You’ve likely heard of student loan refinancing, or the process of combining your student loans into a single payment for a lower interest rate through a private lender.
Although that sounds pretty enticing, should you actually refinance your student loans? This option is great for a lot of people but it’s not for everyone.
Student loans are growing and young Americans are drowning in a sea of debt exceeding $1 trillion. Why is it getting so bad? 18-29 year-olds find themselves borrowing money for their education and nearly 1 million student borrowers default payments each year, so most of that money is not being repaid.
Some student loan borrowers are seeing the benefits of refinancing their student loans for this reason, to get better rates and pay less money over the life of their loan.
But how do you know if refinancing your student loans is the right move for you? Read this post to find out more.
What does ‘refinancing your student loans’ mean?
You can save money on interest and make payments more manageable by refinancing your student loans. All you have to do is consolidate or refinance your student loans.
This would allow you to lower your interest rate, which can help save money and (hopefully!) become debt-free in a timely manner. Sounds perfect, doesn’t it? Even though there are cost-saving benefits, this strategy can be risky for federal student loan borrowers.
Beware, this option is typically only suggested to borrowers of private student loans, since refinancing federal student loans would force you to forfeit the federal protections.
We will touch more on this later, but it’s important to note right away so you don’t get confused.
If you want to take advantage of the ease of single payments, you can consolidate your federal student loans and keep the protections, but this won’t lower your interest rate on those loans.
When should you refinance your student loans?
This depends on your situation.
If you have student loans and want to save money on interest by refinancing, you need to first evaluate your current financial situation.
What benefits and protections will you lose by refinancing? Confirm that the pros outweigh the cons before jumping ship. These savings can be worth it for some borrowers, but not all.
Check out this student loan refinance calculator to crunch your numbers and see what your savings could be.
You should also research what protections you will lose to determine if it’s worth the risk. If you have private student loans, then student loan refinancing probably makes sense.
Private student loans are more likely to have higher interest rates and don’t qualify for student loan forgiveness or the federal repayment plan.
For borrowers who have a steady job, heavy cash reserves, and can pay off their debt in a short period of time – refinancing may make more sense because lower interest payments mean paying off debt faster.
Consequences of refinancing federal student loans
The biggest consequence of refinancing federal student loans is that you’re removing your safety net. Federal student loan borrowers are offered many repayment plan options that make paying back loans plausible:
- Income-Based (IBR)
- Pay As You Earn (PAYE)
- Revised Pay As You Earn (REPAYE)
These plans are meant to help you pay off your student loans depending on your situation. For example, the IBR plan sets up a monthly payment plan based on your income. And if you’re a borrower who uses an income-driven plan to pay back federal student loans, you may also qualify for student loan forgiveness.
Of course, there are advantages and drawbacks to every program, so you should draft a pros and cons list of each one to determine your best option.
Will you refinance your student loans?
Unfortunately, there are no set guidelines that indicate who should refinance their student loans and who shouldn’t. That decision falls onto the borrowers themselves. So research is important. Know the full picture of your decision before you sign any paperwork and contracts binding you legally to something you aren’t 100% sure of.
If you think refinancing is the right choice for you, congratulations! You’re one step closer to being debt free by making a smart financial decision to help you get there faster