Let’s say you owe $45,000 at a 6.5% rate. Over 10 years, you’d pay $16,316 in interest.
But if you could refinance that debt to a 3.5% rate? You’d pay $8,398 over 10 years, resulting in savings of nearly $8,000.
When you refinance student loans, you can select new repayment terms. Most lenders offer terms of five, seven, 10, 15, or 20 years.
You could choose a shorter term to get out of debt faster and save the most on interest. Or you could choose a long term to lower your monthly payments.
Crunch the numbers with a student loan calculator (many lenders offer these on their websites) to determine which loan repayment term makes most sense for you.
Getting a new interest rate and new repayment terms means adjusting your monthly payment.
If you can afford to pay more each month, you could choose a short term and get out of debt ahead of schedule. Note that you can always make extra payments to get out of debt even faster without penalty.
If your payments are way too burdensome, you can choose a long term (like 10, 15, or 20 years) to lower your payments. Snagging a lower interest rate will help bring your payments down, too.
But remember, the longer you’re in debt, the more interest you’ll pay over time.
Refinancing several loans means combining them into one. Instead of tracking multiple due dates, you can simply make one payment to one loan servicer. This could really simplify things if you’re currently juggling multiple accounts and payments.
Student Loan Gal is excited to bring you welcome bonuses of $100 to $200 from most of our recommended lenders! Check out our list of lenders to see which ones offer cash back when you refinance your student loans.
Although you’ll probably go with the lender that offers the best interest rate, don’t forget to look for extra perks and benefits when choosing your lender, too.
Hate your student loan servicer? Refinancing with a private lender means you get to switch to a new one who’s hopefully more helpful.
When we put together our list of recommended lenders, we went with ones who have a good reputation for customer service, since we know how frustrating it can be to deal with an unhelpful loan servicer.
Cons of student loan refinancing
While student loan refinancing can be helpful for some borrowers, it’s definitely not for everyone. Here are some potential disadvantages.
Refinancing federal student loans, such as Direct and PLUS loans, turns them private. As a result, they’re no longer eligible for federal forgiveness programs such as Public Service Loan Forgiveness or Teacher Loan Forgiveness.
If you’re working toward any of these federal forgiveness programs, don’t refinance your federal student loans with a private lender.
Since turning federal loans private makes them ineligible for federal programs, this counts for federal income-driven repayment plans, too, such as Income-Based Repayment and Pay As You Earn.
These plans are really helpful if you want to adjust your payments along with your income. Most private lenders do not offer income-driven plans. So if you feel you need one now or in the future, don’t turn your federal loans private through refinancing.
Private refinancing lenders have fairly lofty requirements for credit and income. If you don’t meet them, you could have trouble qualifying for a loan. And if your credit just meets the cutoff, you probably won’t get the best rates.
Most refinancing providers let you apply with a creditworthy cosigner if you need to boost your chances. But you might not want to share debt with someone, and any issues could lead to conflicts between you and your cosigner.
Before having anyone sign on to your application, make sure you have a clear discussion about what this means and what everyone’s expectations are around repayment.
Consider all the pros and cons before making changes to your student loans
As you can see, refinancing student loans has both pros and cons. Make sure you’ve familiarized yourself with all this information before applying.
To learn even more, head to our Refinancing 101 guide.
And if you’re ready to check your rates, hop on over to our list of recommended lenders.