Should You Refinance Your Student Loan?
Depending on your circumstances, refinancing your student loans can be beneficial. Learn what refinancing is, how it works and how and when to refinance your student loans.
Student loan refinancing simply means taking out a new loan to repay your existing loans. You’ll start making payments on this new debt. Many individuals refinance to access lower interest rates or monthly payments.
Student loan refinancing can be advantageous for you if you have the right qualifications. However, it’s not always ideal. As a borrower, you need to know when to refinance student loans and when you should not.
Researching your options and knowing the pros and cons can help you make an informed decision.
Student loan refinancing is taking out a new loan to pay off existing student loans. By refinancing, you start making payments on this new loan.
Having the right qualifications can make refinancing student loans a good idea. For instance, borrowers with excellent credit scores may benefit from this.
On the other hand, certain circumstances make refinancing student loans a bad idea. For example, it’s not the right option if you don’t have a steady income.
Pros & Cons of Student Loan Refinancing
Student loan refinancing comes with benefits and drawbacks. Weighing the pros and cons can help you make the best decision based on your situation.
The table below gives a quick overview of the good and bad sides of student loan refinancing.
Pros & Cons of Student Loan Refinancing
- New payment plan: Obtaining a refinance loan will change your payment plan. This may make it easier for you to budget your payments.
- Combines multiple loans: You can use student loan refinancing to consolidate multiple student loans, so you’ll only have to make a single payment every month. This can reduce the chances of missed payments and late penalties.
- Lower interest rates: You may get lower interest rates if qualified. This could help you save a lot of money over time.
- Lower monthly payments: Some lenders offer longer repayment terms, which may lower your monthly payments. Check the interest rates you must pay throughout the loan to determine whether a lower interest or a shorter term is more advantageous.
- Release a co-signer: Refinancing can be a good option if you want to release a co-signer on your current student loan.
- Longer payment period: You may end up with a longer payment period. This can be disadvantageous if you’re already halfway through your loan repayment.
- Lower interest rates and payments may not be available: Student loan refinancing doesn’t always lead to lower interest rates and monthly payments. That’s especially true if you have a poor credit score.
- Loses student loan forgiveness eligibility: Refinancing a federal student loan may make you ineligible for loan forgiveness options. Generally, private loans also don't qualify for student loan forgiveness.
When Student Loan Refinancing Is a Good Idea
There are various potential benefits to student loan refinancing. These can include lower interest rates or lower monthly payments. However, you may need to meet specific qualifications to get a deal.
Below are some instances in which student loan refinancing is a good idea.
You Have an Excellent Credit Score
One of the factors lenders consider when evaluating a student loan application, including refinancing a student loan, is your credit score. The minimum score may vary per lender. Generally, having an excellent credit score will help with qualifying for competitive interest rates. The higher your credit score, the higher the chances of getting lower interest rates.
Being eligible for reduced interest rates is a huge advantage as it can lower the total cost of your loan repayment.
You Want to Pay Off Your Student Loan Faster
Refinancing can let you roll multiple loans into one. Consolidating your loans can make them easier to manage. Making only one monthly payment can also help you avoid missed or late payments and penalties.
By refinancing, you also may get an opportunity to change your repayment terms. If you want to repay your loan earlier, you can opt for a shorter term. Keep in mind that shorter repayment terms may lead to higher monthly payments. Make sure you evaluate your capacity to make payments first.
You Want to Release a Co-signer
If you didn’t have a good credit history when you applied for a student loan, chances are you had to include a co-signer on your loan. If you want to release your co-signer from your existing loans and relieve them from any form of liability in the future, student loan refinancing may be right for you.
Lenders have different requirements for borrowers who want to release their co-signers. For instance, you may need to meet a minimum credit score, make on-time principal or interest payments for a certain number of months, and choose specific repayment terms. Check with the lender to ensure you’re qualified to release your co-signer.
You Want to Switch to a Fixed-Rate
A variable interest rate on your student loans can lead to higher payments. Refinancing your student loan can help you switch to a fixed-rate. This can be cheaper over time since a variable interest rate depends on market conditions and may increase as market rates change.
Before choosing to refinance your student loans, compare the interest rates. Refinancing may be a good idea if interest rates on a new loan are lower than on your current student loan(s). If not, refinancing may not be the best choice for you.
When Student Loan Refinancing Is a Bad Idea
In some cases, it makes more sense not to refinance your student loans. For example, you may not be eligible for refinancing if you have a poor credit score. You also may not get competitive interest rates if you have a lower credit rating.
Knowing the different instances in which student loan refinancing is a bad idea can help you determine if it’s the solution for you.
You Have a Poor Credit Score
Lenders typically have a minimum credit score requirement for student loan refinancing. Each lender has different requirements. But if you have a poor credit score, your refinance application may not be approved.
Some lenders may accept a borrower with a poor credit score with a co-signer. However, this means your co-signer will share the responsibility for your repayment. If you and your co-signer both have poor credit, you may find it challenging to get approved. If you are approved, you may not get access to competitive interest rates.
You’re Working on Loan Forgiveness
If you have a federal student loan, you may want to work toward loan forgiveness. The government has various programs, including public service and teacher loan forgiveness options. If you qualify for any of these, your remaining student debt balance may be canceled after a certain service period.
If you refinance your federal student loans with a private lender, you’ll no longer qualify for federal student loan forgiveness. You may still find state or university repayment assistance and forgiveness programs, but you won’t be eligible for federal programs.
You Don’t Have a Steady Income
Refinancing means taking out a new loan from a private lender. Your existing student loans are repaid, and the balance is rolled into the new loan. Thus, you only have to deal with one loan payment.
Typically, people refinance student loans to take advantage of lower interest rates or monthly payments. Although this may be appealing, refinancing isn’t always ideal.
If you don’t have a steady income or risk income loss soon, you may want to rethink refinancing. Failure to make your payments consistently can lead to penalties. It may also affect your credit score. In some cases, you could face a lawsuit.
You’ll Need Federal Student Loan Benefits
If you have federal student loans, you may qualify for various benefits. For instance, income-driven repayment plans calculate monthly payments based on a percentage of your income. Private student loans used for refinancing aren’t eligible for these repayment plans.
Additionally, federal student loans have a six-month grace period for making loan payments after you graduate. If you graduated recently, you might lose this benefit if you refinance. Student loan refinancing may be a good idea if you’re willing to let go of these benefits.
Summary: Should You Refinance?
Student loans are great tools to help you finance your higher education. However, paying down student loan debt can be difficult. For some individuals, student loan refinancing is a great option.
But before you proceed with an application, make sure you know when you should and shouldn’t refinance student loans.
You Should Refinance If:
If you’re in the following circumstances, you should refinance your student loans:
- You have excellent credit: Lenders check credit scores. Excellent credit makes it easier to get approved for refinancing and helps you access competitive interest rates. If you have poor credit, improve your score first to qualify for lower rates. You can start by making on-time payments. Be wise in choosing loan applications, as too many may further hurt your score.
- You want to pay off your student loan faster: Refinancing can consolidate multiple student loans, making it easier to manage payments. You can choose a shorter repayment term, but remember that this can lead to higher monthly payments.
- You want to release a co-signer: You can release a co-signer by refinancing your student loans. Lenders may have requirements you should meet, such as a minimum credit score and making on-time payments. Clarify with the lender to see if you qualify.
- You want to switch to a fixed rate: If your existing student loans have variable interest rates, you may make higher payments due to changing market conditions. You can refinance your student loans using a new loan with fixed interest rates. Check your current rates; refinancing may not be ideal if they’re lower than the refinance rates.
These are only some instances when refinancing might be a good idea. Evaluating your needs and financial situation can help you reach a decision for your unique circumstances.
You Should Not Refinance If:
In certain cases, student loan refinancing isn’t a wise decision. Here are some instances when you shouldn’t refinance:
- You have a poor credit score: Having a poor credit score may make you ineligible for student loan refinancing. Some lenders may approve your application, but you’re not likely to get competitive interest rates.
- You’re working on loan forgiveness: If you have federal student loans, you may be eligible for loan forgiveness programs. You’ll no longer qualify if you refinance your student loans through a private lender.
- You don’t have a steady income: Lenders may have minimum income requirements. Having a steady income can help ensure on-time payments.
- You’ll need federal student loan benefits: If you have federal student loans, you may qualify for repayment plans that could lower your monthly costs. Federal student loans also have a grace period, which allows you to begin repayment six months after graduation.
Although some individuals may benefit from student loan refinancing, others won’t. If the cons outweigh the pros for you, you may want to find other solutions.
Frequently Asked Questions About Student Loan Refinancing
Understanding how to refinance student loans can be challenging, especially for first-timers. MoneyGeek answers some frequently asked questions to give you more information on student loan refinancing and help you decide whether to do it.
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