If you’re one of the approximately 45 million Americans with student loans, you’re probably willing to consider any option that might help you save money.
The process of student loan refinancing, which means taking out a new loan to pay off one or more existing loans, can help you do that. Right now, interest rates are at an all-time low, so now more than ever people are interested in refinancing to save money.
However, it’s an important decision to weigh carefully. Read on to find out the pros and cons of refinancing student loans.
Why you should refinance student loans
Let’s start with the fun part. Here are a couple of ways refinancing student loans can benefit you.
Save money on interest
Usually, the number one reason borrowers choose to refinance their student loans is to get a lower interest rate and save money. If you took out your loans several years ago, or borrowed when your credit wasn’t in great shape, there’s a good chance you can qualify for a better rate now. Refinancing was how Travis eliminated his six-figure student loan debt.
Use our Student Loan Refinancing Calculator to estimate how much you could lower your total and monthly loan payments by refinancing your student loans.
Even if you’re able to decrease your rate by just a bit, the savings can really add up over time. Consider this example: Say you have a $10,000 loan at 6.5% interest and a term of 10 years. Your monthly payment would be $114 and you’d spend a total of $3,626 in interest. However, if your rate was just 5.5%, that payment would drop to $106 per month and you’d save $898 in interest over the life of the loan.
Manage debt easier
If you have multiple student loans, you may have trouble keeping track of how much is due when and to whom. By refinancing to a new, single loan, you only have one payment to worry about each month. This can help you avoid missed payments that result in late fees and ding your credit score.
You also have the ability to change your repayment period. Not everyone refinances with the goal of getting a lower interest rate; some borrowers might want to shorten their term to save money on interest, or lengthen the term so their monthly payments are more manageable. Just keep in mind that if your goal is to save money overall, extending the term will work against you since you have to pay interest for a longer period.
There are other perks to refinancing student loans. If you currently have a cosigner on your student loans, refinancing releases them from being tied to that debt. Many private lenders also offer perks. LendKey offers an opportunity to put loans in forbearance during an economic hardship and has a refer a friend program, where you can earn cash for referrals. Earnest offers forbearance options if you lose your job, get an income reduction, take parental leave or if you are experiencing high medical bills. Earnest also allows you to skip one payment per year, upon request. SoFi offers a temporary forbearance if you lose your job. Plus, they have a referral program and offer personalized financial advice from credentialed financial advisors. College Ave offers 16 different options for loan terms, ranging from 5 to 20 years.
Why you shouldn’t refinance student loans
Though there is opportunity to save a lot of money by refinancing your student loans, it’s not always a great idea. Here’s a look at a couple of reasons why you might not want to refinance.
Lose federal loan benefits
One of the biggest potential drawbacks of student loan refinancing is the fact that you have to forfeit all your federal benefits if you refinance federal student loans. Because refinancing involves taking out a new loan with a private lender, your federal loans permanently become private loans by refinancing.
That means if you ever need to go on an income-driven repayment plan, defer your loans or put them in forbearance, or pursue loan federal forgiveness, you won’t be able to. Unless you’re certain that you won’t need these benefits in the future, it’s best to refinance private loans only.
Tough qualification criteria
Another challenge to keep in mind is that you’ll be expected to meet fairly strict eligibility requirements. For example, most lenders require you to have earned a degree, plus show proof of at least two years of steady employment. You’ll also need a good credit score to qualify for refinancing, with the lowest rates reserved for borrowers with excellent credit. Many lenders also require a minimum annual salary.
Fortunately, if you don’t qualify to refinance on your own, you may be able to apply with a cosigner. Of course, this can present its own risks, since your cosigner is 100% liable for your debt if you can’t pay it. So before refinancing with a cosigner, be sure that person is up for the responsibility and understands the risks.
If you’re considering refinancing your loans, Credible is a great tool for comparing multiple lenders at once. Splash Financial is a student loan refinance marketplace that matches borrowers to a lender that’s right for them, and lets you check your rates.
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.