Student loans are one of the major financial hurdles that cripple young adults in the United States. College students who graduated with a bachelor’s degree in 2015 and 2016 had an average student loan debt of USD$31,800. With that amount, they can buy a brand-new car or furnish an empty apartment. (1)
Most people take years before they can repay their student loans, and as long as they’re paying for it, they have a lower financial capacity and freedom for other responsibilities. Because of this debt, they can’t apply for other loans, start a new business, or at the very least, take it easy after graduating—it’s a huge setback.
If the debt caused by your education is heavily inconveniencing you, find out whether you can refinance student loans to make them less of a burden. Unfortunately, doing it isn’t something you can decide upon lightly since refinancing comes with various pros and cons. This article will discuss those.
Upsides Of Refinancing
Before anything else, know that the upsides of refinancing depend on your current situation. For instance, if you already have a good credit score, decent income, and stable job, refinancing your student loan debt can be a smart choice.
Some of those benefits you can reap from it are the following:
- Lower Interest Rate: Refinancing your loan can let you adjust your interest rate. You can change it to variable or fixed interest. And depending on the lender you’ll choose, you may further benefit from much lower interest rates.
- Remove or Add Cosigners: Typically, parents are often signed as cosigners in student loans. If you want to relieve them of the burden, you can refinance and remove them as cosigners. On the other hand, if you have insufficient income or limited credit history but want to reduce your interest rates, you can add new cosigners.
- Consolidated and Streamlined Payments: If you have multiple student loans, refinancing can allow you to consolidate everything into monthly payments. Most private firms offer this, but you can also do this through the federal government’s Direct Loan Consolidation program. Do note that consolidation of your loans also comes with various pros and cons as well. Be sure to read up on that particular process.
- Change or Adjust Payment Term: You can change the repayment term depending on your current financial capacity or goals. Typically, student loans have a maximum payment term of 10 years. Most refinancing institutions can extend it up to 20. However, most people refinance their loans to make it shorter to save some money by reducing the loan’s interest rate. (2)
Refinancing offers various conveniences that you may want. However, there are multiple downsides to getting one, which will be discussed in the next section, that may not fit your goal. Nonetheless, if these pros are too favorable for you to pass up, go for it.
Downsides of Refinancing
Refinancing isn’t for everyone because of the several downsides it has. Nonetheless, it’s up to you if you can work on these limitations. And in case you don’t have student loans yet, remember that you have other payment or funding options for your education. You don’t need to limit yourself to student loans.
Anyway, here are the downsides and limitations of student loans.
1. Not Everyone Can Refinance: Remember that the primary requirements for refinancing are a low debt-to-income (DTI) ratio (below 50%) and a good credit score (higher than 650). Of course, you also must ensure the following:
- You have a job or a consistent source of income.
- You still have to pay USD$5,000 or more in your loan.
- Your loan must not be in default.
- You have graduated or completed your degree.
2. Having A Low Credit Score Affects Interest Rates: Some refinancing institutions accept people with credit scores as low as 650 without a cosigner. However, the lower your credit score, the limited options you’ll have regarding interest rates.
3. You May Get Tempted to Lengthen Your Loan Term: It’s easy for people to choose to stretch their loan terms for them to have financial relief. Always remember that the longer the term, the higher the interest you’ll pay. It’s advisable to clear your debts immediately whenever you have the financial capacity to do so.
4. It Doesn’t Always Lead to Savings: Some refinancing companies may let you experience some savings. However, not all of them do. In exchange for the numerous conveniences of refinancing, most refinancing companies give higher interest rates. If you’re looking for a refinancing institution that may provide you with better interest rates, make sure to use their prequalifying tools to see if you’ll get a good deal.
5. Conversion Into Private Debt: If you have federal student loans, refinancing will convert that debt into a private one. And when that happens, you’ll lose federal protections, programs, and perks, like Public Service Student Loan Forgiveness (PSLF) and Income-Driven Repayment (IDR).
6. Disqualification From Deferring Payment and Forbearance: Aside from PSLF and IDR, refinancing will remove your option to defer your federal student loans, which allow you to stop paying for a set amount of time. Together with deferred payment, not refinancing also gives you the option to have your loans be in forbearance when you already have reached the maximum number of times you can defer your payment.
Take note that refinancing while having no stable income spells doom. If you have federal student loans, it will be much better to readjust your payment plans instead if you’re experiencing financial hardships.
Don’t forget that private institutions aren’t as flexible and forgiving as the government when it comes to paying debts, as they will require you to pay up regardless of your economic situation.
Refinancing offers several benefits that can alleviate some of the burdens that student loans bring, especially if you find a company with great deals. However, before you apply for one, consider the downsides mentioned here.
Also, remember that there are other ways to make it easy for you to tide over through your student loan repayment aside from refinancing. Be sure to read on those as well.
- “Student Debt Fast Facts,” Source: https://nces.ed.gov/fastfacts/display.asp?id=900
- “How Long Does It Take To Pay Off A Student Loan?” Source: https://www.consumerfinance.gov/ask-cfpb/how-long-does-it-take-to-pay-off-a-student-loan-en-621/
- “Requirements For Student Loan Refinancing,” Source: https://www.savingforcollege.com/article/requirements-for-student-loan-refinancing