It’s no secret that student loans are one of the top causes of debt in the United States. According to Forbes, there’s a total of $1.75 trillion in debt between federal and private student loans. Of that number, just more than 90% consists of federal student loans, and most college students owe some amount of debt.
Because of the overwhelming amount of student loan debt, many people ask themselves, “Is it worth refinancing my student loans?” This is especially true as the three-year hiatus on student loan payments has officially ended and payments and interest accrual have resumed.
If you’re considering refinancing your student loans but aren’t sure it’s the right decision, you’ve come to the right place. There are several things to consider when making this decision, such as the type of loan you have, your interest rates, and more.
This blog explains how to weigh the pros and cons of student loan refinancing to help you decide if it’s the right choice for you.
What Is Student Loan Refinancing?
While most people have heard the term “refinancing” thrown around from time to time, few people understand what it actually means. We’re here to break it down for you.
When you refinance your student loan or loans, it essentially means that you trade it in for a new debt.
In other words, you would apply for a new loan from a private lender that would pay off your existing loan. You would then make monthly loan payments to your new lender rather than the lender that originally gave you the loan.
While you still have to pay back your loans, student loan refinancing often results in a lower interest rate, flexible payment terms, and can reduce your monthly payment.
Is Student Loan Refinancing the Same as Loan Consolidation?
While refinancing and loan consolidation both involve combining your loans into one monthly payment, they’re not actually the same thing.
Student loan refinancing is available for both private and federal student loans and has the potential to lower your interest rate and reduce your monthly payments. Click here to get matched with student loan refinancing offers in less than 60 seconds.
Student loan consolidation, on the other hand, is only available for federal student loans and not for private ones. Although a federal direct consolidation loan combines your debts into a single payment, making it easier to monitor and repay, the interest rate and monthly payments aren’t necessarily lower. As such, consolidation is less likely to save you money than refinancing.
Pros of Refinancing Student Loans
Now that you have a better understanding of what loan refinancing is, let’s take a look at the advantages it offers.
Lower Interest Rates
One of the biggest advantages of student loan refinancing is that you can significantly lower your interest rate. So, by refinancing and reducing your interest rate, you can lower your monthly payments and total loan payment.
Another big advantage of refinancing is that it takes all of your loans, federal and private, and streamlines them into a single monthly payment.
For example, let’s say you have each of the following loan types:
- Direct Subsidized
- Direct Unsubsidized
- Student PLUS
- Federal Perkins Loan
- Direct PLUS Loan
To top it off, you also had to take out a small private loan for student housing and other needs. As a result, you could be making anywhere from three to six different payments to different lenders, which can be difficult to track. If you refinance your student loans, you only have to make one payment to one lender. Seems more manageable, right?
Opportunity to Change Loan Terms
Student loans from federal and private entities often have very fixed repayment plans and terms. Private lenders that refinance student loans, however, are more flexible with their repayment plans.
With that being said, you can either extend the life of the loan balance and make lower monthly payments for longer, or you can shorten the loan and make aggressive payments for a shorter amount of time.
Improved Credit Score
Because of the difficulties involved with keeping track of your student loans and the high-interest rates they can carry, it can be easy to fall behind on your payments. Unfortunately, in addition to putting you deeper into debt, missed payments can negatively affect your credit score.
Since refinancing your student loans often results in lower interest rates, flexible monthly payments, and a single payment, it can be easier to stay on track and not miss payments. As such, refinancing your student loans can actually help improve your credit score rather than negatively impact it.
Cons of Refinancing Student Loans
On the other hand, there can be some disadvantages when it comes to refinancing your student loans, including the following.
Loss of Federal Loan Benefits
The biggest disadvantage of refinancing federal student loans is that you lose out on federal loan benefits you qualify for. Benefits for federal student loans include things such as student loan forgiveness, income-driven repayment plans, student loan repayment assistance, and loan deferment or forbearance.
If you qualify for student loan forgiveness or need any of these other benefits, it might not make sense to refinance your federal student loans. Plus, you won’t qualify for Public Service Loan Forgiveness (PSLF) if you refinance your federal loans.
However, these stipulations don’t apply to private student loans. You can refinance just your private loans and still receive benefits on your federal ones.
The second disadvantage of refinancing student loans is that not everyone can qualify. Most reputable private lenders require you to have a credit score of at least 650 to 670. So, if you don’t have a good credit score or any credit at all, refinancing might not be an option.
Potential for Higher Costs if Rates Rise
Finally, while many people save money through student loan refinancing lenders, there’s no guarantee that you will. For instance, if you already have a great fixed interest rate on your loan and refinancing could result in higher interest rates, there’s no reason to refinance.
Additionally, some companies that refinance student loans only offer variable rates. Unlike fixed rates, variable rate loans have interest rates that can change throughout the loan term, resulting in an interest rate increase or decrease. It’s important to understand that even though the initial rate might be lower, the rate can increase if you have a variable interest rate.
Steps to Refinance Your Student Loans
If you’ve weighed the pros and cons above and think it makes sense to refinance your student loans, here’s what you should do.
1. Research and Select a Credible Lender
The first step of any major student loan decision is to do some research and shop around for different student loan refinancing lenders. Because of how popular refinancing has become, there are dozens of options to choose from, which can be overwhelming and frustrating.
To make it easier to compare lenders, we’ve done the research and compiled a list of our trusted partners. Click here to get matched with student loan refinancing offers in less than 60 seconds, with APR rates starting from 1.88%. Credit & Debt gathers information about credible lenders for you and makes it easy to compare interest rates, monthly payments, and repayment plans. Plus, comparing pre-qualified rates is 100% free, with no impact to your credit score!
Using Credit & Debt for your student loan refinancing needs can save you time, money, and help reduce the stress of refinancing.
2. Gather the Necessary Documents
Once you’ve compared the plans and rates that various lenders offer and have chosen the right one, you can start gathering the documents and paperwork you’ll need to apply for refinancing.
While these vary from lender to lender, they usually include the following:
- Driver’s license, passport, or another form of government photo ID
- Your Social Security card or number
- Documents related to the student loans that you plan to refinance
- Documents showing proof of income
The reason that loan and income documents are so important is that your lender will want to check your debt-to-income ratio (DTI). Your DTI is the ratio of your debts to the amount of income you have. Ideally, you want as much income and as little debt as possible to qualify for refinancing and to get a good interest rate.
3. Complete the Application Process
If you have the necessary documentation and information, you can proceed to complete the application process. This includes filling out a loan application form and entering requested financial and personal information to the best of your ability.
After you complete the application, there’s a good chance that your lender will check your credit history. With that being said, you may want to check your credit score and ensure it is higher than 650 – this is usually the minimum score required by most lenders.
4. Review and Sign the Loan Agreement
If the lender reviews your application, finances, and credit score and approves your loan, you can review and sign the official loan agreement. This can all be done online through DocuSign or a similar platform and is usually a fast and smooth process.
5. Keep Track of the Progress
Keep in mind that there can be a short waiting period between when you sign the new loan agreement and when the refinance company actually pays off your current loans. In the meantime, keep track of the loan progress and continue making payments on your federal and private student loans until the refinancing plan kicks in.
Once your new lender pays off your student loans and transfers your debt, you receive a payoff letter from your old lender. Once this happens, you can stop making payments to them and start focusing on your new student loan payment to the refinancing company.
The Bottom Line About Student Loan Refinancing
Refinancing your student loans can be a great way to reduce your monthly payments, lower your interest rates, and get on a better repayment schedule. Since you can refinance federal loans as well as private student loan debt, it can be a good alternative to debt consolidation.
However, before opting to refinance, it’s important to make sure that you qualify for a lower interest rate, meet the necessary credit requirements, and don’t need access to federal loan benefits. You should do your research and shop around for the best refinancing option for you.
With no origination fees, no service fees, and no prepayment penalties, you can compare the best student loan refinance rates, all for free with Credit & Debt.
Credit & Debt does not provide debt relief or loans and is not a lender. A Credit & Debt coach will guide you through a free financial evaluation, help you understand your options and connect you with a qualified partner.