One way to lighten the load on your student debt is to refinance your loan through a private lender. Ideally, you’ll be able to get a lower interest rate, which will lower your monthly payment and reduce the amount of interest you’ll pay over the life of the loan. This can be a win-win when it comes to managing your debt.
But before you make any decisions, it’s important to understand the difference between refinancing and consolidating your student loan debt. Many people think they’re the same thing, but they’re not. While consolidation simplifies things by combining many smaller loans into one, refinancing replaces your old loan with a new one.
For a better understanding of refinancing, let’s look at student loan refinance pros and cons.
The pros
Learn the benefits of refinancing student loans.
1. Pro: A lower interest rate could save you money
You’ll pay less. As mentioned before, the point of refinancing is to get a lower interest rate, which saves you money. Likewise, a lower monthly payment leaves you with more money to pay down debt. That helps you strike a balance between living your life and paying off your debt.
2. Pro: You can choose between a fixed or variable rate
You can shop for a better rate. There’s a good chance you’ll be able to choose between a fixed or variable rate for your new loan. While a fixed rate will stay the same for the duration of the loan, a variable rate, which can change, may start out low, but it could increase down the road. That means your monthly payments would go up as well.
3. Pro: You’ll have a single monthly payment
One payment is easier to manage than many. When you refinance multiple loans into one, you simplify the process. With only one payment, you may be more likely to pay it on time. That’s important for a healthy credit score.
4. Pro: You can refinance both federal and private student loans
Both federal and private student loans qualify. While consolidation only applies to federal student loans, you can refinance both federal and private student loans. Keep in mind that there’s some risk involved when you turn federal loans private through refinancing. You could lose some important benefits, such as the option to tie payments to your income, which could make them more affordable. You’d also give up any opportunities for loan forgiveness, which means part or all of the loan would be canceled (you’d no longer have to pay off some or all of the debt).
5. Pro: You could get a lower interest rate using a cosigner
You can also use a cosigner. When a parent or other responsible person cosigns your loan, it could improve your chances of getting the loan and getting a lower interest rate. Be sure your cosigner understands the risk, which includes repaying the debt if you can’t.
The cons
Below are some potential disadvantages of student loan refinance.
1. Con: You’ll be restarting the payment process
You’re starting all over again. When you refinance a loan, you’ll be restarting the payment process. Depending on your situation, that could cost you. If you extend your payments further out into the future it means you’ll be paying interest for a longer period.
2. Con: You can’t combine other debt with your student loan
You can’t refinance everything. When refinancing your student loans, it may seem like a good idea to combine other types of debt into your new loan. Although this would simplify things, you can’t combine your other debts with your student loan.
3. Con: Application and processing fees could add up
Additional fees could be high. While you’re shopping around for a lower interest rate, ask about application and processing fees as well. If you’re not careful, these additional fees can quickly add up.
4. Con: You may need a strong credit score to qualify
Your credit score could make a big difference. To qualify for a new loan and a better interest rate, you’ll need a strong credit score. The lender will also consider your income, which helps to determine if you can pay back the loan. If you make enough money and your credit score is high, you’ll probably qualify for a better interest rate.
Similar to consolidation, there’s a lot to think about before you refinance. But if you have good credit and a steady job, it’s certainly worth considering. It could save you money in the long run. Learn more about paying off your student loans.
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