• Mike Bink, AAMS®, CCFS®

Benefits and Disadvantages of Refinancing Your Student Loans


Refinancing student loan debt means you trade your current student loans for a brand new loan. The main reason people refinance student loans is to get a lower interest rate, which helps save interest and pay off your student loan debt faster. However, student loan refinancing isn’t for everyone. Here are some of the key benefits and drawbacks to refinancing your student loans.


Drawbacks of Student Loan Refinancing

You lose the option for student loan forgiveness

If you refinance a federal loan into a private loan, you can no longer qualify for public service loan forgiveness by working as a teacher, nurse, lawyer and more. This also includes if there is ever widespread cancellation of federal student loans, which has been proposed.


Private student loans do not offer income-driven repayment plans

If you have federal student loans, you could qualify to have your loans put on an income-driven repayment plan. This bases your monthly payment to a percentage of your income. Private student loans aren’t eligible for income-driven repayment plans. If you refinance a federal loan into a a new private loan, you no longer have this option.


Deferments on private student loans are not as generous as they are with federal loans

When you have federal student loans, there are options to defer student loan payments. You could temporarily postpone payments due to an economic hardship or if you become unemployed (for up to three years). If you refinance your federal loans, depending on your lender, you have more limited options or may not be eligible for any deferments at all.


Variable interest rates could increase

When refinancing your student loans, you can choose a variable or fixed interest rate. If you opt for a variable interest rate instead of a fixed interest rate on your new loan, the interest rate could increase over time. Variable interest rates are appealing, since they start off lower than the equivalent fixed interest rates. It’s best if you only opt for a variable interest rate if you are confident you will be able to pay off the student loans very quickly.


Not everyone will qualify for refinancing

There are certain requirements for refinancing student loans. Specific requirements vary by lender, but generally, lenders will require a steady job, degree completion, a minimum amount to refinance, a credit score of 650 and debt-to-income ratio under 50%.

Benefits of Student Loan Refinancing

Reduce your interest rate

Lowering the interest rate on your loans could save you thousands of dollars, depending on your loan amount and the new loan terms. For example, say you have $50,000 in student loan debt at 7% interest on a 10-year term. If you were able to refinance that amount at an interest rate of 4% for the same term, you would save $8,918.


Pay off your student loans faster

Since you are paying less interest on your student loan, you may be able to pay more towards the principal balance.


Simplify managing your student loans

Refinancing student loans takes multiple loans from potentially several lenders and streamlines into one loan. This means a single monthly payment and one due date. This could reduce your chances of missing payments and late fees.


Reduce your monthly payment

Some private lenders offer you flexible repayment terms. If you choose a longer repayment term, this could lower your monthly payment. However, keep in mind that the longer your term, the more you are paying in interest over the life of the loan.

Get a cosigner released from your student loan

If you had a parent or other family member cosign your student loan during college, they may be wanting to cut ties with it. If your current lender doesn’t offer a cosigner release or you don’t quality for it, refinancing the loans will eliminate the cosigner since it’s a new loan.


In Conclusion

For most families today, student loans will be part of the equation when it comes to paying for college, and managing your loans properly can save you thousands on the overall cost of college.


Proactive college planning and developing a smart lending strategy can help you manage this piece of the puzzle properly to improve your situation. This is where a college planning advisor can really help you lower your overall cost of college. If you would like to speak with an advisor to see how we can help you develop a smart lending strategy, schedule a call with our team today!

AUTHOR

Mike Bink, AAMS®, CCFS®

Mike works with families to simplify the college funding process and is widely recognized as an expert in college planning. He is passionate about empowering families to become informed consumers of higher education so that they don't pay a penny more for college than they absolutely have to.

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