What are the Pros and Cons of Refinancing Student Loans?

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Student loans are an efficient and straightforward way to support your education. But the financial choices you make at one point in life can be with you for decades. In the case of student loans, this period can span from 20 for undergraduates to 45 years for professional graduates. But your financial situation is not bound to remain static over time. 

So, what if your income or credit score has improved? Or what if the economic climate gives you access to lower interest rates? How can you take advantage of these changes? Refinancing your student loans can help – but there’s a little more you need to know about this financial move.

What Does Refinancing Your Student Loan Mean?

Before diving into the pros and cons of refinancing your student loan, it is important to answer one question: what is refinancing student loans?

At its core, refinancing a loan is a financial move that allows you to swap an existing loan for a new one, usually to take advantage of lower interest rates, better terms, more suitable monthly payments, or a shorter loan lifespan.

Refinancing your loan can help you repay your student loan debt faster and save thousands of dollars on interests if:

  • You benefit from a solid financial situation that allows you to keep up with repayments
  • Your credit score is 670 or higher and you have a pristine financial history
  • You can find a refinancing provider that offers the terms you need to help you save money

For example, specialized lenders like SoFi can help refinance your student loan and guide you in the choice of the best new loan terms for your needs.

The Advantages of Refinancing Your Student Loan

According to recent surveys, refinancing a student loan can lead to savings of over $270 per month and nearly $14,000 over the life of the loan. But there is more than one advantage of this financial move to consider:

A student loan refinance can save you a lot of money in multiple ways

Firstly, accessing lower monthly repayments can lower your debt-to-income ratio and free up cash, thus giving you access to other financial products like mortgages. 

Alternatively, you could keep your repayments as they are but access lower interest rates. Or, you might keep the same interest rates, increase monthly payments, and shorten your loan life, thus saving thousands in interest over time. 

Plus, unlike refinancing a mortgage, refinancing a student loan does not involve origination, application, and prepayment fees.

A refinance allows you to benefit from an improved credit score or a cosigner’s financial history

If your credit score has improved since you graduated or you have the chance to take out a loan with the support of a cosigner with a great financial history, refinancing is for you. A creditworthy relative or friend can help you obtain a more convenient refinance and access top loan terms.

Refinancing is a way of consolidating different loans 

If you have multiple loans – such as federal loans from multiple services or a mix of federal and private student loans – refinancing them allows you to consolidate them into one. 

This means that you will only need to deal with a single monthly payment with the lender that offers you the best rates and terms. In turn, this move can streamline your finances, allow you to benefit from the same interest rates across your loans, and lower your debt-to-income ratio. 

The Drawbacks of Refinancing Your Student Loan

If you have a high credit score and a solid financial history, the benefits of refinancing outweigh the drawbacks of this choice. Nonetheless, refinancing a student loan is not a decision to be taken lightly – and certainly not while federal loans’ interest rates are still at 0%!

Here’s what to keep in mind:

Refinancing eligibility requirements are not always easy to meet

Student loan refinancing companies require you and your cosigner to meet strict requirements. Firstly, you’ll need to have a degree to qualify. Additionally, your credit score should be no lower than 660-670.

Refinancing might prevent you from accessing repayment protection and other benefits

Federal student loans offer multiple repayments protection options, including deferment, forbearance, and loan forgiveness. Make sure your refinancing lender offers some alternatives to protect your financial situation in the case of prolonged unemployment or financial fallbacks. 

Refinancing limits your repayment flexibility and the ability to access income-driven repayment plans

Federal loans offer the opportunity to switch from standard repayment plans to income-driven repayment plans, which allow you to extend your loan life by 10 years. When refinancing, you won’t be able to benefit from multiple repayment options. 

Partnering With an Expert

While refinancing a student loan can be beneficial, it is not the best choice for all graduates. Make sure to partner with an experienced lender who can recommend the best time to refinance, as well as the best new loan terms and rates for your financial circumstances.