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There is more than $1.4 trillion in student loan debt currently in the United States across 44 million borrowers according to Student Loan Hero. Interest rates are not helping the situation. Interest rates are often around 5-7% but can go even higher than 10%! My own private loan was 10% before I refinanced with LendKey. (Ouch!!) It can feel like your payments aren’t even making a dent in your student debt. It is no wonder students are seeking out student loan refinancing options.
Student loan refinancing can be a great option but, like with anything, there are pros and cons. You should do plenty of research before refinancing your loans. Here are some pro’s and con’s to consider.
Pro: Lower Interest Rate
By lowering your interest rate you could save hundreds or thousands of dollars over the life of your loan.
Con: Lengthening the Repayment Time
If you have 7 years left on your loan when you refinance and choose a 15-year plan, you may be paying more in interest than you would by staying with your original loan. A possible solution is to refinance with a shortened schedule. Some allow you to pay back over 5 years but 10 years seems to be the standard.
Pro: Lower Payments
If you are struggling with your current payments and there are no income-based options available, then you can lower your payments with student loan refinancing. The problem is that lower payments often mean a 15 to 20-year repayment term.
You may pay more interest overall depending on the terms, but it could be worth it if you are struggling with finances month to month. You can also choose the lower payment option and then start overpaying once you are more financially stable. This way you can cut back on your interest.
Con: Losing Federal Benefits
One very important thing to consider is your federal loan benefits. These DO NOT transfer to a refinanced student loan. Please consider this carefully when debating student loan refinancing. You will also lose the ability to apply for Public Service Loan Forgiveness (PSLF), so if you are aiming for that do not refinance your federal loans. If you have private loans, then you do not risk losing out because you had no federal
If you have private loans, then you do not risk losing out because you had no federal benefits, to begin with and they don’t qualify for PSLF. Federal loans also tend to have a lower interest rate than private loans, which makes it less appealing to refinance.
Pro and Con: Variable vs Fixed Options
You have the option of choosing between variable and fixed interest rates. Consider this carefully as there are pro’s and con’s either way. Variable interest rates are often lower than fixed rates, but they have the ability to increase over time with the market (With LendKey I was offered 5.18% variable or 7.2% fixed).
I was coming from 10% variable with my private loan and chose the variable offer. My refinanced loan went from 5.18% when I refinanced in July 2016 to 5.73% as of April 2017).
However, even with the increase of variable over time, it could still be considerably less in the long run. Fixed rates will never change, but they are usually much higher than the variable rate. Again, consider this carefully when making your choice.
Pro: One Consolidated Payment
Some students have loans owned by multiple loan providers which mean multiple monthly payments. With student loan refinancing, you can consolidate all your loans into one easy payment. A quick note: you can also consolidate your federal loans without refinancing.
However, if you consolidate your federal loans into a new federal loan, the clock resets on your payments because it is treated as a new loan. If you are in Income-Based Repayment or hoping to apply for PSLF then avoid doing this!
Con: Credit Score Checks
The loan refinancing companies will check your credit score when you officially apply for refinancing which can cause it to take a small hit. However, if you plan to refinance you can apply for multiple loan companies over a 30-day period and it will only count as one company checking your scores.
Tip: you can check your potential rates with companies using a soft pull which does not affect your credit score. This will let you know before you officially apply, what rates they may offer you (or if you will be declined).
Pro: Choose Your Loans to Refinance
This one is a biggie. You do not have to add all your loans into your refinance! This means if you have both federal and private loans you don’t have to worry about losing your federal benefits. You can pick and choose which loans to include. When I refinanced, I only chose my high-interest private loan. I left out all my federal loans.
Con: It is Not Always Easy To Refinance
Some student loan refinancing companies have very strict guidelines for refinancing. SoFi is one of them. You have to have a VERY high income to get qualified. Others require your debt to income ratio to be under a certain percentage or make a certain amount of monthly income. Check out the lender’s guidelines before applying.
I say that student loan refinancing is a great thing if you do your research. That being said, I would heavily advise against refinancing your federal loans. There are just too many benefits you lose out on and it seems risky. However, if you have high-interest private loans than I say go for it.
My Tips for Refinancing
- Check out multiple lenders and what their requirements are
- Apply to more than one lender but make sure they are all within a 30-day window
- Don’t expect to get approved for everything (I was denied to multiple lenders at first)
- You can do a “soft” credit pull that does not affect your scores by just checking to see what your rates would be but not actually applying yet
- Be patient, the process can take a while. You can find out how I did it with LendKey here.
Places to Refinance
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Have you had experience refinancing your student loans? Have questions for me? Leave me a comment below!
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