Pros and Cons of Student Loan Refinancing

If you finished college with substantial student loan debt, you’re not alone. In fact, nearly 45 million Americans currently carry some form of student loan debt, with an average balance hovering around $30,000. One option worth looking into if you want to save money on your student loan payments is refinancing. When you refinance your student loans, you essentially replace your existing loans with a new one. This may help achieve a lower interest rate with a single lender, as opposed to individual loans from multiple lenders.

As with any major financial decision, however, student loan refinancing comes with some inherent pros and cons. There is no universal answer as to whether refinancing student loans is the best decision. It must be assessed on a case-by-case basis. Still, many people who are still making payments on their student loans can benefit from refinancing. By assessing the potential pros and cons of student loan refinancing, you can ultimately make an informed decision about what’s best for you.

Advantages of Student Loan Refinancing

Let’s start with an overview of some of the most compelling reasons to consider refinancing your student loans. Keep in mind that some of these benefits may not apply directly to your situation. After you’ve reviewed the possible pros and cons of refinancing, you’ll need to consider which apply best to your loans. Then you’ll have to determine whether the pros outweigh the potential cons.

Ability to Drop Any Co-Signers From Your Loans

Many students need co-signers when they initially take out student loans, especially those who enter college immediately after high school. This is because they haven’t had the opportunity to establish enough credit history.

If you took out private or federal student loans with a co-signer and want to have them removed, refinancing could allow you to do so. This can give you a greater sense of independence while also relieving your co-signer from this responsibility—which is a welcome benefit for most.

On the flip side, you also have the option to refinance with a co-signer as a means of maximizing your savings. This is recommended if you still lack an established credit history, or if your credit score is less than ideal. By refinancing with a co-signer, you can potentially get offered lower interest rates.

Simplified Due Dates and Monthly Payments

When many students take out student loans, they do so on a semester-by-semester basis. For the “typical” four-year degree, this can easily result in eight different open loan accounts. In some cases, these loans may have different interest rates or may even be carried with different lenders.

If this situation applies to you, then it may be a hassle trying to remember all of your different student loan due dates and payment amounts each month. By refinancing your student loans, you’re able to consolidate all your different repayment accounts into one loan with a single interest rate. It’s important not to confuse this with federal student loan consolidation, which will simplify your loans into one lump sum payment but will not lower your interest rate.

When you refinance, you can enjoy the benefits of both consolidation and a lower interest rate. From there, you’ll also enjoy the simplicity of having just one monthly payment and due date to remember.

Save Money on Interest Over Time

Perhaps the biggest benefit of student loan refinancing is the money saved over time. The whole point of refinancing your student loans is to renegotiate terms such as interest rates. A lower interest rate usually decreases the amount of money you repay over the life of the loan. Even a small reduction in your interest rate can make a significant difference over the repayment term of your loan.

Choose Your Desired Loan Terms

When you refinance your student loans with a private lender, you’ll oftentimes be able to choose whether you want a fixed rate or variable rate loan. With a fixed rate, you’ll enjoy the peace of mind in knowing that your interest rate will not fluctuate at all market changes, resulting in a stable monthly payment for the life of your loan. With a variable rate loan, on the other hand, your interest rate can rise and fall with the market; this can create some unpredictability but can also save you money if interest rates drop.

Potential Drawbacks of Student Loan Refinancing

Of course, refinancing student loans may not be right for everyone. Specifically, there are a few potential drawbacks to consider before you make the decision to apply for refinancing.

Losing Out on Federal Loan Benefits

If you have federal student loans, it’s important to understand that refinancing requires you to switch to a private lender. As a result, you’ll lose out on the benefits that can come along with carrying a federal loan. The biggest benefit of having federal student loans is the ability to choose a repayment plan that works for you.

For example, federal student loans give you the option of income-based repayment plans. These plans allow you to pay a comfortable sum of money each month based on how much money you’re currently earning. This can be ideal for recent graduates who may be at entry-level positions or have yet to secure steady jobs. These payment plans can also be adjusted and changed easily at any time to reflect your current financial situation.

Some other potential benefits that come along with keeping a federal student loan include:

• forbearance options
• free and easy consolidation
• flexible repayment periods (up to 25 years)

When you switch to a private loan, you will lose out on some of these repayment options.

Loss of Eligibility for Loan Forgiveness

Some Federal student loans are also eligible for loan forgiveness. This is most commonly available to those in public service fields, such as education and law enforcement. Private lenders don’t offer forgiveness options, so this is another potential benefit you’ll be losing out on when you refinance.

Minimal Overall Savings (In Some Cases)

Depending on current interest rates and credit score factors, some borrowers simply won’t benefit much when they refinance. Those who had co-signers on federal loans when rates were low, for example, may find that interest rates are about the same or higher if they choose to refinance right now. And for those whose credit scores have dropped since they first took out student loans, it may be difficult to even get approved for a new loan with a lower interest rate and other favorable terms.

Is Student Loan Refinancing Right For You?

Now that you have a better understanding of the inherent pros and cons of student loan refinancing, you can decide whether student loan refinancing is right for you. Generally, student loan refinancing is a smart choice if you can get approved for a better interest rate. Furthermore, refinancing may work for you if you’re not relying on benefits from federal loans (such as flexible payment plans).

If you’re interested in exploring your student loan refinancing options, LendKey can help. In a matter of minutes, we can connect you to reputable lenders to get the ball rolling. From there, you can embark on your refinancing journey with greater confidence and peace of mind.