Below we take a look at the pros and cons of refinancing student loans.
Refinancing your student loans can be wonderful. Having lower, more manageable payments is quite appealing! But it’s not all sunshine and unicorns.
Before you decide to refinance, you should be aware of both the good and bad when it comes to refinancing. The information will help you make a decision is it makes sense for you to refinance and some pitfalls to look out for if you do.
The Pros and Cons of Refinancing Student Loans
Benefits of Student Loan Refinancing
Saving a lot of money is the main benefit of refinancing your student loan. Refinancing can potentially save you thousands of dollars! But there are more benefits to it than just that. Here’s a list of benefits that you may get from refinancing and some goals it can help you achieve…
- You can pay off your student loan faster, and become debt-free quicker
- Lower interest rates
- Save thousands of dollars in payments over the course of your loan
- Release a co-signer
- Reduce your monthly payments for student loans
- Refinance a parent loan in the student’s name
- Start a savings fund
- Focus on more important expenses and any other loans you may have
Is Now a Good Time to Refinance Your Student Loan?
For many, the answer here is YES! Now is definitely a good time to refinance your student loans. This is because interest rates have recently dropped quite a bit due to fears of an economic downturn due to the coronavirus outbreak.
When Should You Not Refinance a Student Loan?
Student loan refinancing is not a great option for everyone. If you refinance, you’ll be working with a private lender.
If you currently have a federal student loan, by using a private lender you’ll lose out on many federal protections that comes with federal student loans. Protections such as income-based repayment options, forbearance or deferment on your loans, and loan forgiveness programs.
Refinancing is also an irreversible process. So if you decide to proceed with refinancing, you are not allowed to go back.
Also, refinancing is not a great option for those who work in the public service sector, i.e, those who work in the government or who do nonprofit work. This is because you could qualify for loan forgiveness after you have made 120 payments towards your loan which is usually a better option.
Lastly, educators and teachers who work at low-income schools, doctors and nurses in certain states and those who are or were in the military can also apply for loan forgiveness. That almost always is a much better option than refinancing.
Do You Qualify?
Not everyone qualifies for student loan refinancing. Private lenders have stricter eligibility requirements than federal loans.
You’ll have to prove that you have a stable income and steady cash flow. You’ll also need to have a good credit score. (If you don’t have either of those, you can look into having someone cosign your loan with you.)
Lenders may have different requirements so do your research on them before applying. Understand each lender’s requirements and see if you can qualify for refinancing before you start the process.
This article is part of our series: Student Loan Advice for Online College Students
The next topic in the series is: Student Loan Forbearance