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The Downside to Refinancing Your Student Loans

Kat Tretina

If you have high-interest student loans — some loans have interest rates over 11% — student loan refinancing can sound like a dream come true.

You can lower your interest rate, save money, and pay off your loans years ahead of schedule.

What could possibly be the problem?

Well, there is a downside to refinancing your student loans. Before submitting your loan application, make sure you understand both the benefits and drawbacks of refinancing your debt.

What is student loan refinancing?

Student loan refinancing is a strategy some people use to manage their debt. You apply for a loan from a private lender to cover the amount of your current debt and use it to pay off your existing loans. After that, you’ll have just one loan to manage instead of several. And, you’ll have only one monthly payment to remember to make to one loan servicer.

The new loan is entirely different than your old ones. It has a different interest rate, loan length, and minimum payment.

Why would someone refinance? There are some major benefits:

1. You can save money

If you qualify for a loan with a lower interest rate than your current debt, you can save thousands of dollars over the length of your loan.

2. You can lower your monthly payment

When you refinance, you can opt for a longer loan term. Extending the loan length can reduce your monthly payments, making them more affordable.

3. You can pay off your debt early

With a lower interest rate, more of your monthly payment will chip away at the loan principal instead of interest charges. If you keep up with the payments, you can pay off your refinanced loan months or even years ahead of schedule.

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The downside of refinancing student loans: 5 things to consider

While refinancing can be very beneficial for some, it’s not for everyone. There is a downside to refinancing student loans. In fact, here are five reasons why refinancing may not be a good idea.

1. You may not be able to reduce your interest rate significantly

The biggest benefit to student loan refinancing is the ability to qualify for a lower interest rate. However, that perk is only helpful if your current  student loan rates are high.

If you have loans with lower interest rates, such as the current 4.53% rate on Direct Subsidized and Unsubsidized Loans, you may not be able to qualify for a loan with a lower rate.

Even if you opt for a variable-rate loan, which tends to start off quite low, the rate can fluctuate over time. If the market changes, you could end up with a higher rate than what you had originally, even if you save more money initially.

2. You may not have access to deferment or forbearance

If you have federal student loans, you have the option of entering forbearance or deferment. Through these programs, you can postpone making payments on your loans without becoming delinquent or entering default. This benefit can be a big help if you’re facing financial hardship, such as a medical emergency or job loss.

When you refinance, your federal loans become private ones. You’ll lose the ability to defer your payments under the federal program, which tends to be more lenient than deferment and forbearance options from private lenders. If you work in a volatile industry where layoffs are common, that’s a big drawback.

3. You won’t be able to use an income-driven repayment plan

If you have federal student loans and don’t make a lot of money, you can apply for an income-driven repayment (IDR) plan. With IDR plans, the loan servicer caps your monthly payment at a percentage of your discretionary income and extends your repayment term. Depending on your family size and income, you could have a payment as low as $5.

Once you refinance, you’re no longer eligible for IDR plans. You’ll have to make the full monthly payment each month, even if your income changes or your family grows. If your income is low or if you expect it to fluctuate, it may be better to keep your loans as federal loans.

4. You won’t qualify for loan forgiveness

Some federal loan borrowers can qualify for loan forgiveness through programs like Public Service Loan Forgiveness or Teacher Loan Forgiveness. After completing a service term and making qualifying payments, the remaining balance on your student loans is completely discharged. If you had a lot of student loan debt, that means you’re no longer responsible for repaying thousands of dollars.

Unfortunately, you’re not eligible for those programs once you refinance your loans. If you’re a teacher or work for a non-profit or government agency, student loan refinancing may not be for you. It may be more cost-effective to keep your loans as federal debt so you can qualify for these forgiveness options.

5. You may not be able to get approved

To qualify for a refinancing loan and to get a low interest rate, you need to have good to excellent credit. Otherwise, you’re unlikely to get a loan at all.

If your credit is less than stellar and you don’t have a co-signer to help you, student loan refinancing is probably not an option for you.

If that’s the case, don’t give up! Instead, work on boosting your credit score and improving your income. By doing so, you’ll increase your chances of qualifying for a refinancing loan in a year or two.

Managing your student loan debt

If you are struggling with education debt and want to pay off your loans as quickly as possible, student loan refinancing can be a smart strategy. However, it’s not an approach that works for every borrower. Especially if you have federal loans, think twice about refinancing, as it affects what benefits and programs you can use.

If you’ve weighed the pros and cons and think refinancing is right for you, use Purefy’s Compare Rates tool to get offers from multiple student loan refinancing lenders at the same time  — quickly and simply  — with one easy form.

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ELFI Rate Disclosure

4 ELFI Rate Disclosure:

Education Loan Finance is a nationwide student loan debt consolidation and refinance program offered by Tennessee based SouthEast Bank. ELFI is designed to assist borrowers through consolidating and refinancing loans into one single loan that effectively lowers your cost of education debt and/or makes repayment very simple. Subject to credit approval. See Terms & Conditions. Interest rates current as of 11-21-2022. The interest rate and monthly payment for a variable rate loan may increase after closing, but will never exceed 9.95% APR. Interest rates may be different from the rates shown above and will be based on the term of your loan, your financial history, and other factors, including your cosigner’s (if any) financial history. For example, a 10-year loan with a fixed rate of 6% would have 120 payments of $11.00 per $1,000 borrowed. Rates are subject to change.

SoFi Rate Disclosure

3 SoFi Rate Disclosure:

Fixed rates range from 3.99% APR to 8.24% APR with a 0.25% autopay discount. Variable rates from 2.24% APR to 7.99% APR with a 0.25% autopay discount. Unless required to be lower to comply with applicable law, Variable Interest rates on 5-, 7-, and 10-year terms are capped at 8.95% APR; 15- and 20-year terms are capped at 9.95% APR. Your actual rate will be within the range of rates listed above and will depend on the term you select, evaluation of your creditworthiness, income, presence of a co-signer and a variety of other factors. Lowest rates reserved for the most creditworthy borrowers. For the SoFi variable-rate product, the variable interest rate for a given month is derived by adding a margin to the 30-day average SOFR index, published two business days preceding such calendar month, rounded up to the nearest one hundredth of one percent (0.01% or 0.0001). APRs for variable-rate loans may increase after origination if the SOFR index increases. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. This benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The benefit lowers your interest rate but does not change the amount of your monthly payment. This benefit is suspended during periods of deferment and forbearance. Autopay is not required to receive a loan from SoFi.

Earnest Rate Disclosure

2 Earnest Rate Disclosure:

Actual rate and available repayment terms will vary based on your income. Fixed rates range from 4.24% APR to 9.24% APR (excludes 0.25% Auto Pay discount). Variable rates range from 3.49% APR to 8.24% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loan refinance loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. The maximum rate for your loan is 8.95% if your loan term is 10 years or less. For loan terms of more than 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95%. Please note, we are not able to offer variable rate loans in AK, IL, MN, NH, OH, TN, and TX. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account.

ISL Rate Disclosure

5 Iowa Student Loan Rate Disclosure:

Fixed Rate Loan Terms: 5 years/60 monthly payments, 7 years/84 monthly payments, 10 years/120 monthly payments, 15 years/180 monthly payments, or 20 years/240 monthly payments. Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. This rate is expressed as an APR. Fixed APRs range from 3.94% to 8.48% APR [low to high range with 0.25% auto-debit rate reduction]. Rates are subject to change without notice. Fixed rates will not change during the term. Since there are no fees associated with this loan offer, the APR is the same percentage as the actual interest rate of the loan including a 0.25% auto-debit rate reduction. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. All estimates are based on information provided by you and are for informational purposes only, accuracy is not guaranteed and may not reflect actual rates or savings and do not constitute an offer of credit. Your actual rate, payment and savings may be different based on credit history, actual interest rate, loan amount, and term, including your cosigner [if applicable]. If applying with a cosigner, we use the higher credit score between the borrower and the cosigner for approval purposes. All loans are subject to credit approval.

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