You’ve heard about refinancing a mortgage, to lower your interest rate and save money in the long run. But, did you know that there’s also ways to refinance student loans? If refinancing your student debt means that you get a much better interest rate and pay less over the life of the loan, doing it can make perfect sense. But, there are pros and cons to refinancing or to leaving your loans alone—especially if they are from the Federal government.
Why Do It?
There are two major reasons why refinancing student loans can be a good idea. The first is that refinancing can mean a lower interest rate. Some private loans have rates that go up and down with the market, while most federal loans have fixed rates. For example, the rate on the PLUS Loan is 6.84 percent as of 2015. Refinancing may give you a fixed rate that is one or two percentage points lower than what you’re currently paying.
Another reason to refinance is that you can adjust the term of the repayment to better meet your needs. If you’re struggling with payments under a 10-year repayment plan, you might switch to a 15-year plan when refinancing. Alternatively, if you’re interested in paying off your loan sooner, you can refinance to a five-year plan.
Are There Risks?
One of the risks of refinancing student loans is that if you refinance federal loans with a private lender, you give up any benefits of the federal loans. For example, private lenders don’t offer income based repayment plans, so if your current payment is tied to your income, you’re likely to see it jump quite a bit if you refinance. You also lose the ability to have your loans forgiven after 10 or 25 years if you refinance with a private lender. Although some private refinancing programs do let you go into forbearance, or defer payments if you lose your job, many do not, meaning that you remain responsible for the payments even when your income is greatly reduced.
How is Refinancing Different From Consolidation?
When examining your student loan options, you might have come across consolidation. Consolidating your loans might sound similar to refinancing, but it’s usually a much simpler process. When you consolidate student loans, you combine several loans, with different interest rates, into one. You end up paying a weighted average of the interest rates on the loans and you only need to make one payment, not several, each month. There is a federal program available for loan consolidation, but there isn’t a federal program for refinancing.
Who Qualifies for Refinancing?
Refinancing isn’t for everyone. Your credit plays a big part in the process. Usually, the higher your credit score, the lower your interest rates. Some refinancing programs won’t accept borrowers with scores below a certain amount. You also have to prove that you have a fair amount of income and the ability to repay the refinanced loan before you are approved.
If you are currently trying to make heads or tails of your student loans or trying to decide if refinancing is the right option, we can help. We offer a DIY tool to help you figure out what to do about your federal loans. CESI can help you make the most informed, sensible decision for your unique situation today.
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