According to the National Student Loan Debt Clock, the total amount of student loan debt is growing by more than $2,726 every second. Student debt has undoubtedly become a crisis that’s left legions of college graduates wondering how they’ll ever become debt free.
We at Student Loan Hero fully support and advocate the many benefits of student loan refinancing as a solution for managing burdensome debt – for the right borrowers. While refinancing could mean a lower interest rate, better repayment terms, and faster debt payoff, it’s definitely not the best option for 100 percent of borrowers.
There are some inherent drawbacks to refinancing that might make you reconsider – the last thing you’ll want is wishing you stuck with your original repayment plan.
When to reconsider student loan refinancing
First, ask yourself why you want to refinance your student loans. Some popular reasons include:
- You want to pay off your student loans faster.
- You’re trying to save money by lowering your interest rate.
- You want a lower monthly payment.
- You need to release a co-signer.
Student loan refinancing can impart a lot of financial benefits. But these benefits don’t come without tradeoffs. Here’s what student loan refinancing can take away:
1. Loss of federal repayment benefits
When you refinance federal student loans (including subsidized and unsubsidized Direct Loans, PLUS, Perkins, etc.), you replace them with a new, private loan. That means you’ll no longer be eligible to receive any of the benefits that come with a federal loan; that can spell an inflexible repayment structure for many borrowers.
The biggest loss may come in the form of losing the option to sign up for an income-driven repayment plan, which limits monthly payments as a percentage of your income.
Additionally, deferment, forbearance, and loan forgiveness programs through the federal government also become inaccessible once you go through with student loan refinancing. So despite owing money to Uncle Sam, you’ll lose his financial assistance when going from federal to private. Consider if this is a risk you’d like to take.
2. Fixed to fluctuating interest rates
Variable interest rates can be alluring – a low initial APR can mean a lot of savings in the first few years of repayment. The only problem is that the interest rate is bound to fluctuate; in a rising interest rate environment, this can pose a risk if you’re looking to save money over the life of your loans.
When it comes to refinancing your student loans, be aware of whether you’re giving up fixed interest rates for variable ones. It’s a gamble, for sure – one that might end up saving you some big bucks if rates stay low. But they may also rise, costing you in the long run.
3. Savings are reserved for top applicants
When it comes to federal student loans, borrowers receive the same interest rate, regardless of income, job status, college major, or creditworthiness.
Refinance to a private student loan and that equality goes out the window. Now, the interest rate you’re offered is based on your credit score (or similar measurement of creditworthiness).
High-income earners and those with excellent credit will get the best interest rates and repayment terms. Student loan refinancing probably won’t end up saving you money if your credit score and income aren’t great.
When student loan refinancing is the right choice
Refinancing one private loan to another private loan is a less drastic decision, since it’s more or less a switch from one set of interest rates and conditions to another, with no loss of federal benefits or other factors.
It also opens up the opportunity to work with lenders that have a reputation for being at the forefront of the industry, like SoFi and Earnest. These lenders may also back you with added perks such as career coaching, budget counseling, and unemployment protection.
If you’re on the right career path and confident that your financial status can only go up from here, refinancing may be the right choice for you.
Like all major life and financial decisions, it’s up to you and your own individual situation to see if refinancing your student loans is the most viable option. Whatever your decision, with timely loan payments and a strategic approach to repayment, you’ll avert debt and be on your way to financial freedom faster than you can say, “refinance.”
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Rates (APR)||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!|
|2.54% - 7.38%||Undergrad & Graduate||Visit SoFi|
|2.57% - 6.32%||Undergrad & Graduate||Visit Earnest|
|2.80% - 7.02%||Undergrad & Graduate||Visit Laurel Road|
|2.56% - 8.12%||Undergrad & Graduate||Visit Lendkey|
|2.72% - 6.49%||Undergrad & Graduate||Visit CommonBond|
|2.88% - 8.34%||Undergrad & Graduate||Visit Citizens|