With interest rates at all-time lows, now may be a good time to refinance your student loan debt. Securing a lower interest rate could save you thousands over the life of your loan, allowing you to make progress toward your other financial goals. But before you start comparing lenders, it’s important to consider the pros and cons of refinancing your student loan debt to decide if this is the right move for you.
Pros and Cons of Refinancing Student Loan Debt
There are lots of benefits to refinancing your student loan debt. You may be able to get a lower interest rate, pay off your debt early, and consolidate multiple loans into a single one to streamline your finances. But if you’re trading in your federal loans for private ones, you’ll lose some loan forgiveness options and repayment protections.
So before you take the plunge, it’s important to consider all of the pros and cons of refinancing student loan debt. Here’s a more detailed overview of the benefits and drawbacks to help you make an informed choice.
Pro: Lower Interest Rate
One of the biggest pros of refinancing your student loan debt is the chance to get a lower interest rate. Even reducing your rate by 1% to 2% could save you thousands over the term of your loan.
Say you have a student loan balance of $28,950 at a rate of 8% that you’ll be done paying off in a decade. If you refinance into a loan with the same term but a 2% lower interest rate, you’ll save $3,581 over the life of the loan.
Pro: Change Your Repayment Period
Another benefit of refinancing is the ability to change your repayment period. If you choose a shorter loan term, you’ll be able to pay off your loan early and save on interest. Going back to the example above, if you refinance into a loan with a 5 year repayment period instead of a 10 year term, you’ll save $8,568 total.
If you’d rather have lower monthly payments, you can extend your loan term instead. Keep in mind that you’ll usually end up paying more interest in the long run. But it may be worth it to have more financial breathing room.
Pro: Consolidate Your Loans
If you have both federal and private student loans, you may have multiple payments to manage every month. Having several loans from different servicers can make it hard to remember to make your payments on time.
If you want to streamline your finances, refinancing your loans through a private lender is a great way to do it. Instead of juggling multiple loans, you’ll have just one monthly payment you’ll need to budget for.
Con: Strict Eligibility Requirements
Although refinancing your student loans can get you a lower interest rate, you’ll need solid credit to qualify. Lenders want to see good credit scores of 660 and above. If you haven’t had a chance to build up your credit history yet, you might miss the cutoff.
Most lenders will allow you to boost your application by getting a cosigner. But if you don’t know someone with good credit who’s willing to vouch for you, you may not qualify for refinancing.
Con: Lose Federal Loan Protections
If you refinance your federal student loans with a private lender, you’ll lose the protections that come with them. For example, you’ll no longer be eligible for public service loan forgiveness. You’ll also miss out on the student loan interest freeze that Biden extended until September 30, 2021.
Another con of refinancing is losing out on federal repayment protections. Although private lenders usually have deferment and forbearance options, they may not be as generous as the ones offered by the government.
The government does offer its own direct consolidation loans. This allows you to combine multiple federal loans into a single loan to streamline your finances and retain your repayment protections.
But you can’t include any private loans in your federal consolidation loan. You won’t be able to get a lower interest rate either, which is one of the main reasons people refinance.
Now that you know more about student loan refinancing, do you think it’s the right choice for you? Let us know in the comments section below.
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Vicky Monroe is a freelance personal finance and lifestyle writer. When she’s not busy writing about her favorite money saving hacks or tinkering with her budget spreadsheets, she likes to travel, garden, and cook healthy vegetarian meals.
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