Pros and Cons of Refinancing Student Loans

Borrowers often refinance student loans for two main reasons: 1) lower monthly payments and 2) cost savings. Loan interest rates and term length play a significant role in determining which lender to choose based on a borrower’s financial goals. And it can get a bit complicated when adding federal student loans into the mix. Whether you have undergraduate or graduate school student loans, knowing the pros and cons can help you decide if refinancing your student loans is right for you.

What Happens When You Refinance A Student Loan?

You could use a student loan refinance to pay off both federal and private student loans. A refinance creates a new loan, which may or may not be with your current lender. It will likely have a different interest rate and payment terms from your prior loans.

Pro: One New Monthly Payment

A student loan refinance could consolidate multiple federal student loans and your private loan into one new loan. It’s easier to track payments and avoid late or missed payments since you only make one monthly payment.

Pro: You Can Save Money

Repayment terms as short as five years are available. The shorter the term, the higher your monthly payment but the more money you’re likely to save in interest versus a loan with a longer term. If you anticipate an increased income or ability to pay off your loan quickly, then consider refinancing all of your education loans at a lower interest rate and with a shorter term.

Pro: You Can Lower Your Monthly Payments

Repayment terms of up to 20 years are available which may increase the total cost of the loan but will also keep your monthly payments low.

Con: Federal Student Loan Repayment Benefits Disappear

Income-based repayment plans and loan forgiveness options are unique to federal student loan programs and may be lost if you refinance these loans. Borrowers on a graduated repayment plan or those eligible for loan forgiveness may want to weigh their options carefully.

Con: You Have to Qualify

Private student loans are credit-based. Generally, you should have a steady income and good credit or the ability to obtain a cosigner who does. Fortunately, student loan refinance applications are quick, easy and free. Qualifications for a student loan typically include credit, employment stability (6 plus months with current employer) and income (at least $40,000 per year).

Pro: You Can Use a Cosigner

If you don’t meet income or credit history requirements for a student loan refinance or if you’d like to see if you can obtain a better interest rate than the one offered to you, consider using a cosigner.

A family member or friend can act as the cosigner on the loan and may help you qualify since their income and credit history may now be factored into the approval decision. Even if you are eligible for a student loan refinance on your own, a cosigner with a higher credit score or income may help you obtain a lower interest rate.