Paying back your student loans can be a hassle. Do you know what can make them less of a hassle? Refinancing! Maybe you’ve heard that term before but aren’t actually sure what it means. Let’s go over it.
What Does It Mean to Refinance a Student Loan?
When you refinance your student loans, you’re agreeing to let a lender pay off your current loans. You’ll then get a new private loan to pay your new lender back. This new loan often comes with better terms than your first loan. So, refinancing can help you reduce your monthly payment or interest rate.
Which Student Loans Should I Refinance?
You can refinance both your private and federal student loans. When you refinance, you’re essentially combining your loans into a new, private loan. If you have federal student loans and you refinance them, you’ll lose out on the benefits that come along with them. You’ll give up benefits like flexible repayment plans and possible loan forgiveness.
For example, the government recently extended the loan repayment pause through September 1st, 2022. This repayment pause, though, is only for federal student loans. Private student loans aren’t eligible. Refinancing now would mean having to start making payments again. If you’re planning to take advantage of any of the benefits of federal student loans, then refinancing may not be a good option.
Refinancing private student loans, though, is a different situation. It’s commonly agreed that refinancing private student loans can be a good move. If your financial situation has improved since you first took out the loan, you probably qualify for better terms. To qualify for better terms, focus on having a good credit score and steady income. A good credit score is at least 670 or higher. A steady income is enough to support your current lifestyle plus the loan payments. If this sounds like you, then refinancing can be a great financial move. Securing better terms and a lower interest rate can save you a lot of money in the long run.
You also want to think about how much of the term or balance is left. If your outstanding balance is low, then refinancing might not be the best move. Even if you can get a lower monthly payment, you might be extending the life of your loan. This can make you pay more interest over time.
Pros and Cons of Student Loan Refinancing
As you can see, deciding to refinance is a personal decision. While for some people it’s a good idea, for others it might not be. This can be for different reasons.
Pros
Refinancing your loan will usually get you better terms. Most people can get a lower interest rate or monthly payment. This helps out a lot because it can help you pay off your student loans faster and save money in the long run.
When you refinance your loans, you may also have the option to consolidate. If you choose to refinance and consolidate, you’re basically combining your loans into a new one. This makes managing your monthly payments easier. Instead of having various payments, you’ll have one.
Additionally, if you have a cosigner, refinancing your loans can release them.
Cons
Refinancing when you have a cosigner can be a good idea. But, refinancing when you have federal loans might not be. By refinancing, you’re going to be giving up federal benefits, which can really come in handy. Currently, the loan repayment pause is helping out a lot of people. But, it’s only available for federal student loans. If you do refinance, you have to be sure you won’t need the benefits. Finally, if refinancing gets your loan term extended, you’ll end up paying more. Even if the extension does lower your monthly payment, you’ll pay more in interest over time.
Final Thoughts from the Nest
Refinancing can be a good move for a lot of people. The key is taking an honest look at your situation and seeing if it’s the right move for you.
Has your financial situation improved? Do you think you’ll be needing to take advantage of the benefits of your federal student loans? How much time is left until you’re fully paid off? These are all questions you want to ask yourself before you decide to refinance.
When you’re ready, use Sparrow to help you compare student loan refinance options. Fill out the Sparrow application to get matched with what you qualify for with 15+ lenders. You can even save the ones you’re interested in and compare them before making a decision.