“I’ll never be able to repay these loans.”
“I can’t afford my rent, let alone loan payments.”
“I would have so much more freedom if I didn’t have student loans.”
If any of these thoughts sound familiar to you, you’re not alone. Among the class of 2017, 65% of college students left school with student loans. And you, like many, may be wondering about the pros and cons of refinancing student loans.
If you’re focused on paying off your debt as soon as possible or want to save money, you’ve likely considered student loan refinancing. But should you refinance federal student loans?
You can refinance some or all of your federal student loans, and you can even refinance federal and private student loans together if you have both. Here’s what you should know before submitting your refinance loan application, including the essential pros and cons of refinancing student loans.
What is student loan refinancing?
Student loan refinancing is a process where you work with a private lender to take out a loan for the amount of your current debt; you use the new loan to pay off your old ones. The refinance loan has different repayment terms than your old ones, including interest rate, monthly payment, and length of repayment.
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Can you refinance federal student loans?
If you took out federal student loans to finance your education, you likely have multiple different loans and monthly payments to worry about — potentially with different loan servicers. Plus, your loans currently are stuck at whichever federal loan interest rate was in effect at the time you applied.
With a variety of federal loans to deal with — all with different due dates, bill amounts, and interest rates — it can be hard to keep track of everything and maintain on-time payments. You also may be in a much better financial situation now that you’ve graduated and entered the workforce. With a good career, credit history and income, you may have the opportunity to take advantage of a lower rate and save money while paying back your debt.
If you’re finding it difficult to manage a large quantity of loans, or you think your financial situation could score you a lower rate, refinancing federal student loans could be an excellent solution.
By pursuing a refinance for your federal loans, you can combine all your loans into one — saving you the headache of managing multiple payment amounts and dates. And, refinancing also provides the opportunity to get a better rate for those who qualify — allowing you to save big on interest costs over the course of paying back your loan.
Getting approved for a student loan refinance — and getting the lowest rates — usually depends on credit history and income. If you don’t have a strong credit score or steady income, you can always choose to apply with a creditworthy cosigner to have higher odds of approval.
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What if you have both federal and private student loans?
With student loan refinancing, you decide which and how many student loans you want to include in the refinance. You can choose to only refinance federal loans, only private loans, or a combination of both — based on your own financial situation and student loan pay off goals.
Depending on the types of loans you have, it’s important to understand the pros and cons of refinancing student loans. The benefits and drawbacks of refinancing federal loans is quite different than refinancing private student loans pros and cons. So if you have both types of loans, make sure you have a good grasp of both scenarios before moving forward.
Benefits of refinancing student loans
Refinancing your student loans is a quick and easy process, but there are certain student loan refinance pros and cons to be aware of. Refinancing offers several benefits that can greatly improve your student loan situation and debt management, but it’s important to understand both the positives and negatives before applying.
See how these refinancing benefits — as well as the pros and cons of refinancing student loans — match up with your personal student loan pay off goals.
1. You can save money
When you refinance, you can qualify for a lower interest rate. With a lower rate, more of your payment goes toward the loan principal rather than interest, allowing you to save a significant amount of money.
For example, let’s say you had $35,000 in student loans at 6.6% interest — the interest rate on Direct Unsubsidized Loans for graduate students for the 2018-2019 school year — and a ten-year repayment term. Over the course of ten years, you’d repay a total of $47,904.
But if you refinanced those loans and were approved for a ten-year loan at 5% interest, you’d repay just $44,548. Refinancing would help you save over $3,300. You would also lower your monthly payment by $28—if you use that money to make an extra prepayment on your loan each month, you’ll pay off your loans even sooner.
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2. You can reduce your monthly payment
When you refinance, you can extend your repayment term or qualify for a lower interest rate. Either way, you could be eligible for a lower monthly payment, freeing up more money in your monthly budget.
For example, if you had $20,000 in student loans at 6% interest and a ten-year repayment term, your monthly payment would be $222 per month. If you refinanced and qualified for a loan with a 5% interest rate and a 15-year term, your payment would drop to just $158 a month. Refinancing would free up an additional $64 a month from your budget, allowing you to pursue other financial goals.
3. You can pay off your student debt faster
With more of your payment going toward the principal rather than interest, refinancing can help you pay off your debt ahead of schedule.
For example, pretend you had $30,000 in student loans at 6.6% interest, and a $342 monthly payment. It would take you 120 months to pay off your loans. But if you qualified for a lower interest rate of 5%, but kept making a monthly payment of $342, you would cut down your repayment term by almost a year. You’d save money and get out of debt much faster.
4. You’ll have one easy payment
Chances are that you took out more than just one student loan. You may even have a mix of federal and private student loans. If that’s the case, juggling multiple loans, monthly payments, and due dates can be confusing. Refinancing can help streamline things for you.
When you refinance, you consolidate your student loans together. Going forward, you’ll have just one loan to manage and one easy monthly payment.
Disadvantages of refinancing student loans
Student loan refinancing can be extremely beneficial, but it’s not for everyone. There are risks involved, especially if you have federal student loans. Here are the primary cons of refinancing student loans.
1. You’ll lose access to income-driven repayment plans
Under an income-driven repayment (IDR) plan, the loan servicer extends your repayment term and caps your payments at a percentage of your discretionary income, dramatically reducing your payments. However, you no longer qualify for IDR plans once you refinance your loans.
If you’re in a low-paying field, or your income fluctuates from year-to-year, refinancing may not be a smart option for you. It may be a better idea to keep your federal loans as is so you can qualify for an IDR plan.
2. You won’t be able to enter your loans into deferment or forbearance
With federal loans, you can enter into deferment or forbearance if you experience a financial hardship, such as an illness or job loss. Under these programs, you can postpone making payments without entering into default, giving you time to get back on your feet.
Once you refinance, you lose out on this federal benefit. Some refinancing lenders do offer forbearance options, but their versions tend to be stricter and shorter in duration.
If you work in a volatile field, or have recurring health issues, it may be wise to postpone refinancing so you have the option of placing your loans into deferment or forbearance.
3. You won’t qualify for federal loan forgiveness
Some federal student loans are eligible for loan forgiveness programs, such as Public Service Loan Forgiveness. But once you refinance, you no longer qualify for loan forgiveness. And no private lender offers forgiveness options.
If you work for a non-profit organization or government agency and plan to do so for the next ten years, it may be financially wise to pursue loan forgiveness rather than student loan refinancing.
Weigh the pros and cons of refinancing federal student loans before applying
Student loan refinancing is an effective way to manage your debt — helping you save money, reduce your payment, and streamline your loans. However, there are some significant pros and cons to refinancing student loans that you should consider before applying for a loan.
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Overall, refinancing is a smart choice for those with good credit, a stable income, and who don’t plan on using federal loan benefits.
By doing your homework on refinancing student loans pros and cons, you can ensure you make the right decision for your needs. The best place to start is by comparing your rates with Purefy to see what you can save.
Simply submit some basic information about yourself in Purefy’s Compare Rates tool, and see the refinance options you qualify for in seconds — all in one place with no impact to your credit. Just remember to factor in all the pros and cons of refinancing student loans before choosing to apply for your favorite loan.