Student loan refinancing is the process of getting a new lender to pay off your existing loans through the issuance of a new loan at a lower interest rate. This practice helps to save you money in the long run.
Refinancing your loans depends on whether you will find a rate that will make a difference in your financial life. Therefore, it is not a practice for everyone, and not all student loans should be refinanced. Refinancing also comes with cons that must be considered.
In prior years, students would end up stuck with their student loans with a high interest without any chance of relief. But now, there are plenty of lenders willing to help students out with their loans, and lessen the burden.
What Can You Refinance?
You can refinance both your federal loans as well as private student loans. When you do this, you pay off all the loans you have, and you are left with only one loan to service. The terms of the new loan are usually better than the existing loans.
Benefits Of Refinancing
You Get A Low-Interest Rate
A lower interest rate is one of the main reasons why people consider refinancing student loans. This will lead to major savings for you in terms of interest. However, it is merit-based, and the more qualified you are for refinancing, the lower your interest rate offer will be.
This is a pretty big deal because low interest means paying back a lower amount overall. You will also gain access to variable interest rates, which will either decrease or increase your repayment period as per the market options.
You Will Be Able to Consolidate Your Loans
With refinancing, all but one of your loans are paid off. This is called loan consolidation.
This helps students who might have ended up with more than one loan, such as federal and private loans, and who pay too much in terms of loan repayments each month.
You Can Use a Cosigner to Get an Even Lower Rate
You may have applied for a refinancing loan and was not successful due to having a bad credit score. Or you were successful but you wound up with a high interest rate.
If this is the case, it is possible to find a cosigner who will co-sign the loan for you so that you can get lower rates. This is an excellent option, especially for students, as it allows them to pay extremely low interest rates even when they do not qualify for them.
Can It Really Save You Money? Should You Really Consider It?
If you are paying very high interest rates, and per your calculations, you can get a cheaper loan that will significantly reduce your financial burden, then you should go ahead and do it. But you must consider a few things.
When you refinance, you are essentially taking out a new loan. If you have private loans only, then that is not an issue, but if you have federal loans, you will end up giving up your federal loan protections, which include a very low-interest rate and IDR.
No matter how low the refinancing interest rate might be, it can never beat what a federal loan would offer. Most federal loans have meager rates, to help students keep up with the payments each month and maintain a strong payment history.
Conclusion
You must ensure that you consider both the pros and cons of refinancing student loans. With refinancing, you will end up losing the benefits associated with federal student loans. One of which is the ability to enjoy things such as deferment.
However, if you have a combination of both federal and private student loans, refinancing is a worthy option to consider.