Should You Refinance Your Student Loans? Weighing the Pros and Cons

The weight of student debt is like a noose around the necks of millions of Americans. With time, the noose keeps getting tighter if you haven’t figured your way around it or have repaid the entire debt. 

If you are burdened with student loans, it means your dream of homeownership will be delayed. Not only this, but your career choices might be driven with this aspect in mind, and this may derail you from getting your dream job. 

While you are trying to stay afloat even though the weight of your student loans is almost drowning you, you may hear lenders or financial institutions sing the song of student loan refinancing. 

Of course, it is tempting to dive headfirst if it means getting respite from high interest rates and monthly payments. But before you leap, it is prudent to carefully consider the pros and cons of refinancing your student loans so you don’t end up in more debt down the road. 

Refinancing student loans: Potential benefits 

• Opportunity to save money with a lower rate of interest 

The potential to save money is one of the primary benefits of refinancing student loans. When you refinance, you are replacing one or more of your current loans with a new one. 

Provided you meet the eligibility requirements, the new loan may have a lower rate of interest that could save you money in the long run. Using a student loan calculator will give you a clearer idea. 

Please note that reducing the interest rate by even a single point means saving thousands of dollars. Hence, it is an important factor to consider. 

• Lower monthly payment 

Depending on how you look at it, this point can actually be categorized as either pro or con. 

When refinancing your student loans, you could potentially reduce the monthly payments by extending the term. So, while the monthly payment is reduced, the terms of the loan are extended. This means you will be paying more money in interest during the life of the loan. 

• Consolidated payment 

Do you have loans with multiple lenders? It might become a challenge to keep track of every payment of each loan. Thanks to refinancing, you can consolidate multiple loans into a single loan and make a single payment. This is going to help you stay on top of your monthly payments and make better financial decisions. 

So, if you have both private and federal student loans, refinancing your loans might be an excellent way to simplify communication between lenders. This is because federal and private lenders operate differently and even have different regulations. 

Besides these, it is possible to refinance multiple times. If you qualify and the interest drops or you want a different term, you can refinance your student loans again. 

Refinancing student loans: Potential drawbacks 

• Not everyone is eligible for refinancing 

Refinancing your student loans is easier said than done because not everyone meets the eligibility requirements. To get approved, you will need a low debt-to-income (DTI) ratio and a good credit score. 

Ideally, a minimum 650 credit score is required to qualify for refinancing. But if you have a score of 700+, it will give you a much better chance. Lenders usually look for a DTI ratio that is below 50%. The lower the rate, the better. 

You can calculate your DTI ratio by dividing your total monthly payments by your monthly earnings. 

If you do not qualify for refinancing on your own, you may need a co-signer. 

• A lower rate of interest is not guaranteed 

There’s the opportunity to get a lower interest rate, but this isn’t guaranteed. So, before opting to refinance your student loans, you must use refinancing calculators to find out how much you would be saving in interest compared to what you are currently paying. 

Typically, lenders offer prequalification tools where you can enter your credentials and receive a rate quote. This isn’t the same as submitting a loan application. 

If you prequalify, you can shop around for personalized terms and rates. 

• The new rate of interest is determined by your credit score 

If your credit score is good and above the minimum requirement, you can get a better interest rate. However, there’s no guarantee it will be lower than your current loan. 

• The timeline for paying off loans might be extended 

Refinancing may mean extending the time it takes to pay off the student loans completely. 

• All federal protections and benefits are lost 

Federal student loans carry specific repayment and forgiveness benefits, including programs like closed school discharge, Public Service Loan Forgiveness, permanent and total disability discharge, and so on. Federal borrowers are offered hardship payment relief by the Education Department, which reduces the risk of defaulting on their balance. Such uniform benefits are not offered by private lenders. 

When your federal student loan is refinanced, you are basically swapping those loans for private loans. This results in losing the benefits of the federal program.

Before making a decision about refinancing your student loans, you must take into consideration the potential advantages and losses. Please note that converting your federal student loans to private loans via refinancing means you cannot change them back to federal loans and, hence, lose out on all the benefits. 

Conclusion 

So, here are the potential benefits and drawbacks of refinancing your student loans. It is prudent to carefully assess your financial situation, compare lenders, and consider the pros and cons before making a decision. 

Although refinancing your student loans can potentially lower your monthly payments and rate of interest, it may result in extending the loan term and loss of federal benefits. Furthermore, you may not qualify for refinancing at all if you have a poor credit score or your DTI ratio is too high. 

Before refinancing, you must explore all your options and focus on improving your credit score. You can use prequalification tools and refinancing calculators to make an informed decision. 

Word of caution: Never rush into refinancing. You might end up losing more in debt in the long run. Take your time to weigh all your options before making a decision.