Pros & Cons of Refinancing Student Loans

by | Dec 27, 2021 | Education Feature

Even if you’ve never done it before, it’s likely you’ve at least heard of refinancing. This is because it’s something that happens all the time, across many different forms of debt.

The idea behind refinancing student loans is mostly the same as if a homeowner were to do it for their mortgage, or a corporation for their long-term debt obligations. All want to get lower interest rates; and many want to extend the term of their loan to lower monthly payments. If you’re one of the borrowers who has claim to a part of the United States’ $1.75 trillion in outstanding student loan debt, refinancing could help you pay down your portion sooner.

But what is refinancing? Mechanistically, refinancing student loans is a simple process. You’re just taking out a new loan that will pay off and replace your old one. When you can find a student loan offer that has better a better rate and repayment term, refinancing can save you a boatload over time.

Now that you have an idea of what it means to refinance, it’s time to investigate some of the pros and cons of refinancing student loans.

What Are the Pros of Refinancing Student Loans?

Let’s first dig into some of the pros of doing a student loan refinance. There are many of them, which is why it makes sense for many borrowers to go ahead with refinancing their student loans. Here are some of the main pros of refinancing:

  • You can lower your interest rate – Interest rates are probably the most critical element of student loan—or any kind of debt. This is because interest rates determine how much you’ll end up paying back beyond the principal balance of the loan. A high rate means borrowers will be surrendering more cash that they never even got to use upfront. Getting the lowest possible rate will ensure you’re not paying as much interest, which is the sign of a good loan.
  • You can alter your repayment period – If you need more time to pay of your loan with a lower monthly payment, or feel like you can do it in less time and therefore pay less interest and get a lower rate, refinancing can help you out. Things change over time. When your life situation evolves, you want your loans to adapt with you. Refinancing allows consumers to have a loan that matches their current needs.
  • You can find the best interest rate – In the past, searching for the best rate on a loan could be a major headache. This, however, has changed thanks to companies like Juno. Instead of being a lender themselves, Juno negotiates with a long list of lenders and then chooses the ones who have the best offers. Borrowers just have to go to Juno’s site and fill out an application to get access to the best student loan refinancing deals out there.

These are a few of the top benefits of refinancing student loans. There are, of course, some drawbacks as well. Next let’s take a look at some of the cons of refinancing student loans.

What Are the Cons of Refinancing Student Loans?

There’s nothing that has only upside and no downside in life. Refinancing student loans is no different. While there are many pros, cons exist as well. Here are some drawbacks to consider:

  • You might lose federal student loan benefits – There is no federal refinancing of student loans—only Direct Consolidation Loans. This means anyone who want to refinance student loans will have to do so through a private lender. While this is okay on its face, federal student loan benefits, such as income-based repayment plans, loan forgiveness, and other perks, will likely go away if you refinance. While getting a better interest rate will be worth it for some people, you need to weight the potential outcomes before going through with a refinance.
  • Your credit is important – Those who have gotten federal student loans in the past didn’t have to worry about their credit score. This changes with a refinance, however, since you’ll be dealing with a private lender. Those who want to refinance will have to meet a certain credit score, or else will have to utilize a co-signer.

At the end of the day, there’s only one person who can decide if refinancing your student loans is a good idea: you. Everyone’s situation is unique. Contemplate some of the pros and cons of refinancing, and how those will impact you in the long run.

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