Refinancing student loans could be a confusing process. Refinancing a student loan means essentially trading your old loan for a new one with a private lender.
Many borrowers choose to refinance in hopes to reduce their interest rate, which saves money. It could also change your loan term – a shorter term means higher monthly payments but paying less in interest and eliminating debt sooner. A longer term could mean lower monthly payments, but paying more interest and having that debt hang around longer. Other reasons for refinancing include simplifying loans into one payment and releasing a cosigner from a loan.
However, there are drawbacks to refinancing student loans, too. Refinancing federal loans means you’ll miss out on great benefits. These include the potential for student loan forgiveness, the ability to make payments based on your income, an option to temporarily stop payments if you lose your job or have another economic hardship, potential to have interest paid by the government during deferments (if your loans are subsidized), and the ability to discharge loans if the borrower dies or becomes disabled. If you enroll in an income-driven repayment plan, the remaining balance is forgiven after 20 or 25 years, but you will need to be taxes on whatever the balance is.
Carefully consider the pros and cons of refinancing and what is best for your specific situation.
We asked Steve Muszynski, Founder and CEO of Splash Financial, a student loan refinancing marketplace that partners with banks and credit unions, for his expert insight on student loan refinancing. He shares misconceptions about refinancing, how to prepare for refinancing, and when it’s not a good idea.
Tell us about Splash Financial.
Splash is a leading destination helping people save money on their student loans. We allow applicants to fill out one simple form on our website and we instantly shop our network of banks, credit unions and other lenders to find people great student loan refinancing offers. Checking your rate only takes a couple of minutes, doesn’t impact your credit score and the entire refinancing process is free.
What are misconceptions when it comes to refinancing student loans?
There are three main misconceptions:
- You can only refinance once. In reality, you can refinance multiple times.
- Refinancing is a difficult or expensive process, similar to refinancing a mortgage. The refinancing process is free, and many lenders can process applications in days, rather than weeks.
- Only private loans can be refinanced. Actually, both federal loans (loans made by the government) and private loans are eligible.
See also: How to Refinance Student Loans
What are the biggest mistakes borrowers make when refinancing?
The biggest mistake is not having a financial plan or goal prior to refinancing. In some cases, refinancing is simple – for example, going from 8% to 4% on a private loan. However, certain scenarios – such as lowering your rate but agreeing to pay the loan back faster – could overburden some borrowers. While this route can ultimately save you money, it’s important to understand your own financial position and not over-commit.
When is refinancing student loans not a good idea?
Government loans have some benefits that private refinanced loans do not, so it’s important to understand your plan and position. If you have federal loans and work in a non-profit 503c organization, you may be eligible for a form of forgiveness from the government.
If you are confident about your job security, do not work at a non-profit entity, and have strong credit, refinancing may be a good option.
What should borrowers do to prepare before they apply to refinance a student loan?
Regardless of preparation, borrowers should check their eligible rate, which takes only about two minutes and doesn’t impact credit. Once you see the rates you’re eligible for, you should evaluate it as part of your financial plan. This includes reviewing what interest rate you have now, and comparing it to how much you could save by lowering it.
It’s also important to go into the process with a plan – for instance, do you want a lower monthly payment, or savings over your entire life? The difference is that you could extend your loan term from 10 years to 20 years and drastically reduce your monthly payment, or you could decide to increase your monthly payment and pay off your loan over a shorter period of time.
Besides refinancing, what are things borrowers can do to help pay down their student debt faster?
If you aren’t refinancing, it’s most likely because you want to take advantage of government programs or because you are not eligible due to credit reasons. In these scenarios, people desiring loan forgiveness from the government should make sure to get the proper certification annually, or they risk not having the forgiveness granted.
Those who are not eligible for refinancing can look into income-based repayment from the government, which can allow you to pay less temporarily.
You can also organize your student loan debt so that one has the highest interest rate – then, pay off that loan first. This will save the most money in the long-term.
For more information on Splash Financial, visit their website.
At Savingforcollege.com, our goal is to help you make smart decisions about saving and paying for education. Some of the products featured in this article are from our partners, but this doesn’t influence our evaluations. Our opinions are our own.