With over $1.5 trillion in outstanding student loans in the U.S., many borrowers are wondering what options they have to get out from under their debt. While the common advice is to lower your expenses and continue to climb your career ladder to up your income level, you can add refinancing your student loans to that list. Keep reading to find out if refinancing your student loans may be right for you.
What Are Some Reasons to Refinance Your Student Loans?
When people think ‘refinance student loans,’ they might have the idea that it’s only for those who are falling behind on payments or other emergencies. But refinancing your loans can be a way for those with stable income and good credit to take control of their loan payments. The main advantages revolve around saving money and changing the terms to suit your changing needs as a borrower.
Save Money by Lowering Your Interest Rate
The first and most common reason why someone would consider refinancing their student loans is to save money. Because private student loans are set with higher interest rates than federal loans, this can be a barrier to paying off your loans if you have a lower level of income. Although many new graduates’ first full-time jobs tend to be low or average salaries, once you’ve moved to a higher-level position, you’ll tend to have a better credit score and more leverage to negotiate a better interest rate.
Change the Terms of Your Repayment
When you redefine your repayment terms, you can combine multiple loans into one and/or adjust the amount of time on the loan. Combining all of your loans into one can make paying them off much easier as they’ll be governed by one interest rate and one payment, rather than multiple.
But there are some downsides, as extending the term will likely raise your interest rate and you’ll be paying extra interest for longer. Similarly, shortening the term will raise your monthly payment but with the benefit of lowering your interest rate.
In theory, you’ll be able to pay the loan off sooner and pay less interest overall. However, both of these options depend on having a solid budget, stable income, and good credit.
You Can Remove a Co-signer
Many students who take out private loans need a co-signer to afford their education. But once a graduate is out on their own, especially some years after college, they may want to remove a co-signer from their loan to take it on for themselves. This means that once you have stable income, releasing your co-signer from your student loans will mean that not only will they no longer be legally responsible for the debt, but they’ll have a lower debt-to-income ratio as the loans will no longer be connected to their credit.
Cons To Consider
Nothing is without its faults or downsides, and that’s certainly true with student loan refinance. Before you start thinking about the repayment you might shorten or a different monthly payment, there are some factors you’ll need to consider.
Downsides To Refinancing Federal Loans
There are a few factors to consider before refinancing, mainly the type of loans that you have. If you have federal loans, you may be eligible for a loan forgiveness program or other benefits depending on your income level and the industry you’re employed in. If you refinance federal loans you’ll lose access to those benefits, which means that any credits you’ve accrued from an income-driven repayment plan will be reset, and you’ll be ineligible for a number of other discounts.
It May Temporarily Hurt Your Credit
Since 15% of your credit score is based on the length of your credit/loan history, refinancing may cause it to take a hit. Refinancing involves closing all loans to open another and that means you’ll be losing the higher credit score that comes with making regular payments on longstanding debts. Refinancing may also lower your credit with hard inquiries, so you should avoid shopping around for too long.
If Your Loans Are Near Paid Off
Although it may seem beneficial to refinance when you’re around a year away from paying off your loans, refinancing at that point isn’t recommended. Not only is it unlikely to save you much money, but it can hamper your credit score which will be impacted further after paying off the loan.
Weigh Your Options
Refinancing your private student loans can be a great opportunity to take your debt into your own hands and save some money along the way. But you’ll need to consider all of the details and benefits you may miss out on if you refinance and weigh the pros and cons for yourself. Either way, knowing that you have some choices to pay off your debts faster and on better terms can be the key to financial independence.
