Should I Refinance My Student Loans?

If you’re on the hook for federal student loan debt and thinking of refinancing, you might want to think twice. Federal student loans offer protections that you will lose if you choose to refinance. Here are some things to consider before deciding to refinance your student loans: 

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  • Do you qualify for federal loan forgiveness?
  • Do you need income-driven repayment?
  • Are you at risk of losing your job?
  • Do you have savings set aside in case of a financial emergency? 

If you answered yes to any of these questions, refinancing your loans might not be the best decision for you. 

In the below sections, we will discuss how to refinance your federal student loans and when it’s a good idea to do so.

Pros and cons of refinancing federal student loans 

Refinancing refers to the act of borrowing money from a private lender and using it to pay off one or more existing loans. While it might not be the best decision for everyone, there are reasons why people decide to refinance their student loans. Here is a breakdown of the pros and cons:

Pros

  • A lot of times, borrowers are able to apply with a cosigner to get a break on interest rates: If you don’t have a sturdy enough credit score to reap the benefits of refinancing, many private lenders will allow you to apply with a cosigner. This is not required to refinance, but it is definitely a viable option for people with low credit or income. Don’t worry about being tied to your cosigner either—many lenders will allow you to part ways with your cosigner after a few years of consecutive payments. 
  • If you manage to get a lower interest rate, it could save you money: No matter how you pull it off—whether you have a strong credit score or you get the help from a cosigner—the more fit you are to meet the requirements, the lower your interest rate will likely be. Being able to snag a low interest rate can make a huge difference in the total amount you owe with overall savings in the thousands. 
  • You would only be responsible for one monthly payment from a private lender of your choosing: One of the major pros of refinancing your student loans is that you can select a private lender, and only be responsible for a single loan amount. Loan consolidation can give you a similar result, without the possibility for a lower interest rate. Another reason why people opt for student loan refinancing is because Parent PLUS Loans are transferrable with leading private lenders. 

Cons

  • To qualify, you must be able to meet some high requirements: Just like when you apply for student loans, applying for student loan refinancing requires that you are a legal resident and have an undergraduate or graduate degree. A good credit score is another comment requirement, especially if you want to refinance at lower rates. 
  • You must stick with your repayment plan until the debt is paid: One of the benefits of federal loans is that you have the flexibility to change plans when needed. When you choose to refinance, the loan terms are not as forgiving. Once you begin on a repayment plan, you are locked in until the loan is fully paid off. However, most companies will at least allow you to choose what type of plan you are on. For instance, you would get to decide the length of your repayment plan and the amount of your fixed monthly payment. 
  • You will no longer have federal repayment protections: This is not to say that a lot of leading refinancing companies are unwilling to work with you if you are having financial troubles. There are companies that will allow you to put a temporary halt on your payments if you become unemployed or if you end up suffering some other type of financial burden. Even still, the protections that the government offers in this arena are better than any that you will likely find from a private lender. For example, with federal loans, borrowers can sign up to get forbearance for up to three years in certain circumstances. There is also different types of loan forgiveness associated with federal loans. If you don’t think you can afford to lose either of these protections, you might want to reconsider. 

Final Thoughts

If you’ve weighed the pros and cons and decided that you feel secure about forfeiting your federal loan protections, it’s time for you to do some thoughtful shopping. Do some research and look for a lender offering the best deal. 

There are a lot of private lenders who are willing to run a soft credit check to see if you prequalify. During this process, they will usually be able to show you your new interest rate. Remember, if you’re seeking a lower interest rate, you will either need strong credit or a cosigner, dependable income, and a college degree. Be wary of lending companies advertising big savings—how much you save will rely on your specific information.