Published in Borrow
Written by Kristyn Pilgrim

The Pros and Cons of Refinancing Student Loans (Is It Worth It?)

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    The Pros and Cons of Refinancing Student Loans (Is It Worth It?)

    Published in Borrow
    Written by Kristyn Pilgrim

    The average student loan interest rate is 5.8%, but some rates can be much higher or lower.

    Refinancing student loans can potentially lower your interest rate if you have good credit and good financial standing. You will also need to have been making consistent on-time payments on your loans. 

    Student loan refinancing can change your interest rate and help you lock in a fixed rate if you have a variable rate. It can also lower your monthly payments by extending the life of your loan. Your repayment period may change from 10 years to 30 years, for example. 

    Refinancing student loans is not always the best course of action, however. Doing so can mean that you will pay more in interest over the life of your loan, so you will pay more money out of pocket in the long run. If you have federal student loans and use a private financial institution to refinance, you can also lose some of the benefits of those federal loans.

    You need to weigh all the options when looking to refinance student loans to ensure that it is a good plan for you.

    The Ins and Outs of Refinancing Student Loans

    Refinancing a student loan works much like a refinance of any other type of loan. If you are trying to lower your monthly payments or think you can get a better interest rate, a refinance might be a good option. Refinancing can also help you consolidate multiple student loans and loan payments into one monthly payment.

    When you refinance student loans, your original loans will be paid off by your new lender, and you will be issued an entirely new loan and promissory note. This means that you will also lose any potential perks or benefits of your original loans. You may no longer be eligible for certain loan forgiveness or income-driven repayment plans, for instance. This is especially true if you have federal student loans and look to refinance through a private lender. 

    Student loan refinancing can often save you money, but this is not always the case. Refinancing your loan changes your loan terms. While it may make your monthly student loan payments lower by spreading out your timeline, this may mean you will pay more over time.
    Look carefully at the lender’s offers and loan terms and take note of the potential aspects you may lose or gain through a refinance.

    Interest Rates on Student Loan Refinance

    Student loan interest rates can vary widely, depending on a myriad of factors. Each lender will offer different terms and rates.

    Fixed interest rates mean that your rate will stay the same throughout the entire life of your loan, but these rates are typically a little higher than variable interest rates. 

    Variable interest rates can go up and down with the market. While they can look attractive since they often start out low, they can spike over the average fixed rate too.

    Fixed interest rate loans can be easier to budget for, as your monthly payment does not change. With a variable rate, it can.

    Interest rates can range from just under 3% to over 15% based on your personal financial resources, credit score, the type of refinance, loan lender, repayment plan, and loan terms.

    Refinancing Federal vs. Private Student Loans

    If you have more than one federal student loan and are looking to consolidate them into one payment, you can consider a direct consolidation loan. Just like with a regular refinance, you will be issued an entirely new loan with reformed loan terms. You may be able to lower and simplify your monthly payment through federal loan consolidation, but you may end up paying more in the end. 

    Federal loan consolidation takes the weighted average of all your federal loans’ interest rates and rounds up one-eighth of a percent for a fixed rate. This may be lower than your highest interest rate, but higher than your lowest rate.

    Extending your loan repayment terms from 10 years to 30 years can also make your monthly payments lower, but your overall student loan debt and payments will be higher. There are no fees to apply for a federal direct consolidation loan.

    Private student loans, or even a mixture of federal and private loans, can also be consolidated through a private lender. Banks, credit unions, and financial institutions all act as private student loan lenders and offer refinancing options. Private loan refinancing requires good credit to qualify.

    Credit Scores and Refinancing

    To qualify for a good rate when refinancing student loans through a private lender, you will need to have a credit score of close to 700 or better. You may be able to use a co-signer with good credit to obtain good rates. The higher your credit score and better your debt-to-income ratio, the better rates you can get.

    It is pretty typical to not have a lot of credit when you initially apply for a student loan. If you have since graduated from college, have a stable job and steady income, have built up some credit, and have been consistently making your student loan payments, you may be able to refinance your student loan and get a better rate with more favorable terms.

    When applying for a student loan refinance, the lender will look at the following information:

    • Credit score and history
    • Credit card and other debt
    • Income
    • Employment and job stability
    • Creditworthiness of co-signer (when applicable)

    It can be in your best interest to wait to seek out a student loan refinance until you have a higher credit score, steady income, and lower debt-to-income ratio. The refinancing process will require a credit check, which can cause your credit score to take a slight hit. You may be better off to wait until you have more income, less debt, and some positive credit before trying to refinance student loans.

    Should I Refinance Student Loans?

    When looking to refinance student loans, consider all the factors.

    Are you trying to lower your monthly payments or your overall student loan debt? Many times, lowering your monthly payments is done by pushing out your repayment period, which will mean that you will pay more in interest and be paying off your loans for a longer period of time.

    Oftentimes, the lowest possible interest rates are variable rates, as well, which can be a gamble. They are not likely to remain as low as they start out. If you have a variable rate loan and are looking to refinance to a fixed-rate loan, even if the initial rate is higher, this may actually end up saving you money down the line.

    Refinancing student loans can cause you to lose access to benefits, such as income-driven repayment plans and federal loan forgiveness programs like the Public Service Loan Forgiveness (PSLF) plan. Check your eligibility for these federal loan benefits if you hold federal student loans and are looking to use a private lender to refinance. 

    Pay attention to different interest rates, loan repayment terms and periods, loan benefits (and potential loss of benefits), and lender offers when looking to refinance your student loans. 

    You can often apply to multiple lenders. Many have preapproval or refinance calculators you can use to determine how much you can save and what your possible interest rates might be before going through an in-depth credit investigation.

    Generally speaking, you may consider a student loan refinance if the following is true:

    • You have excellent credit or a willing co-signer with excellent credit
    • You have a stable job and a good income
    • Your initial loans had variable interest rates, and you are looking to lock in a fixed interest rate loan
    • You want to consolidate more than one student loan into one easy monthly payment
    • You have been making your student loan payments on time and on a consistent basis

    A credit counselor can help you to decide if refinancing your student loans is a good plan for you right now.

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