A college education costs a lot these days. With college costs rising at rapid rates, many people have to take out loans in order to finance their higher education.
Having to make a big student loan payment every month can prevent you from being able to invest for retirement and save money for life purchases.
While there are ways to cut your monthly spending, save on groceries, and make more money, when your student loans have sky high-interest rates, it can be disheartening to see such a big chunk of your monthly income go towards your debt.
Student loan debt totals more than 1.3 trillion. The class of 2016 graduated with an average of $37,172 in student loan debt. Many people are looking for a solution to get better control over their student loan debt.
High-Interest rates can put a damper on debt repayment by increasing the amount of time it takes to repay the debt and the amount you end up paying back over time.
For many types of debt, you can refinance. If you have credit card debt, you can negotiate your rates or use a balance transfer card. You can refinance your mortgage or auto loan. However, when it comes student loan refinancing, a lot of people are still unfamiliar with their options.
Student Loan Refinancing: What It Is
Student loan refinancing is the process of obtaining a new loan for your debt, on different terms.
A private lender takes your loans and combines them into a new loan with a different repayment schedule. Student loan refinancing can be an attractive option to those with high-interest rates and monthly debt payments. It can result in different repayment terms like lower monthly payments and a better interest rate.
Refinancing can be a great way to get better control over your student loans, but it does have its advantages and disadvantages. Here are some pros and cons to student loan refinancing.
Pro: Lower Monthly Payments
Perhaps the biggest advantage to student loan refinancing is being able to lower your monthly payments towards your debt. This is usually achieved in two ways: a lower interest rate and a change in the repayment duration.
If you have good credit, you may be able to get a lower interest rate on your student loans through refinancing. When you don’t have as much going towards interest, your monthly payments can decrease. However, it’s important to look at the repayment period. If you get a longer repayment period through refinancing, it could lower your monthly payments but have you pay more in the long term.
Con: Loss of Federal Benefits
Student loan refinancing is best for those with high-interest private student loans. When you have just federal student loans or a mix of federal and private loans, it can get more complicated.
When you refinance your federal student loans, you could lose the federal loan benefits like loan forgiveness and income-based repayment programs. If you have a lot of federal loans and you’re on an income-driven repayment plan or in a loan forgiveness program, it could be better to stick with them instead of refinancing.
Pro: One Payment, One Loan
When you took out loans in college, you most likely look out new loans every semester. This ends up resulting in having varying loan amounts from several lenders. Keeping track of the different due dates, interest rates, and loan amounts can be tiresome.
With refinancing, since all of your old loans are paid off and combined into one new loan, you get the peace of mind of having just one loan with one interest rate and one due date to remember. This can give you peace of mind and make managing your student loans easier.
Con: No Grace Period
Many student loans come with a grace period. This allows you to have the time to plan things out and stabilize your income situation. If you lose your job or decide to go to graduate school, you can defer your loans.
When you refinance your student loans, there is no grace period or ability to defer, and your repayment process usually begins immediately. If you think your income situation may change soon or you’re thinking about going back to school, it may be better to not refinance your loans.
What to consider before refinancing
There is no risk in seeing what sort of rates and savings you
Make sure you understand the terms and conditions that come with refinancing your loans with a new lender. If you do choose to refinance, review the repayment period and interest rate and make sure the lender has a good record of customer service.
Refinancing your student loans has its pros and cons. Refinancing can be a great way to save money and achieve a more manageable debt repayment. However, it is a big financial decision. Assess the benefits and potential savings you may get through refinancing and see if it’s the right fit for you.
Find out how much you can save on student loans through refinancing your student loans on SoFi. Also check out our post on when and how to refinance your student loans.
Have you ever considered refinancing your student loans? Are you better off refinancing or just keeping your current rates?
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Ha, I actually had a post on my site two weeks ago about this topic. I think refinancing can be great, I did it myself when paying off my loans, and helped a good deal. That being said, I’ve seen others rush to get it done not to realize some of the benefits they give up. As you said, it doesn’t hurt to check out rates – just know what you’re getting yourself into if you do proceed with the refi.
this is an interesting point of you are things about think before refinance or not