Pros and Cons of Refinancing Student Loans

Pros and Cons of Refinancing Student Loans
Loans, loans, and more loans.
 
I can’t be a personal finance blogger without speaking on the issue of student loans.
 
We all have them or know someone who has them.  The burden they bring can be emotional and physical.
Regardless what you think about student loans, we have to deal with them.  One option is refinancing your existing loans.
Know your Rates
Unlike a lot of my fellow personal finance bloggers, I did not graduate college with student loan debt (Mom and Dad, if you are reading this, thank you).  However, my wife had undergrad loans of about $34K when we got married.  About $8K were federal loans and $26K were private loans.  Every time I looked at her monthly loan statements I noticed one major difference between the two loans.  I notice her federal loan had an interest rate of 6.5% and her private loan had a rate of 3.25%.  A pretty big difference!  My question for you is this: do you know the interest rates on your loans? If you don’t, stop reading this and find out.
 
How does refinancing work
Let’s say you have a loan for $10K.  A bank or financial institution offers you a new loan of the same amount of $10K.  No, you do don’t have $20K in loans at the point.  Rather, the purpose of the new loan is to pay off the old one.   This is refinancing.  You are essentially paying off a loan with another loan.  Or in other words, you are replacing an old loan with a new loan.  Why would someone do that?  Because people refinance with the hopes of getting better terms than the original loan.

Shop around

Refinancing your student loan is an option available to you at any point.  If you didn’t know, now you know.  Actually, finding a lower interest rate is one of the major reasons why people consider refinancing.  Once you find the rate for your current loan, shop around see how your rate compares to other offers on the market.

Pros and Cons to Refinancing
Just like everything in life, there is a catch.   Citizens Bank put together a helpful table on the pros and cons of refinancing student loans.   I will do a brief summary of the points they laid out.
Here a the list of reasons of why to consider refinancing (and the potential cons to consider):
Lower Interest Rate
  • if the lower rate is a result of shorter payback period, monthly payments will go up
  • if the lower rate is a result of a switch from a fixed rate to variable rate, the variable rate could go up at any time
A reduced monthly payment
  • The reduced monthly payment, could extend the payback period and/or increase the interest rate
Consolidate all loans into one loan
  • If your interest rates varies for loans (like my wife’s), your new loan rate could be higher or a higher monthly payment
Repay loans faster
  • shortening the payback period could increase your monthly payment amount
Lock in a Fixed rate
  • could mean a higher interest rate in the short term
Refinancing Federal Loans
Federal loans provide some unique options to borrowers that are typically not available with private loans.  Consider these options:
  • deferred payments
  • income-driven payment options
  • a longer grace period
  • loans can be discharged
  • student loan forgiveness options
Where to start?
Now that you have the facts, you have to see what makes the most sense for you.
LendEDU (Affiliate Link) is a good place to start your research.  Here is a quote from their site:
“LendEDU is a marketplace for private student loans and student loan refinancing. With one short, free application, we allow our users to compare up to 12 different student loan and student loan refinancing lenders. LendEDU does NOT hurt your credit!”
If you have some time and some loans, you should check it out.  Its FREE!
Have you refinanced your loans?  How was your experience?  Let me know in the comments.


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4 Comments on "Pros and Cons of Refinancing Student Loans"

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Emily
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We were just talking about this yesterday! Ben also has a 6.5% interest rate. Too high!

Chris
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This is really informative. I learned a lot. I am planning to do the same thing for so long.

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