What are the pros and cons of refinancing student loans?

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There’s a lot to consider when deciding if you should refinance your student loan. You can only refinance your student loans through a private lender, so any federal loans you refinance will turn into private loans.

You may be angling for better terms on your loan, but refinancing can also come with consequences.  Here’s what you need to know. 

Pros of refinancing your student loan

Potentially lower interest rate. Whether you’re going for a variable or fixed loan, you can sometimes get a better rate than your current one. Advertised rates on lenders’ websites are often only available to those with exceptional credit, though, so make sure you see your personalized rates before you commit to taking out a loan from a company. 

Refinance and consolidate into one monthly payment. When you took out your student loans, you may have ended up with several different federal or private loan servicers, which can make it difficult to keep track of your debt. You can refinance and consolidate these loans into one payment and may be able to get a lower rate or a different repayment term length.

If you prefer a different process that allows you to keep a federal loan servicer, you can lump your federal loans into a singular payment with a Direct Consolidation Loan, but you can’t include any private loans. 

Reduce monthly payment or pay less overall. You can pay less per month when you refinance by choosing a longer term length, but you’ll pay more over the life of the loan because you’ll be paying interest for longer. If you’d like to pay less overall, you can choose a shorter term length. 

Apply with a cosigner or release your cosigner from your current loan. If you don’t have a lengthy credit history or enough income to refinance your loans on your own, you can enlist the help of a cosigner to potentially nab a better rate than the one you currently have.

On the flip side, if a parent or family member cosigned your student loan during college, they might want to get out of the obligation now. Negotiating a cosigner release on your current loan is often a difficult process, but a new loan will simply eliminate the cosigner. 

Get a new loan servicer. If you’re dissatisfied with your current loan servicer, federal or private, you can get a new servicer simply by refinancing your loan. Before you do this, reach out to the company’s customer service and see if they can fix your issue. 

Cons of refinancing your student loan

Lose federal payment protections. The biggest downside of refinancing a federal loan is losing the protections that accompany them. This includes federal student loan relief programs like Public Service Loan Forgiveness, which forgives the debts of graduates working in the public sector after a minimum of 10 years of service and eligible payments.

You won’t be able to take advantage of repayment options like Income-Driven Replayment plans, which use your income and family size to figure out your monthly payments. Depending on those factors, you pay back 10% to 20% of your income for 20 to 25 years — and you may pay as little as $0 per month. Income-Driven Repayment plans offer a safeguard if you happen to lose your job because your payments would scale down as a result. 

The Biden administration may also forgive thousands of dollars in student debt, which the president promised on the campaign trail, though that isn’t guaranteed. Your savings on interest may not make up for losing these perks.

Might not qualify for deferments or forbearance. Some private lenders won’t let you stop payments for any reason.  With federal loans, you may be able to defer payments if you’re unemployed, enrolled in school, or serving in the military. If you refinance, you’ll also lose the six-month grace period that accompanies federal student loans. This is the time before you have to start repaying the loan. 

You also wouldn’t be eligible for COVID-19 related loan forbearance, currently in place through September 30, 2021. 

You need to hit eligibilty requirements. To get a loan with a private lender, you may have to meet lofty qualifications, like a great credit score — especially to get a loan with a top-notch rate. If you don’t meet these requirements, your lender choices may be limited. 

You’re locked into a repayment plan. With a federal loan, you can alter your repayment plan. For example, you can switch from a standard repayment plan to an Income-Driven Repayment plan. With a private loan, unless you refinance your loans a second time, you don’t have that option.

Variable rates can go up. Variable rates might seem like a more attractive option than fixed rates, as they often start lower. However, variable rate loans fluctuate based on various factors, and you may end up with a rate that’s higher than the one you had with your previous loan. 

Could have a longer repayment term. If you’re struggling to keep up with your monthly payments, you may opt to stretch them out over an extended period. While this isn’t a negative in and of itself, you’ll end up paying more in total interest than with your current loan term if you do so. 

Refinancing a student loan can be a great option if you’re looking to change the terms of your existing loans, but there are significant drawbacks you need to consider before making your decision. 

Ryan Wangman

Junior Loans Reporter

Ryan Wangman is a junior reporter at Personal Finance Insider reporting on personal loans, student loans, student loan refinancing, debt consolidation, auto loans, RV loans, and boat loans. In his past experience writing about personal finance, he has written about credit scores, financial literacy, and homeownership. He graduated from Northwestern University and has previously written for The Boston Globe.  Learn more about how Personal Finance Insider chooses, rates, and covers financial products and services here>>

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