Paying off student loans is never a pleasant process, especially if you have a high interest rate, loan life, or monthly payments. Just ask the over 44 million borrowers in America who owe over $1.48 trillion in student debt. As depressing as those numbers look, at least you know you’re not alone!
Millions of Americans are struggling to pay off their student debt, and millions more have succeeded with strategies like refinancing. Today, we’ll be taking you through the pros and cons of refinancing, and hopefully helping you save some money on your student loan debt.
When you refinance your student loan, you replace it with a new loan which completely pays off your current debt. However, in order for refinancing to improve your finances, the new loan should have a lower interest rate or better repayment terms than the old loan. There’s no point in replacing your existing loan with a worse one, especially since refinancing is a time-consuming and expensive process.
You’re not getting rid of your debt, you’re just replacing it with something that might be easier to pay off in the long-run. Of course, refinancing isn’t for everyone, but if your credit score has increased since you first took out a loan and you now qualify for better interest rates or lower monthly payments, it might be worth looking into.
People refinance for many reasons. Some want a lower interest rate on their loans, while others want to consolidate multiple loans into a single loan in order to pay off the debt in a simpler and more efficient way. If you’re looking to extend or shorten the life of your loan, to reduce the cost of monthly payments, or to free yourself from having a co-signer, refinancing might help you accomplish your goals.
Of course, you should keep in mind that refinancing gets rid of the old loan entirely, including any benefits of the old loan. For example, if you’re looking to refinance a federal student loan with a private loan that offers a lower interest rate, you risk losing the special protections of federal student loans, including loan deferment and loan forgiveness programs offered to public servants.
Or let’s say you want to lower the fixed rate of your loan by replacing it with a variable rate loan that offers a lower interest rate. This could benefit you in the short term by reducing your monthly payments and total interest owed, but variable rates and the markets which decide them are unpredictable. That 3.5% variable rate could easily shoot up to 8% in five years and end up costing you more in the long-run than your original loan.
Refinancing Student Loans
Student loans can be especially tricky to refinance when it comes to federal student loans. As mentioned above, if you plan to replace your federal loan with a private loan, you might lose some of the protections which federal student loans offer. If you’re trying to consolidate your private and federal loans into a single loan to simplify the payment process, you should compare the benefits of the new consolidated loans with what you stand to lose by replacing those old loans.
If you’re looking for a lower monthly payment on your student loans, you can accomplish this by replacing your old loan with a new one which either has a lower interest rate or gives you a longer time to pay the loan off. A lower interest rate means paying less money in the long-run, but extending the life of your loan usually means paying more interest as it accrues over time.
Refinancing to get rid of your co-signer will give you financial freedom, but at the cost of higher interest rates and monthly payments (especially if you have bad credit). Refinancing your variable rate loan for a fixed rate gets rid of the anxiety of unstable markets and rising monthly payments, but at the cost of a higher interest rate and higher monthly payments. Basically, every potential benefit of refinancing your loan comes with a potential cost as, so you need to weigh all your options before you decide.
Should I Refinance?
You should only refinance your student loans if it will save you money over time or solve a problem, such as getting rid of complicated loan payments by consolidating. If you find yourself wanting to refinance for other reasons besides saving money or solving a problem, you should just stick with your old loan.
Before you contact a loan refinancer, you should examine the terms of your loan, finances, and the potential costs of refinancing. Besides costs such as higher interest rates and losing the benefits of your old loan, refinancing itself is a costly and time-consuming process, often involving closing fees for thousands of dollars. Run the numbers to find out how much money you’d pay in the long run if you stick with the new loan vs. refinancing for a new loan. If you more than break even, you should consider refinancing.
In the end, refinancing is a balancing act which comes with many pros and cons. However, if you play your cards right and have a good credit score, you could save yourself a lot of money and headaches in the long run by refinancing your loans.