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Updated on Friday, December 7, 2018
Is refinancing student loans a good idea?
In many cases, the answer to this question is yes. Refinancing may bring down your interest rates if you qualify, saving you money on your student loans. Plus, it gives you the chance to choose new repayment terms and adjust your monthly payments.
But there could also be downsides to refinancing student loans, so it’s crucial to weigh the pros and cons before you make any changes to your debt.
If any of the following five scenarios apply to you, you might be better off avoiding refinancing and going with a different repayment strategy for your student debt.
1. You’re relying on federal repayment plans or forgiveness programs
If you refinance government-provided federal student loans with a bank or credit union, you turn them into a private student loan. Since you won’t have federal loans anymore, you’ll no longer have access to federal repayment plans or forgiveness programs.
The government offers a variety of repayment plans to help you adjust your monthly payments, such as income-driven repayment, extended repayment, and graduated repayment. Private lenders, on the other hand, typically don’t let you change your payments once you’ve selected terms. If you want to keep the option of income-driven repayment or another federal repayment plan open, refinancing might not be the right move for you.
You could also lose eligibility for federal forgiveness programs, such as Public Service Loan Forgiveness or Federal Teacher Loan Forgiveness. These programs only forgive federal loans, not private ones, so you should likely avoid taking your debt private through refinancing if you’re working toward federal loan forgiveness of any kind.
2. You don’t have a stable source of income
Before approving you for student loan refinancing, lenders look to see if you have strong credit and a stable income. Not only does this reassure them that you have the means to repay a loan, but it also helps you avoid taking on private debt you won’t be able to pay back.
Without a stable income, you run the risk of missing payments and going into default. And as described above, private lenders don’t have as many flexible repayment options as the federal government does if you’re struggling to pay.
Private lenders typically don’t offer income-driven plans, and as mentioned, few will let you adjust your bills once you’ve selected a term (unless you refinance for a second time). Some will let you postpone payments through forbearance if you run into financial hardship or go back to school, but this varies by lender and is just a temporary solution.
So if you’re worried about your ability to pay back your college debt, you might want to wait until your income is more stable before refinancing your student loans.
3. Your interest rates are already low
One of the biggest perks of refinancing student loans is getting a lower interest rate on your debt. Reducing your rate could save you money over the life of your loans.
Let’s say you owe $25,000 at a 6.8% annual interest rate. Over 10 years, you’d pay $9,524 in interest. But if you could bring that rate down to 4.5% through refinancing, you’d pay just $6,092 in interest over 10 years — and if you could pay back the debt faster, you’d save even more on interest.
But this perk only applies if you’re able to lower your rate through refinancing. If your rates are already low, you might not derive much benefit from refinancing.
Fortunately, it’s easy to get an instant rate quote from many refinancing providers online. You’ll enter a few basic pieces of information — e.g. loan amount, school, income — and the lender will show you prequalification offers.
By shopping around a little, you can see if refinancing would bring down your interest rate and save you money on your student loans.
4. Your cosigner isn’t happy about sharing debt
If you can’t meet a lender’s requirements for credit and income, you could apply with a cosigner who does. Even if you can qualify on your own, adding a cosigner to your debt could help you get the lowest rates.
But sharing debt is a big responsibility, and your cosigner will be on the hook for your student loan in the event you can’t pay. What’s more, the debt will show up on your cosigner’s credit report and could affect their debt-to-income ratio.
This could make it harder for your cosigner to take out a loan if they need one in the future, so enlisting a cosigner shouldn’t be taken lightly. You should even be careful about talking a parent into sharing your debt if they’re reluctant to do so.
If any financial issues arise in the future, this cosigned debt could put a strain on your relationship that’s simply not worth the lower interest rates you might get from refinancing.
5. You don’t have much time left on your student loans
When you refinance student loans, you have the chance to choose new repayment terms. Most lenders offer terms between five and 20 years. Unless you’re specifically trying to lower your monthly payments, you need to be careful not to accidentally extend the life of your loans.
If you’ve only got a few years left on your debt, choosing a term of five years or more could leave you owing money (and making repayments) for longer than you need to. That being said, you can typically prepay your loan without penalty — but at the same time, you might not feel as motivated to pay more than you’re required to each month.
So if you’re on track to get out of debt in a short period of time, be careful you don’t refinance for an even longer repayment term.
Is it bad to refinance student loans?
So is refinancing student loans a good idea or a bad idea? In many cases, refinancing is a savvy move, but there are some scenarios when the cons could outweigh the pros.
If you’re relying on federal repayment plans or forgiveness programs, for instance, turning your debt private wouldn’t be a good move. And if you’re concerned you won’t be able to afford monthly payments, you might also wait to refinance until your finances are more secure.
But if none of these concerns are an issue, refinancing could be a smart strategy to lower your interest rate, adjust your monthly payments and choose new terms. It also lets you switch to a new loan servicer, which could have better customer service than the one to which you’re currently assigned.
When it comes to managing student loan debt, avoid making rash decisions that could cost you. Make sure you’ve educated yourself on the advantages and disadvantages of student loan refinancing, so you can feel confident you’re making the best decision for you and your finances.