Is Student Loan Refinancing Risky? Here is What You Should Know

pros and cons of student loan refinancing

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Now that you are done with school, the next question at the back of your head could be what next? Maybe you want to start off your grad school immediately- that is if you were doing your undergrad. Or get a job and start fattening your bank account. Have you thought about how to repay your student loan though?

We all know how hectic repaying your student loan can get. If you have started repaying yours, you are more likely to understand the financial drain that comes with it. However, it does not have to be draining as such.

At Every Buck Counts, we strive to make your personal finances management easier. It is for this very reason that I tell you, for certain, that there are ways out here for repaying your student loan and still live the life you deserve. Stress-free.

Sounds sweet, right? This is everyone’s dream, and you can live this dream.

While looking for ways to repay my student loan, I stumbled upon loan refinancing. Student loan refinancing is when a private lender consolidates all your student loans into one loan. The new loan will, of course, comes with different repayment terms. This means a lower interest rate than what you were initially paying, as well as a new schedule.

Consolidating and refinancing both your federal and private student loans together is now possible, thanks to firms like SoFi and Laurel Road.

Questions to Answer Before Refinancing Your Student Loan

1. Why do you want to refinance?

Answering this will help decide whether student loan refinancing is the right option for you. Are you trying to repay your students loans faster? Or maybe you want to reduce your monthly costs by reducing your monthly repayments. Or you are looking for a lower interest rate option.

Answering this will also help you decide which firm is best for your refinancing needs.

2. What Interest rates are good for you?

Most federal student loans have interest rates ranging from 4%-7%. For some, the rate could even be lower or higher than this. Private student loans are costlier with rates ranging from 9%-12% on average. What is your current interest rate? The higher it is the more you are likely to benefit from refinancing.

Since you are shopping for a new loan, look for a lender that offers you a lower and manageable interest rate that you currently. If they don’t, then why are you looking for refinancing in the first place?

Whatever interest rate and other repayments you decide to settle for, make sure they are friendlier.

3. What is your credit score?

You will be surprised how much this can affect your new repayment terms. If you have a great credit score, refinancing your student loans will be easier for you. It will also come with better terms

Before approaching any lenders, check our your credit score from sites like FreeScore360, Money Tips, and Your Score and More.

4. Is a cosigner needed?

Check out the requirements from the financier you are considering to go onboard with. Some might not require a cosigner, especially if your credit score is good. If your credit score is low, then chances are you will be required to have a cosigner.

You might not be needing a cosigner, but looking for a way to release your current cosigners from the responsibility of repaying in case you default. If you have a great credit score, and you are sure you are financially stable to repay the new loan on your own, then inquire if it is okay to release your previous cosigners.

5. Will the federal student loan repayment options be useful in the future?

One thing about the federal student loan is that it comes with a couple of benefits that private financiers cannot extend. Benefits such as waivers, deferment, and repayments that are based on your earnings. With private financiers, these are not available. And you will certainly not get them once you have refinanced your student loan with a private firm.

If you feel that you will need these benefits in the future, then refinancing with a private firm is not for you. if you are confident enough of your ability to survive the repayment period without these benefits, then keep reading.

Now that we have gone through some of the most important questions to ask, it is important to weigh the pros and cons of student loan refinancing. This, I believe, will be more helpful in your decision-making process.

Pros and Cons of Student Loan Refinancing

Pros

  1. Reduce your monthly repayment- one of the pros of refinancing your student loan is a chance to reduce your monthly repayments. This means you have a chance to get a monthly repayment that is affordable. If your current student loan is under a private financier, then this will help you a lot.
  2. Getting a lower rate- the chances of getting a lower interest rate through refinancing is quite high. It is one of the reasons why a number of people opt to refinance their student loans. This will help you save a couple of bucks every month.
  3. Releasing your cosigner- in case you are assured of your financial ability, then you can release your cosigners from the burden of repaying your student loan upon default. It would be such a relief to them, I am sure. This could even improve your cosigners credit rating.
  4. Making simpler payments- I know how hard it is to keep up with multiple payments- for those with more than one student loan, and with different financiers. Once you have refinanced, it will be easier for you to keep up with the repayment. Why? Because you will only need to pay only one student loan.

Cons

Unfortunately, there is always a bad side to everything. And student loan refinancing is no exemption. Without further ado, here are the cons that could stand between you and student loan refinancing:

  1. No federal student loan benefits- once you have signed the documents to refinance your student loan with a private firm, you might as well forget about those benefits that federal student loans come with. This goes for waivers, deferment options as well as a chance to repay based on your income. Does this sound like something you can live with?
  2. Paying more- have a lower monthly repayment courtesy of refinancing comes with a price. And that price is a longer repayment period. This means that you will be stuck on that student debt trap for longer than you thought of, only with a lower monthly repayment.
  3. To death and beyond- unlike federal student loans, private student loan financiers are likely to follow your loved ones for repayment in case you kick the bucket. Or even your estate. Once you refinance your student loan, this is one of the cons that comes with the package.

Before we finalize on this, it will be rude of us to leave without giving you options to some of the best companies to in case you still want to refinance your student loans.

1. SoFi

This company allows you to consolidate and refinance both your private and federal student loans. To qualify, you must have finalized your studies, either in grad or under grad school. The repayment terms vary from 5 to 20 years, with either capped or fixed rates.

The good thing about them is that you can press- in case you find yourself unemployed and cannot make your monthly payments. Their rates for fixed rates range from 3.90% to 7.8% APR. For variable rates, it is between 2.47% to 6.99%- capped at 8.95% to 9.95%.

2. LendKey

Their fixed rates range from 3.49% to 8.72% APR, while their variable rates range from 2.47% to 8.03% APR. they also have the longest period in terms of unemployment protection (18 months). In case you have an annual income of more than $24,000 per year then you can qualify for refinancing.

3. Earnest

They refinance student loans for both federal and private student loans. Their period ranges from 5 to 20 years, with a variable rate of 2.47% APR and above and a fixed rate of 3.89% APR. additionally, they have no minimum income requirement- making it easier for anyone to qualify. They also have unemployment protection period.

Have you refinanced your student loan? How was the process, and what is the progress so far? We would love to hear from you. In case you are considering refinancing your student loans, we hope that our list of pros and cons, companies with refinancing as well us the important questions to ask goes a long way in helping you make your decision. Do let us know!

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