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Refinancing Student Loans: Pros and Cons

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The United States currently houses about $1.75 trillion worth of federal and private student loan debt. With the cost of college tuition steadily rising in recent decades, managing that student loan debt has become an inconvenient burden to many. Luckily, students with loan debt can refinance and ease the burden, freeing up cash for other expenses.

What Are the Qualifications for Private Student Loan Refinancing?

Unfortunately, not everyone can refinance their private student loans. To do so, you must exhibit:

  • A fair-to-excellent credit score, usually 650 or better
  • Proof of income and employment
  • A debt-to-income ratio of less than 50%
  • Your college degree

Some lenders have varying criteria that may be different than those listed here. Always do your research and ask plenty of questions before making any final decisions.

Pro: Control Over Your Repayment Period and Interest Rates

Refinancing your private student loans allows you to exercise more control over your repayment schedule based on your payoff preferences. You can also choose your lender when you refinance.

In other words, if you recently got a significant salary increase, have a good or excellent credit score, and wish to pay off your student debt faster, you can refinance. This could potentially earn you a shorter payoff period with higher principals and lower interest rates on your payments.

On the other hand, if you wish to extend your payoff period due to financial hardship, you can refinance and extend your term while lowering your monthly principal (your monthly payment minus interest), freeing up cash to be used for other expenses.

Overall, refinancing grants you control over how and when you pay off your student debt. However, that control is best exercised when your finances are in good shape, and there is no guarantee you’ll get lower interest rates, especially as the Fed aggressively hikes rates.

Make sure you shop around and compare offers for the best rates.

Pro: Group Your Debt Into One Monthly Payment

It’s common for private student loan debt to be spread among several lenders, with monthly payments going to each lender once the payoff period begins. Refinancing your private student loan debt can streamline these monthly installments into a single payment. This also makes it easier to track your payment progress and ensure you’re always paying on time.

Con: Lose Out on Federal Repayment Protections

When you refinance your private student loan debt, you lose out on federal repayment protections, such as income-driven repayment and any federal freezes on repayments. While some refinancing companies may offer attractive forbearance and deferment options, these benefits often fall short of the protections the federal government offers. Remember: once you refinance, you can’t go back.

If you believe you’re on a solid path to loan forgiveness, consider foregoing the refinance and sticking with your current repayment plan.

Con: Heavy Cosigner Responsibility

If you choose to refinance but don’t have the credit score to justify a lower interest rate, you can refinance with a cosigner. However, the criterion for a creditworthy cosigner is often complicated, and the cosigner will be expected to uphold their current creditworthiness throughout the repayment term.

Should you miss a monthly payment, your cosigner’s credit score will be on the line, not yours. On top of that, some lenders may lock in the cosigner on the loan even after you’re able to pay it off without their assistance. Discuss the risks of cosigning very carefully with your potential cosigner and ensure you’re both on the same page.

With Gravity Lending’s online tool, comparing refinancing rates is easier than ever. Get access to a wide range of rates and find the best option for your situation here. For more articles on refinancing and debt management, check out the Gravity Lending blog.