The Pros & Cons of Student Loan Refinancing

If you've borrowed money to pay for college, at some point, you may want to consider refinancing those student loans.  Refinancing means paying off one or more loans with one refinance loan at the interest rate you qualify for at the term of your choosing.  You can include any number of loans with any interest rates or terms into your refinance loan, as long as the prior loans are qualified student loans (used for education purposes with funds paid to a Title IV school in your name).  For some borrowers, refinancing offers an opportunity to save money and better manage their budget. For others, it may not be the best choice. Read on to help decide whether refinancing is for you.

The Pros

•  Improve your interest rate: If the interest rate on your current loan is higher than the refinance interest rate you qualify for, consider refinancing it.  If you have multiple loans with different interest rates, you can choose to include all of them (to make monthly payments to only one loan servicer) or only those with a higher interest rate (to minimize your total monthly payment amounts) in your refinance loan.  Also, if you have any variable-rate loans, your interest rate is subject to change, which correspondingly changes your minimum required payment.  Getting a fixed-rate refinance loan will help you maintain a more predictable budget for your student loan payments.
  
  
• One payment: If you're repaying multiple loans to multiple loan servicers, you're probably already a little frustrated at how tough it is to stay organized. Refinancing will combine those existing loans into a single loan. That means you only communicate with one servicer, make one monthly payment, and manage that payment through one website.
  
  
• Choose your own repayment terms: Student loans have defined terms for when the loan needs to be repaid. However, your current situation may be different than when you first took out the loan.  Perhaps it makes sense for you to have a shorter term, which helps you save on overall interest costs. Alternatively, you may need a longer loan term, which reduces the minimum monthly payment.  Consider the amount of time remaining on your existing loans and your current financial situation to choose the right term for your refinance loan.  Shorter terms can help you save on overall interest costs, while longer terms may fit better into your monthly budget.  Discuss with your new lender the repayment options available before refinancing to ensure you understand your minimum monthly payments and the duration of your repayment.
  
  
• Release a cosigner: If you borrowed with a cosigner, this is your chance (and your cosigner's chance!) to let you take over repayment on your own. This is especially important because your student loans can be a burden on a cosigner. Please note that without a cosigner, you may be offered a higher interest rate than if you add a cosigner to your refinancing loan. Sometimes, a switch from mom and/or dad to your spouse can do the trick.

The Cons

• You may pay more over time: Depending on the term you choose, refinancing with a longer term typically results in lower minimum monthly payments, but will likely result in a higher total amount paid in financing charges over the long term.  Additionally, if you opt to include any loan(s) with a previously lower rate for the convenience of making a single monthly payment to a single servicer, the total amount you pay over time may be higher for the applicable loan(s). Make sure to compare these factors before refinancing!
  
  
• Loss of prior benefits: Student loans, particularly federal loans, offer unique benefits, such as deferred repayment.  Once these loans are repaid, all the benefits are lost, as the prior loans are paid in full.  Although the refinance loan may have its own benefits, the prior benefits are no longer applicable.  For example, if you think that you're going to qualify for the federal Public Service Loan Forgiveness benefit, you probably do not want to include any federal loans with that benefit in your refinance loan.  If your chosen profession disqualifies you from that benefit, the loss of it doesn’t factor into the equation, making refinancing a more attractive option.
  
  
• Timing matters:  When you choose to refinance, timing is crucial.  For example, if your prior loans provide you a grace period after you leave school, you'll lose your grace period (and all other benefits) if you refinance during that time. This timing can be a significant advantage for new graduates just starting in the workforce, so keep an eye on that benefit. If, on the other hand, you've already started working and are in a good position to start repayment, don't delay. That grace period merely postpones the inevitable for a few months.  If you are a student still in school, RISLA even offers a deferred refinance loan so that you can lower the interest that is accruing on other loans you’ve already taken out, but you won’t be required to make payments while still in school.  By refinancing at this time, you can save a significant amount of money over time.

• Credit Score: Refinancing will require a credit check.  To qualify for a lower rate or even get approved, you'll need a good credit score. If you're leaving college with a pile of credit card debt, late payments, or no credit at all, you may need to work to repair your credit score before applying for refinancing loans. Alternatively, you can consider bringing on a cosigner, like a parent, who has good credit.

We strongly recommend that you consider all of these factors before refinancing. 

Want more info on whether refinancing is right for you? Download our Guide to Student Loan Refinancing.