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When it comes to student loan refinancing, many borrowers focus on some great interest rate they’ve seen advertised. Though refinancing may allow some of them to save money, a broader view is in order.If you refinance, a private lender pays off one or all of your existing loans with a new loan that has a new rate and possibly a new length.What are the pros and cons of refinancing your student loans? Here are a few. Understanding them can help you determine whether refinancing makes sense for your personal circumstances.
Pros of Student Loan Refinancing
Refinancing isn’t an all-or-nothing option. Some borrowers refinance one or more student loans while keeping others with the original loan issuer. Three pros of student loan refinancing:1. Lower interest rate. A more appealing student loan interest rate is usually the most compelling reason to refinance. A lower rate will allow you to save money over the life of the loan. You can check quotes for what your rate may look like from different lenders, which usually won’t affect your credit score. The interest rate quoted depends on factors like your credit score, whether you choose a fixed or variable rate, and the loan repayment term.2. Ability to add a cosigner. If you’re still building credit, most refinancing lenders will allow you to refinance with a loan cosigner. A cosigner with good credit may ease the way toward refi approval and a lower interest rate than if you were to take out a loan on your own. 3.Ability to change the loan term. Refinancing can allow you to extend or shorten the loan length. With a shorter term, your monthly payments are likely to go up, but your interest savings can be substantial.
Cons of Student Loan Refinancing
Refinancing student loans typically takes around two to three weeks. While the process is usually relatively hassle-free, there are other things to consider before taking the plunge. Three potential downsides to student loan refinancing:1. Loss of access to federal programs. Refinancing federal student loans with a private lender will remove your access to income-driven repayment plans, Public Service Loan Forgiveness, and protections like federal student loan deferment and forbearance options.Also, if US officials succeed in canceling a set amount of student loan debt, they’ve targeted only federal student loan debt. Conversion to a private student loan through refinancing would make federal loans ineligible for student loan forgiveness.Borrowers who have both federal and private student loans may opt to keep their federal loans and only refinance private loans.2. Approval is not a shoo-in. If you’re still building credit or your financial situation is unstable, you may not be approved for refinancing, or the rates offered could be the same as or higher than your current loan rates. If you’re struggling to pay down your student loans, it may make sense to speak with your original lender about repayment options or explore deferment or student loan forbearance avenues with that lender. 3. Federal loan consolidation becomes moot. A federal Direct Consolidation Loan allows a borrower to consolidate multiple federal education loans into one loan for up to 30 years. (Private refinancing lenders typically have a maximum term of 15 or 20 years.) Consolidation can lower your monthly payment by elongating your loan term, but you will almost assuredly make more payments and pay more in interest than would be the case if you didn’t consolidate. The interest rate is the weighted average of the rates of all the loans, rounded up to the nearest one-eighth of a percentage point.
Is It Worth It to Refinance Student Loans?
Comparing quotes is one way to determine whether student loan refinancing will save you money, but it’s also a good idea to understand the terms and policies that each loan issuer has. Are there any late fees? Do they have policies in place in case of hardship, and for how long?Many refinancing lenders offer the option of a fixed or variable rate on the loan. A variable rate may be lower at first, which can make sense for people who anticipate paying off the loan early.Your financial picture and how you plan to pay off the loan over time is also important. Coming up with several paths toward loan repayment, depending on multiple scenarios, can help you determine a plan that works for your budget and allows you to hit your financial goals.It may be helpful to consider a few what-ifs: What if you were to lose your job? What if that pay raise you anticipate doesn’t come to fruition? What if your car is older and will need replacing? The answers can help determine a course of action.
Knowing the pros and cons of student loan refinancing can be helpful in charting a course to deal with the debt. In addition to looking at rates, you might want to consider where you are financially and where you expect to be, and whether refinancing one or all of your student loans makes sense. Lantern by SoFi makes comparing student loan refinancing options a breeze.
About the Author
Anna Davies specializes in writing for the fintech and startup space. In addition to her personal finance and investing articles for SoFi, she has written for such startups as WeWork, Happy Money, and Haven Life. Fortune 500 finance clients include American Express, Citi, and Chase. Davies has ghostwritten and collaborated on multiple New York Times bestsellers.