The pros and cons of refinancing your student loan debt
With interest rates at rock bottom, maybe now is the time to refinance your student loan debt. Obtaining a lower interest rate could save you thousands of dollars over the life of your loan, allowing you to progress towards your other financial goals. But before you start comparing lenders, it’s important to consider the pros and cons of refinancing your student loan debt to decide if it’s the right decision for you.
Pros and Cons of Refinancing Student Debt
There are many benefits to refinancing your student debt. You may be able to get a lower interest rate, pay off your debt sooner, and consolidate multiple loans into one to streamline your finances. But if you swap your federal loans for private loans, you will lose some loan forgiveness options and repayment protections.
So, before you take the plunge, it is important to consider all the pros and cons of student debt refinancing. Here’s a more detailed look at the pros and cons to help you make an informed choice.
Advantages: lower interest rate
One of the main benefits of refinancing your student debt is the ability to earn a lower interest rate. Even reducing your rate by 1% to 2%, you could save thousands of dollars over the life of your loan.
Suppose you have a student loan balance of $ 28,950 at 8% interest rate that you will be finished paying off in a decade. If you refinance to a loan of the same term but at a 2% lower interest rate, you will save $ 3,581 over the life of the loan.
Pro: Change your repayment period
Another benefit of refinancing is the ability to change your repayment period. If you choose a shorter loan term, you can pay off your loan sooner and save on interest. Going back to the example above, if you refinance a loan with a 5 year repayment period instead of a 10 year term, you will save $ 8,568 in total.
If you prefer lower monthly payments, you can extend the term of your loan instead. Keep in mind that you will usually end up paying more interest in the long run. But it may be worth having more financial leeway.
Pro: Consolidate your loans
If you have both federal and private student loans, you may need to manage multiple payments each month. Having multiple loans from different providers can make it difficult to remember to make your payments on time.
If you want to streamline your finances, refinancing your loans with a private lender is a great way to do it. Instead of juggling multiple loans, you’ll only have one monthly payment to make.
Disadvantage: Strict eligibility conditions
While refinancing your student loans can lower your interest rate, you will need strong credit to qualify. Lenders want to see good credit scores of 660 and above. If you haven’t had a chance to build up your credit history yet, you might miss the threshold.
Most lenders will allow you to boost your request by getting a co-signer. But if you don’t know someone who has good credit and is willing to vouch for you, you might not be eligible for refinance.
Downside: losing federal loan protections
If you refinance your federal student loans with a private lender, you will lose the protections that come with them. For example, you will no longer be eligible for the civil service loan exemption. You’ll also miss the student loan interest freeze that Biden extended until September 30, 2021.
Another downside to refinancing is losing federal repayment protections. While private lenders usually have deferral and forbearance options, they may not be as generous as those offered by the government.
The government offers its own direct consolidation loans. This allows you to combine multiple federal loans into one loan to streamline your finances and maintain your repayment protections.
But you cannot include private loans in your federal consolidation loan. You also won’t be able to get a lower interest rate, which is one of the main reasons people refinance.
Now that you know more about student loan refinancing, do you think it is the right choice for you? Let us know in the comments section below.
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