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If you have a lot of student loan debt, you’re not alone. The class of 2015 graduated with an average of $35,000 of student loan debt, up 6 percent from last year. It’s no wonder, then, that many are considering refinancing their student loans. But is it the right move? Before you refinance student loans, it is important to learn the pros and cons of student loan refinancing.
Refinancing student loans can sound like a great idea: just consolidate the loans you have into a single loan, save money on interest and you get one easy monthly payment. But is it really that simple? To find out, take a look at the pros and cons of refinancing student loans.
If you have significant student loan debt, you may have considered refinancing your student loans. For some borrowers, refinancing may be a good solution. But for others, it can be a big mistake.
To help you decide whether refinancing makes sense in your situation, in this article we outline the main advantages and disadvantages of refinancing student loans. We’ll also look at the pros and cons of federal student loan consolidation, another popular way to simplify student loan repayment.
Advantages and disadvantages of refinancing student loans
To refinance your student loan, you need to go to a private lender. If your student loan refinance application is approved by one of these companies, they will pay off your existing loans and give you an entirely new loan – often with a different interest rate and term. Below are the main advantages and disadvantages of student loan refinancing.
Benefits from refinancing of student loans
Refinancing a student loan can have several positive effects. Here are some of the key factors that can help you:
- A lower interest rate. Consider a $100,000 loan with a 10-year repayment period. If you lower your interest rate from 6% to 4%, you could save over $11,000 in interest over the life of the loan. Check out our refinancing calculator.
- A lower monthly payment. In the example above, you would also reduce your monthly payments by $98 per month. These lower payments can help you pay off credit card debt, build up an emergency fund, or save for a down payment on your mortgage.
- A shorter repayment period. By shortening the term of the loan through refinancing, you save even more interest. Taking the example of the same $100,000 loan, reducing the repayment period from 10 years to 5 years means an interest savings of over $22,000!
- Consolidation. A refinance allows you to combine multiple student loans into one loan, so you don’t have to deal with different terms.
- New organization of services. Not all student loan providers are the same. Some are better than others at customer service, following payment instructions from borrowers and providing accurate information to credit bureaus. If you’re not happy with your loan servicer, refinancing gives you the opportunity to throw them out.
- Release of co-signer. You may be able to negotiate the release of co-debtors on your current loans, but this can be a long and difficult process. Refinancing can enable you to get a brand new loan that has no co-borrower.
- Additional benefits. Private student loan lenders are doing their best to differentiate themselves. Laurel Road, for example, offers unique options for medical professionals, Earnest offers flexible repayment terms and Commonbond’s Pencils of Promise program gives money to children in developing countries.
In addition, many companies offer cash bonuses. In short, student loan refinancing can save you a lot of money and hassle.
Against refinancing of student loans
While student loan refinancing can offer many benefits, there are also drawbacks. Here are some disadvantages of student loan refinancing that you should know before making a decision.
- Cannot authorize deferred payment or installment payments. Federal student loans have deferment and repayment options that allow you to suspend your loan payments while you are unemployed, in school, or in the military. In addition, payments on all Federal Direct Loans at 0% interest have been suspended to relieve COVID-19 (which expires on September 30, 2020). However, some lenders do not allow cancellation for any reason.
- No options for forgiveness. If you refinance federal student loans into private loans, you are no longer eligible for federal student loan forgiveness programs, including the Public Service Loan Forgiveness (PSLF) program. If you have a realistic chance of getting a PSLF, you should not refinance your federal student loans.
- Lack of income-based repayment schemes. With income-based federal student loan repayment plans, your payments decrease as your income decreases. You don’t have that luxury with private student loans.
- The refund may take longer. As mentioned earlier, some borrowers choose to extend the repayment period to reduce their monthly payments. This will improve your cash flow, but it also means that you will have a later repayment date.
- Credit and income requirements. To qualify for student loan refinancing, you must be financially sound. Each lender uses a different definition of good credit, but you will likely need a score of at least 650. Lenders also want to see a good debt-to-income ratio (DTI). A good start is to aim for a value below 40%.
- Loss of grace period. Most federal student loans have a six-month grace period after graduation before payments are due. However, you usually have to start making payments immediately after the refinancing.
If your student loans are already private, many of these disadvantages can be eliminated immediately. But if your loans come from the federal government, you should carefully weigh the financial benefits of refinancing against the government benefits you lose.
Consolidated direct loan: Pros and cons of student loan consolidation
If you have multiple federal student loans, you can consolidate them under the federal Direct Consolidation Loan program.
As with any consolidation, Direct Loan student loan consolidation can make managing student loan payments much easier. But there are other advantages and disadvantages of the direct consolidation loan program that you should know.
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Benefits of consolidating student loans through direct lending
This program can be a good choice for some borrowers, especially those with subprime loans.
Here’s why:
- Federal benefits remain in effect. The good news about consolidating through a direct loan is that you don’t lose all the federal benefits, such as student loan forgiveness, income-based repayment, deferment, and balloon payments.
- Access to additional federal benefits. If you have a Parent PLUS loan, Perkins loan, or Federal Family Education Loan (FFEL), you are not eligible for income-contingent installment plans or the PSLF. But by consolidating these loans through the Direct Loan Program, you can enjoy these benefits.
- Fixed rate loans. If you currently have a variable rate loan, consolidation offers you the option of a fixed rate.
- No credit is required. Borrowers with impaired credit need not worry about being denied participation in a direct loan consolidation program. This program is available to all federal student loan borrowers, regardless of your credit situation.
Although consolidating through a private lender can save you a lot of money, a direct consolidation loan program is really only meant to simplify your monthly payments. If your credit does not qualify for consolidation through a private lender, using this program may be a good choice.
Consolidation of student loans through the direct loan program
There are several reasons why you are better off staying away from a direct loan program, especially if you are hoping to have your student loans forgiven. Here’s why:
- May not include private loans. While it is possible to combine personal and student loans when refinancing, this is not possible with the Direct Loan program. The rules of the Direct Loan program only allow the combination of federal student loans.
- A higher interest rate. The Direct Loan program takes the weighted average of all your federal loans and adds an eighth of 1%. While this is not a significant increase in interest rates, it is still something to keep an eye on.
- The countdown to student loan forgiveness begins. If you were hoping to get some of your federal loans forgiven, you should know that payments made before consolidation are not taken into account. This applies to both income-based installment schemes and PSLFs.
This guide discusses some of the most common advantages and disadvantages of refinancing and consolidating student loans. But if you’re still not sure if refinancing or consolidating student loans is for you, we’re here to help.
During your student loan counseling session, we will discuss your specific situation to determine the best strategy for your student loan. Sign up today for student loan advice.
A plan for a student loan
Refinance your student loan and receive a bonus in 2021.
BONUS of $1,000 for 100,000 or more. 200 for 50,000 to 99,999¹.
VISIT EARNEST
variable 1.99% – 5.64% APR1
fixed 2.98% – 5.79% APR1
1,050 bonus2 for $100k+. 300 bonus for 50k to 99k.2
1,250 bonus3 for 250k+, tiered bonus of 300-500 for 50k-250k.3
1,275 BONUS4 For $150,000 or more. Multi-level bonus from 300 to 575 for 50k to 149k.4
VISIT ELFI
variable 2.39% – 6.01% APR4
fixed 2.79% – 5.99% APR4
1,000 BONUS5 for $100,000 or more. 200 for $50,000 to $99,9995.
VISIT SOFI
variable 2.25% – 6.64% APR5
fixed 2.99% – 6.64% APR5
1,250 BONUS6 for 100k+ or $350 for 5k to 100k.6
1,250 BONUS7 For $150,000 or more. Multi-level bonus from 100 to 400 for 25k to 149k.7
VISIT LENDKEY
variable 1.91% – 7.69% APR7
fixed 2.95% – 8.49% APR7
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1Earnest: $1,000 for $100,000 or more, $200 for $50,000 to $99,999.99. For Earnest, if you refinance $100,000 or more through this site, $500 of the $1,000 cash bonus will be provided directly by Student Loan Planner. In the above price range, an additional discount of 0.25% is included for automatic payment Information on income.
2General promissory note If you refinance over $100,000 through this website, $500 of the above cash bonuses will be provided directly by Student Loan Planner. General Bond Disclosure.
3Laurierweg: If you refinance over $250,000 through our link and Student Loan Planner receives the loan, a $500 cash bonus will be paid directly to Student Loan Planner. If you are a member of a professional association, Laurel Road can offer you the choice of a reduced interest rate or the $300, $500 or $750 cash bonus mentioned above. The Laurel Road proposals cannot be combined. The above price range includes an additional 0.25% discount for automatic payment. Laurel Road Revealed.
4Elfie: If you refinance over $150,000 through this website, $500 of the above cash incentives will be provided directly by Student Loan Planner. Uncover Alfie.
5Sofi: If you refinance $100,000 or more through this website, $500 of the $1,000 cash bonus will be provided directly by Student Loan Planner. The above price range includes an additional 0.25% discount for automatic payment. Disclosure of information about Sofi.
6Valid: If you refinance over $100,000 through this website, $500 of the above cash bonuses will be provided directly by Student Loan Planner. Reliable dissemination of information.
7LendKey : If you refinance over $150,000 through this website, $500 of the above cash incentives will be provided directly by Student Loan Planner. The above price range includes an additional 0.25% discount for automatic payment.
This source has been very much helpful in doing our research. Read more about pros and cons of student loans and let us know what you think.
Frequently Asked Questions
What You Should Know Before Refinancing student loans?
When you put money toward your student loans, you’re paying off the principal. This means that the balance owed on your loan is reduced by the amount of money you paid toward it, and your total balance owed is less. If you’re paying $300 toward a $15,000 loan with a 6.8% interest rate, for example, your total balance owed will be $14,700. Payment frequency and timing also play a role. A $300 monthly payment means you’ll pay that amount over a year, which means you’ll make 12 payments. If the same $300 is divided into 12 $25 payments, you’ll pay the entire $300 in one year, but will make 12 payments.
The largest student loan industry in the United States, Sallie Mae, provides student loan refinancing for college graduates with loans issued by the company. Over the years, it has become increasingly popular for recent graduates to refinance their loans. Although refinancing has its benefits, it also has drawbacks, and before making the decision, it’s important to understand the potential consequences. The advantages of refinancing your student loans with Sallie Mae are the potential lower interest rate, and the opportunity to customize your repayment terms. Refinancing can be a good option if you would like to pay off your loans more quickly and save money.
Is there a downside to refinancing student loans?
While it’s not widely discussed, there are some drawbacks to refinancing student loans. The main issue is that you lose certain consumer protections you had as a student. This can be troubling if you run into trouble paying your loans or a loan service does something wrong, as you may not be protected by the same laws that protect student loan borrowers. In fact, student loan refinancing law is so complex that legislators are currently working to make sure all borrowers know what they’re getting into before they refinance their loans.
The following is a list of blog post ideas for a (Food) blog called “Sandwich Recipes” Refinancing student loans isn’t a decision to take lightly. Although it may help you consolidate your current loans, lower your interest rate, and pay off your debt faster, there are some things you should consider before you choose this route. Refinancing your student loans can have a major impact on your credit score—as much as a drop of 100 points, depending on your current score and loan balance.
Why you shouldn’t refinance student loans?
As the cost of college education continues to skyrocket, many recent graduates are looking into refinancing their student loans. While this may seem like a smart financial decision, it’s not. Refinancing student loans is a bad idea for many reasons. Let’s start with the high interest rates charged on student loans. It’s true that student loans have lower interest rates than other types of personal loans, but refinancing can increase these interest rates, depending on the loan company you choose. That’s a bad deal when you consider that the average student debt is about $27,000, according to the Project on Student Debt.
If you are a college student nearing graduation, you may want to consider refinancing your student loans. Refinancing replaces your original loans with a new set of loans at a different rate. This can be a good idea if you (a) have a good credit score, (b) have a high income, and (c) need to lower the overall amount of your debt. However many students don’t realize that refinancing their loans won’t actually save them any money. In fact, in some situations, it can cost students a lot of money.
