Private student loans are only one of the ways families help cover the costs of college. The Institute for College Access & Success (TICAS) reported that private loans make up 8% of all education debt in 2021.
A 2021 U.S. News survey found that just 30% of borrowers take advantage of refinancing their private loans. Often, borrowers delay refinancing because they don’t understand how it works.
If you are looking for ways to tackle your student loan debt, refinancing private student loans can be a smart decision. However, it’s important to understand the advantages and drawbacks so you can decide if it’s right for you.
6 Pros and 3 Cons to Consider Before Refinancing Private Student Loans
When you refinance your student loans, you apply for a new loan from a lender for some or all of your existing debt. The new loan will have different terms than you had before. From interest rate to repayment term, the loan will be completely different than you have now. Is that a good idea? Refinancing private student loans has both pros and cons, so continue reading to learn how refinancing can affect your loans.
Pro 1: A lower interest rate can lead to significant savings
Depending on the loans you have and when you took them out, your current interest rate could be quite high. According to TICAS, the average interest rate on a cosigned private undergraduate loan with a fixed interest rate was 10.2%. With such a high rate, you could pay thousands more than you initially borrowed due to interest charges.
The biggest appeal of refinancing private student loan debt is the ability to save money. If you have good credit and a reliable source of income, you could potentially qualify for a lower rate than you have on your existing debt.
For example, let’s say you have $30,000 in student loans at 10% interest and a 10-year term. By the end of your repayment term, you will repay $47,575; interest charges would add over $17,000 to your total.
If you refinanced and qualified for a 10-year loan at 6% interest, you’d repay just $39,967 – a savings of over $7,600.
Pro 2: A longer loan term can lower your monthly payment
When you refinance your loans, you can choose a new loan term. Refinancing lenders typically offer options ranging from five to 20 years. If you choose a longer term, you’ll pay more in interest over time, but you can lower your monthly payments.
For example, a $30,000 loan with a 5% interest rate and a 10-year repayment term would have a monthly payment of $318.20. If you refinanced and qualified for a 15-year loan at the same rate, your monthly payment would drop to $237.24. By refinancing your loans, you’d have an extra $81 per month to allocate to other expenses.
You can use the student loan refinance calculator to see how refinancing can affect your payments and repayment total.
Pro 3: A single monthly payments eases money management
If you borrowed multiple years while in college, you likely have several different loans to pay for your degree. In fact, Saving For College reported that the typical undergraduate borrower had as many as a dozen student loans. Keeping track of 12 different loans, payments, and due dates can be confusing. By refinancing your loans, you can combine them into one and have just one payment to remember.
Pro 4: You can release or add a cosigner
Having someone serve as a cosigner increases your chances of qualifying for a loan, but it also means the cosigner is equally responsible for repayment of the loan. Any missed or late payments can also negatively affect the cosigner’s credit.
If you meet the lender’s borrowing criteria, you can refinance your loans solely in your own name. Once the existing debt is paid off, the cosigner’s obligation will be removed, and the account will show up as ‘paid in full’ on their credit report.
Pro 5: Potentially pay off your student debt faster
With a lower interest rate or a shorter loan term, you can pay off your student loans years earlier than you expected. With a lower rate, more of any extra payments you make will chip away at the principal, so you could pay off your loans even faster.
Pro 6: You can lock in a low fixed interest rate
Private student loans can have variable or fixed interest rates. Variable rates can be appealing because they usually have lower initial rates than fixed-rate loans, but the rates will fluctuate over time with the market.
One of the core benefits of refinancing private student loans is the ability to lock in a low fixed interest rate and predictable monthly payments. Current refinancing rates are quite low – fixed-rate loans start at just 2.99% so you could secure that rate for the duration of your repayment.
Con 1: You are locked into a repayment plan
Are there any downsides to refinancing private student loans? When you refinance, you choose a new loan term and payment, and you’re locked into that plan until the loan is paid in full – unless you refinance your loans again.
Con 2: You may not get a lower interest rate
Although some borrowers can qualify for lower rates and save a substantial amount of money, not all borrowers will get a lower rate. If you have poor credit or insufficient income, you may not qualify for a lower rate – or need a cosigner to qualify.
Con 3: It may lengthen your loan term
If you refinance your loans and choose a longer loan term to lower your monthly payments, you could be in debt for several more years. Carrying student loan debt for more time can make it difficult to balance other financial priorities in the future.
Is Refinancing Right for You?
Now that you understand the pros and cons of refinancing private student loans, you can decide if it’s the right financial decision for your situation. Whether it makes sense is dependent on your current outstanding balance, interest rate, and credit score.
To see if student loan refinancing will help you, you can get a quote from College Ave in one minute without hurting your credit score.