In 2020, the average student loan debt of Americans topped $37,500. More than 50% of college students in the United States go into debt in order to go through college.
When you make the decision to go into debt to pay for college, the hope is that the career you are able to obtain with your degree will enable you to pay back your debt predictably and easily.
However, with increasing economic uncertainty in the US and throughout the world, many graduates are crippled with debt that they struggle to pay back.
This may lead individuals to think about whether they should refinance a student loan or all of their loans. Is it a good idea, though? Let’s take a look at the pros and cons to help you make an informed decision.
Refinance a Student Loan: Pros
There are a number of reasons you might want to refinance a student loan. It’s important to look at your own financial situation and determine whether or not it’s right for you.
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You Might Qualify For a Lower Interest Rate
This is one of the biggest advantages of refinancing student loans. If you are able to qualify for a lower interest rate, it means that your monthly payments can be reduced or you can pay off the principal faster. It also means that you will pay less toward your student loans overall for the life of the loan.
You Can Alter Your Payment Plan
When you qualify to refinance your loan, you have the ability to choose the new term of your loan. This means that you can decide how quickly or slowly you want to pay off your loans. If you choose to pay off your loans more quickly, you will have more aggressive monthly payments, while a longer timeframe results in lower monthly payments.
You Can Apply With a Co-Signer
You are more likely to qualify for a lower interest rate if you have a low debt to income ratio and good credit when applying for refinancing. If you are not able to qualify on your own, you could potentially apply with a cosigner to help you get approved and get better loan terms.
You Can Setup Lower Monthly Payments
If you are struggling to keep up with your current repayment plan, your overall financial picture could be benefited by lower monthly payments. If you are able to get a lower interest rate on your student loans, it can help you to make payments on time which is an important aspect of having a good credit score.
This means that you have a higher likelihood of qualifying for the best credit cards in the future and reaching important life milestones like obtaining your first mortgage for a home.
You Can Group Together and Streamline Your Payments
It can be overwhelming, stressful, and chaotic to owe multiple monthly payments to a number of different lenders. If you choose to refinance your student loans, it can help simplify the repayment process so that you only have one monthly bill to worry about.
Refinance a Student Loan: Cons
There are some downsides to refinancing as well. Refinancing your student loans might not always be the best option, so it’s important to do your research before applying.
You Give Up the Protections That Come With Federal Loans
There are a number of protections associated with Federal loans. This includes things like income-driven repayment plans. If you refinance your student loans, you get that these protections.
It also means that you would miss out on federal student loan forgiveness if that became a reality in the future.
You Might Not Be Eligible
You will most likely need a low debt to income ratio and good credit in order to get approved for refinancing. If you are unable to qualify on your own, you will likely need a cosigner who has good credit and a low debt to income ratio.
It Might Lengthen Your Pay Off Timeline
If you are already halfway through paying off your student loans, you might find that refinancing is the best option for you. Even if refinancing does lower your monthly payments, it could lengthen the life of your loan.
Your New Interest Rate Is Partially Determined By Your Credit Score
Typically, you will receive a better interest rate the better your credit score is. However, it’s important to remember that there is no guarantee that you will receive a lower interest rate when you refinance a student loan.
When It Makes Sense to Refinance a Student Loan and When It Doesn’t
When you have federal loans, it might make sense to take advantage of the federal student loan consolidation program rather than refinancing to private loans. This is because federal loans come with a number of protections and benefits that private loans don’t.
On the other hand, if you already have private student loans then refinancing might make sense if it means you can lower your monthly payments or that you could save on interest.
You should be warned, though, that when you extend the term of a loan it means that you’ll pay more interest over the life of the loan than if you stayed with the original loan.
Is Refinancing the Right Decision For Your Student Loans?
As you can see, whether or not refinancing is a good idea has to do with your own particular financial situation. No matter what, you want to make sure that refinancing is the best outcome for your overall financial health. It’s important to look down the road when you are thinking about your financial situation, rather than just considering the immediate implications.
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