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Refinancing student loans has been a consideration of many individuals who would like the best deal possible in paying them back after graduation. There are both advantages and disadvantages to this process, which will depend greatly based on your individual circumstances. Your long-term plans, current financial standing, and other monthly expenses will influence whether doing so is right for you. In the end, it is worth researching the options and receiving rate estimates from private lenders to see if you both qualify and would benefit from refinancing.
How to Check if Refinancing is a Good Fit for You
The first step towards deciding whether to refinance is to see if you would actually save enough interest to see a difference. You can do so by using a student loan refinance calculator, inputting your current financial information, and comparing it to a hypothetical cost you would take on by refinancing. These calculators are typically found on private lender websites, including such top lenders as SoFi and Earnest. Some private lender sites will require you to submit a pre-application before seeing possible numbers, though doing so will give you access to more information down the line.
Advantages to Refinancing
If you have decided that the interest difference is enough to consider refinancing, you will then want to look at the advantages and disadvantages of going through with it. Of course, the biggest pro is saving money on monthly repayments. By saving money, you are able to spend money on other living expenses, such as a mortgage. Moreover, refinancing with a private lender allows you the ability to have a loan repayment plan that you actually want, leaving you with more options than a federal plan typically has.
If you want to pay off your loan as quickly as possible, you can opt for a short-term plan. Alternatively, you can go long-term if that is not an issue for meeting your future goals. Lastly, your payments would be grouped together, which is a great bonus if you currently owe several different student loans. Instead of having to keep track of a number of repayment plans and interest rates, you only have a single payment to worry about.
Disadvantages to Refinancing
The disadvantages are worth thinking about as well. The most prominent one is that you will lose all the protections that your federal student loan provides you. You will not have the option to defer payments due to instability if you lose a job, for instance. The timeline of how long you will have to repay your loan can be stretched out if you are making much lower payments.
This means another twenty years of repayments, rather than just ten. Finally, eligibility requirements for obtaining a refinanced loan from a lender tend to be stricter than with federal loans. You need to have a certain credit score, with most private lenders starting at 650. Furthermore, if you apply for a refinanced loan and get rejected, your credit could take a hit as well.