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Is Student Loan Refinancing a Good Idea?

Emily Welch

2022-02-20

In the past few years, student debt has become a national problem. According to a study conducted by Goldman Sachs, there is over $1.2 trillion in outstanding student loan debt across the United States. That means that there are more borrowers with student loans than there are people living in France or Australia combined. 

Because of the rapid increase in the number of borrowers and how much they owe, refinancing your student loans can be an attractive option for many grads who have good credit scores and high income potential. 

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When Should You Refinance?

When it comes down to whether you should refinance your student loans or not here are some points that you should consider: Saving Money

One of the biggest benefits of refinancing your student loans is the potential to save a lot of money on your interest. When you take out a loan that is underwritten by private lenders you can get a much lower interest rate than what federal student loans offer. This means that the total amount you pay over time will be significantly less, allowing you to save thousands of dollars in interest charges and repay your debt more quickly. 

Private lending institutions usually charge around 4-6% depending on the borrower's credit score. Since you are borrowing from different companies instead of going through one big bank, this allows for a great deal of competition among them which results in lower rates.

Another benefit to refinancing is being able to choose whether or not certain benefits such as income-based repayment plans and loan forgiveness programs will be available to you. This will depend on the new lender that you choose but if you have a high enough debt-to-income ratio, refinancing can give you some more options for repayment plans.

In addition, there have been recent changes in the tax laws that allow borrowers who refinance their federal loans into private loans to deduct up to $2,500 of student loan interest each year from their taxes. In order to qualify for this deduction, your adjusted gross income must be below $80,000 if filing single or under $160,000 if married and filing jointly.

Aside from these benefits of refinancing your student loans, one of the biggest downsides is losing certain borrower protections including deferment. When you take out federal loans you are eligible for deferment and this means that interest does not compound while you are in school. Lenders also offer forbearance which allows borrowers to postpone their payments if they experience financial hardship.


Risks of Student Loan Refinancing

One risk associated with student loan refinancing is that if you fail to meet the requirements for refinanced loans, you risk less favorable terms. For example, if your student loans are refinanced and you miss a payment for one month, the lender could raise your rates and charge more fees on top of what you already owe.

Another risk is that refinancing might limit your repayment options in the future. Once again using the above example; if you miss a payment for one month, you might not be able to choose other repayment options like deferment or forbearance because the new lender will only offer the refinanced rate.

Finally, by refinancing your student loans you may incur more costs than what you are currently paying on your student loans. This means that if your current interest rates are low, refinancing your student loans could result in paying more for your loan.


The Pros of Student Loan Refinancing.

If you are looking to make significant repayment progress on your student loans, refinancing might be the answer. Going back to the above example; if you refinance and take advantage of one of the lower interest rates available, you can save money over the course of your repayment.

Another advantage to refinancing is that it allows you access to lower interest rates. This means that if you are able to qualify for a better interest rate, then you might be able to make more progress on your student loans.

Additionally, by refinancing your loans, some lenders may permit you to consolidate your private and federal student loans. When you consolidate your student loans, this means that you will only have one monthly payment.

The last advantage of refinancing is that it can simplify the repayment process. Once again using the example above; consolidating and refinancing allows borrowers to make a single payment every month instead of multiple payments.


Conclusion

Although refinancing your student loans is an arguable solution to the growing problem of student debt, it's important to weigh the benefits and disadvantages before deciding because there are always consequences that come along with taking out a loan.