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Updated on Monday, November 26, 2018
When faced with any big decision in life, it can help to write a list of the benefits and drawbacks for each option. This same strategy is useful if you’re considering the pros and cons of refinancing student loans.
Refinancing can have some upsides, including saving you money on interest and adjusting your monthly payments.
But switching to a new lender could also come with downsides, which are important to consider before you make any changes to your debt.
If you’re debating the best way to move forward, read on to learn the pros and cons of refinancing student loans.
5 major pros of student loan refinancing
Whether you’ve got private or federal student loans, refinancing with a private lender can be a great way to restructure your debt. Here are the main benefits of refinancing your student debt.
1. Snagging a lower interest rate on your loans
Perhaps the biggest benefit of refinancing student loans is qualifying for a lower interest rate. When you refinance, you replace one or more of your current student loans with a new loan.
Assuming you meet eligibility requirements, this new loan could have a lower interest rate than what you have now. A lower rate could save you money over the life of your loans.
2. Adjusting your monthly payments with new repayment terms
Since refinancing involves taking out a new loan, it also gives you the opportunity to adjust your monthly payments with new repayment terms. Many lenders offer repayment terms of five, seven, 10, 15 or 20 years.
If you choose a shorter term, your monthly payment might go up — but you’d get out of debt faster. Or you could lengthen your loan term to lower your monthly payments.
Reducing your monthly student loan bills could be a huge help if you’re struggling to make ends meet. Just note that adding years to your debt will mean you’ll pay more interest in the long run.
3. Simplifying repayment by combining many loans into one
Student loan refinancing also gives you the chance to combine several loans into one new one. Instead of keeping track of multiple bills to different loan servicers each month, you’ll only have to remember a single payment.
Note that student loan refinancing is different from federal consolidation, which also combines multiple loans into one. Consolidation involves taking out a direct consolidation loan from the federal government, and it only works for federal loans.
But while federal consolidation can simplify your debt, it doesn’t lower your interest rate. Only refinancing offers savings on interest to qualifying borrowers.
4. Switching to a new lender with better benefits
When you refinance, you have your choice of lender, whether a bank, credit union or online lender such as SoFi, CommonBond or Earnest. If you haven’t had great experiences with your loan servicer, you might appreciate the option to switch to a new one.
Plus, some lenders offer useful perks to their refinancing customers. SoFi, for example, provides career coaching and networking events to its refinancing borrowers.
5. Relieving a cosigner of responsibility for your debt
If you had someone cosign your student loans, refinancing could offer the chance to remove them from your debt. As a result, your cosigner will no longer be on the hook for your student loans.
It’s also possible to refinance parent PLUS loans in your name if your parents borrowed on your behalf. That said, you’ll need to be able to meet your refinancing provider’s requirements for credit and income on your own to refinance without a cosigner.
4 potential downsides of refinancing your student loans
Although refinancing student loans can save you money, it could also come with some potential cons. Before applying, make sure you understand the consequences of refinancing.
1. Losing access to federal programs and plans
Many students borrow federal student loans from the government, but refinancing is done with a private lender. So if you refinance federal student loans, you turn them into private debt and lose access to federal programs.
The government offers some useful borrower protections, such as income-driven repayment plans, forbearance and Public Service Loan Forgiveness. Once you refinance, your loan will no longer qualify for any of these federal programs.
If you’re confident that you can make on-time payments, this might not be much of a sacrifice. But if you’re worried about your ability to repay your loan or are working toward loan forgiveness, be wary of turning your federal debt private through refinancing.
2. Giving up flexibility in your repayment terms
While the government offers a range of repayment plans, most private lenders aren’t so flexible. Once you choose your terms, you’re typically locked into your repayment plan unless you decide to refinance again.
Note that you can pay off your loan ahead of schedule without penalty. But if you chose a short term and are struggling to keep up with high monthly payments, your lender might not be so flexible.
What’s more, only some private lenders offer the chance to postpone payments through deferment or forbearance in the event you lose your job or go back to school. Before choosing a refinancing lender, find out your options if your financial circumstances change.
3. Having to meet credit and income requirements
Before issuing you a new loan, private lenders want reassurance that you’ll be able to pay it back in full and on time. That’s why they have fairly lofty requirements for credit and income before approving you for a refinanced student loan.
Most lenders look for a credit score of 650 or higher, as well as a steady source of income or offer of employment. Some also look at your savings and debt-to-income ratio. Finally, some lenders require proof that you graduated, though there are a few that will work with borrowers who don’t have a degree.
Although refinancing may lower your interest rate, only the most creditworthy borrowers will qualify for the best rates.
4. Possibly needing to take on a cosigner
If you can’t meet credit and income requirements, there is a workaround: You could apply with a creditworthy cosigner. Even if can qualify alone, adding a cosigner to your application could help you get the most competitive rates.
But sharing debt is a big responsibility, and it could lead to conflict if you can’t pay. Before adding a cosigner to your refinanced student loans, make sure you both have an open conversation about the responsibility for repaying the debt.
Weigh the pros and cons of refinancing student loans before you act
Student loan refinancing can be an excellent way to save money on interest and choose new terms on your student loans. It’s especially useful for creditworthy borrowers who have a steady source of income and are confident about their ability to repay their loan.
But if you’re worried about sacrificing federal protections, such as income-driven repayment, or you are working toward a federal loan forgiveness program, you should think twice before turning your debt private.
In the end, your approach to paying off student loans needs to be customized to your unique situation. Think about your short- and long-term goals, and carefully weigh the pros and cons of refinancing student loans. This way, you’ll be ready to choose the student loan repayment strategy that’s right for you.