The Pros and Cons of Refinancing Undergraduate Student Loans Before Grad School

Refinancing undergraduate loans while in grad school

For some college graduates, grad school is just around the corner. For others, it may be a couple years down the road. If you’re planning on taking that next step in your education, you may be wondering what to do with your undergraduate loans while in grad school.

If you’ll have a steady income during your graduate studies, it may be best to just continue to make payments. If not, deferment and forbearance are options you can consider.

But if your student loan interest rates are high or you’re unsatisfied with the loans or lender, it may be worthwhile to refinance.

If you’re thinking about refinancing your student loans before heading to graduate school, here’s what you need to consider.

The basics of student loan refinancing

With student loan refinancing, you pay off your current student loans using a new loan from a private lender. The goals of refinancing include consolidating your student loans, scoring a better interest rate, lower your monthly payment, or all of the above.

You can refinance one loan or several, as well as both federal and private loans. However, deciding whether to refinance student loans can be difficult, especially if you have federal student loans. Once you refinance with a private lender, you lose benefits that come with federal student loans, such as federal loan forgiveness and income-driven repayment eligibility.

If you don’t need these benefits, though, refinancing can help you save money on interest or lower your monthly payment.

Pros and cons of refinancing your student loans before grad school

When you refinance your undergraduate student loans, the terms of your new loan may be different from your original ones. Depending on your needs, those new terms might be good or bad.

Pros

When you refinance, you might get a lower interest rate, saving you money as you pay down your loan. Student loan refinancing lenders also offer various repayment terms, giving you more control over your monthly payments. With a lower monthly payment, you can put more money toward other financial priorities. Note, however, that you will likely end up paying more in interest over time.

In many cases, refinancing companies will give you the option to defer your student loans while in grad school. For example, CommonBondSoFi, and Earnest allow academic deferment on your undergraduate loans while you’re in grad school.

Many refinancing lenders also offer forbearance programs for when you experience economic hardship. Unlike deferment with some federal student loans, interest accrues with forbearance regardless of the type of loan.

Also, forbearance eligibility requirements are at the discretion of the lender. If you put your loan into forbearance, consider making payments on just the interest to keep your balance from growing.

Cons

If you have federal student loans, you might lose certain perks if you refinance. For example, you can’t access income-driven repayment plans, which cap your payments at a percentage of your income if they’re too high. And if you’re eligible for any of the federal government student loan forgiveness programs, such as Public Service Loan Forgiveness, you’ll lose that option, too.

Federal student loans also allow you to apply for deferment if you’re attending grad school at least half-time. What’s more, certain types of federal student loans don’t accrue interest in deferment (but some do).

Unfortunately, while some refinancing companies do offer benefits similar to federal loan deferment, it might not be an option with some lenders. These benefits and perks are up to the individual lenders to offer.

That means you might have to keep making payments on your undergraduate loans while in grad school. If you’re financially able to do that, no problem. But if you can’t afford the monthly payments, your finances can suffer.

Your lender of choice might also offer some type of forbearance option, but the policy might not cover you for the entire time you’re in grad school. Avoid assuming that your lender will approve your request for forbearance if you head back to school.

Should you refinance undergraduate loans while in grad school?

At the end of the day, anything you do to lower your payments has the potential to extend how long you’re in debt and cost you more in interest.

If you’re approved for deferment or forbearance on your refinanced loan, interest might still accrue on your loan. If that’s the case, making interest-only payments while you’re in grad school can save you money in the long run.

If you choose to refinance, don’t go with the first offer you see. Calculate the potential savings and shop around for the best deal. Start by comparing rates from the top refinancing lenders and make sure the terms fit your needs.

Ben Luthi contributed to this article.

Interested in refinancing student loans?

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