Connie J. Schlosberg
Student loan refinancing can help you to lower monthly payments on student loan debt. This is done by taking out a new loan, sometimes at a lower interest rate. However, refinancing has both pros and cons. Prior to refinancing, you should understand how refinancing affects your current loans. Read on to learn more, and decide if student loan refinancing is an option for you.
Refinancing Private Loans
Private student loans typically feature variable interest rates that are based on your credit history. When you first apply for private student loans, your credit profile may be limited. Because of this, lenders may consider you to be a high risk. This can result in higher student loan interest rates.
You might qualify for refinancing your existing student loans if you have already graduated, have a job, and have excellent credit. You might also qualify if you have shown good student loan management, reflected in timely payments.
Should you refinance your private student loans?
Refinancing private student loans can be beneficial. Before making the decision, make sure that you:
Examine the APR (annual percentage rate)
The monthly payment on the new student loan may be lower. But the interest rate might be higher. This can happen when the loan term is distributed over more years.
Think about the tax consequences
Is your newly refinanced loan still considered a student loan? Ask the lender. If it isn’t, you might not be entitled to a student loan interest tax deduction.
Refinancing Federal Loans
Although interest rates are currently low, some federal student loans, such as the Unsubsidized Stafford Loan, have steady interest rates. You may qualify to refinance your existing federal student loan with a new, lower interest rate loan if you have excellent credit. However, before you consider this option, be mindful of the risks.
Should you refinance your federal student loans?
Review the type of interest rate
Consider whether refinancing will change your interest rate from fixed to variable. Federal student loans have fixed interest rates, so your monthly payment will always remain the same. If you move to a variable interest rate student loan, your interest rate may (and most likely will) rise higher over the lifetime of the loan.
Find out which benefits you may forfeit
When you refinance your federal student loans, your new loan will be a private loan. Carefully consider this before deciding to make the change, and consider alternatives beforehand.
If you have trouble paying your federal student loan debt, you have several choices available to you that you probably don't have with private student loans. One of those choices is Income-Based Repayment (IBR). Or you might want to consider student loan deferment. Also, if you work in specific jobs such as teaching, you may be eligible for student loan forgiveness. Once you convert your federal student loan to a private student loan, you won’t be eligible for federal loan forgiveness programs or a loan discharge, which may be available to you if you should become permanently disabled.
Understand the consequences
Your student refinancing lender should divulge which benefits you will forgo by switching to a private student loan. If you don’t understand something, ask your lender. If you feel secure in your job, have emergency savings, and are not in credit card debt, you might want to consider refinancing if your goal is lower payments.
Tip! If you’re wondering how much student loan debt you have, try this debt analyzer tool before you decide.
Refinancing your student loans could help lower your monthly payments. But always weigh the benefits and risks before you commit to a new student loan. Once you decide to refinance your student loans, check out these lenders.