Student loans an accepted aspect of life for many people seeking out higher education. Just under 45 million people in the United States currently carry student loan debt. Refinancing student loans is sometimes cited as a way to help the process of repayment. Below is a guide to refinancing student loans.
What Does It Mean to Refinance Student Loans?
Refinancing might sound like an intimidating process, but it’s actually relatively easy to do and understand when you get down to the nuts and bolts of it. So, what is refinancing when it comes to student loans? The most simplistic way to think about refinancing that it’s a process of taking out a new loan in order to pay off an existing one.
At first glance, this might sound like a risky idea. While the concept of taking out more debt in order to pay your already held debts can be dangerous and be a sign of overleveraging, refinancing is a different kind of situation.
Taking out additional debt to pay down a debt is really dangerous when you’re borrowing in order to meet interest obligations, as in this scenario, your liabilities are out of control and keep growing and growing. While someone who wants to refinance might also have too much debt, this isn’t necessarily a prerequisite. In fact, many people with great credit and no problems paying their bills will still choose to refinance loans if they believe it can save them money.
When you refinance, you’re essentially replacing your old student loan or loans with a new one, which will ideally come with more appealing terms. The top reason people choose to refinance their student loans—or any kind of loan for that matter—is to lower their interest rate. But many will also refinance to change the length of the loan or other characteristics.
No matter your motivations for refinancing your student loans, there are a few things to consider before going ahead with the process.
Who Should Consider Refinancing Their Student Loans?
Not everyone is going to benefit equally from a student loan refinance. There are two main distinctions that need to be made when dealing with student loans: federal versus private. For those who have private loans, there aren’t a ton of additional considerations that need to be made before proceeding. If you can get substantially better loans terms, refinancing is a logical move. These are a few of the benefits of refinancing privatestudent loans:
- Lower interest rates mean you’ll be saving money each month, as well as over the course of the whole loan.
- Refinancing can provide an opportunity to consolidate several loans into a single new one, with a lower net interest rate as well as a simplified payment schedule.
- It’s possible to refinance a parent loan to instead be in the name of the child after graduation.
There’s more to consider, however, when you’re dealing with student loans from the federal government. With some federal student loans—especially direct subsidized ones—you’ll want to think twice before pushing ahead with refinancing. These are a few things to consider:
- Refinancing your federal loans will negate benefits like income-derived repayment plans and loan forgiveness. You’ll want hold onto your federal loans if these are features you plan to take advantage of at some point.
- You won’t be able to get federal deferment or forbearance on your loans if your refinance a federal loan to a private one.
As you can see, the arguments against refinancing student loans generally only apply to those who are holding federal loans with attractive terms and conditions. Some federal loans, however, such as PLUS loans, actually might be worth refinancing since they typically come with the least benefits. Those with private student loans don’t need to think too much here, as a low rate and preferable repayment period are going to be the top concerns. Furthermore, market conditions are always changing, there may be a point where refinancing makes sense in your situation regardless of your loan type.
Refinancing can be a great way for borrowers to attain better terms on their loans. Those paying off student loans should strongly consider whether refinancing can help improve their financial situation.