What Are the Advantages and Disadvantages of Refinancing Education Loans?
If you are finding a plan through which you can decrease your interest rates and save your money on payments, refinancing a student loan would be the finest solution for you.
When you decide to refinance your student education loans, you have to combine your various private loans into a single private loan that incorporates one single monthly payment. If the situation is favorable, refinancing will help save you money in the long run. However, this situation is possible only when you qualify for better terms with a lower interest rate. Selecting to refinance any educational loan requires a deep consideration of its advantages and disadvantages. Before signing on to any plan, you must be aware of its both pros and cons.
The decision to refinance student loans is a complex one. With all the information out there, it can be hard to know where to start. In this article, they’ll talk about some of the factors that affect your decision and help you figure out whether it makes sense for you to refinance your student loans. Finally, have a look below to learn the pros and cons of refinancing student loans:
Advantage: Lower interest rates
One of the most obvious advantages of refinancing your student loans is that you can lower your interest rate. This is a merit-based system indeed; the interest rate is likely to decrease if your chances of qualifying for refinancing education loans increase. However, most lenders offer a lower interest rate than what you were originally offered when you took out your loan, so this is an obvious benefit to refinancing.
Lowering your interest rate will save you money over time by reducing how much money is being paid in interest each month. For example, if a borrower were paying 9% on their $50k balance and refinanced into a 5% fixed-rate loan with no other changes (like extending the term or getting just partial payments), they would save about $5k over the life of that new loan!
SoFi advisors state, “If you’re paying a high amount of interest rate, refinancing can be worth considering.”
Advantage: One Singular Payment is Easier to Manage
If you are having a singular amalgamated refinanced loan which includes a blend of multiple loans provided by multiple lenders, then it becomes easy for you to track every payment and the details of each loan. The reason is that refinancing involves amalgamating multiple loans into a single payment which makes this option the top priority. You remain updated about the payments done, money saved, and all other important details regularly.
Furthermore, Private and federal lenders have different modes of operation and regulations, and thus through refinancing, when a blend takes place between the two, communication between lenders becomes extremely simple for those who have both federal and private loans. But, it is highly advised you refinance only when you are offered a rate that is more competitive than your federal loans.
Advantage: Reduced Risk of Defaulting on Loans
- Refinancing student loans can help you reduce the risk of defaulting on your loan repayment.
- You can refinance your student loans to lower your monthly payments, which makes it easier for you to meet your obligations.
- You can refinance a federal loan into one that has a lower interest rate or get a longer repayment term, perhaps resulting in even lower monthly payments!
Advantage: The Ability to Make Extra Payments without a Penalty
While you don’t have to pay penalties, it’s important to remember that paying more than the minimum won’t reduce your interest rate or save you any money. That’s because several factors, including your credit score and other variables, determine the rate.
The only way to lower your interest rate is by refinancing into a new loan with a lower APR.
However, if you want to speed up repayment and get out of debt quicker, making additional payments can help make that dream come true.
Disadvantage: Loss of Federal Loan Benefits and Protections
It is observed that federal loans carry particular forgiveness and repayment benefits, which include several programs such as Public Service Loan Forgiveness, total and permanent disability discharge, closed school discharge, and borrower defense to repayment.
Besides, the education department also provides its customers a “hardship payment relief” which is a temporary forbearance and deferment period provision to all of its federal borrowers. This helps reduce the risk of having a default on your balance.
Private lenders, under refinancing education loan programs, don’t follow the same strategy. They never offer the same perks, other relief, and repayment options that are being provided in other plans.
When you refinance your student loans, you will lose some of the benefits of federal loans. For example, you will not be able to make income-based payments, get forbearance or deferment, or get loan forgiveness. Therefore, if you think that you can qualify for payment relief or federal debt, you should pause the idea of refinancing for a while and explore the other plans available.
Disadvantage: Loss of the Ability to Make Income-based Payments
- If you choose to refinance your student loans, you will lose the ability to make income-based payments.
- Since your loan balance has increased, your monthly payments will likely be higher than they were before.
- All in all, this means that the amount of interest you pay over time will be higher than if you had stuck with refinancing no matter what!
Disadvantage: You Are Locked Up in the Repayment Plan
Federal loans let you change your repayment plan. Herein, you can switch anytime from a 10-year basic repayment plan to a 20-year repayment plan based on income, which sets your payment based on a percentage of your monthly income.
However, refinancing loans provide no flexibility for such types. You are bound to stay on its repayment plan until you pay the complete debt.
You should opt out for a strong choice, for example, a highly reputed and reliable refinancing company. But, you have to keep aware of the most important thing: the repayment term becomes longer if your monthly payment is lower. Therefore, think cautiously before you make any decision.
As you can see in the article, refinancing education loans should be dealt with great care. Make wise decisions while you are opting out to refinance any student loan. Some inherent qualities will help you in this process. For example, let’s say that you are a qualified borrower or you are well versed with finance, loans, debts, interest rates, drawings, grace periods, and much more, then it becomes highly beneficial for you while refinancing an education loan. It can help you repay faster than ordinary time.
However, it’s also true that refinancing is not the right option for everyone. It requires a piece of good knowledge and experience. At last, if you want to not indulge in any wrong choice, then you must consider all the advantages and disadvantages of refinancing education loans thoroughly.
Hopefully, this article has given readers a good overview of the pros and cons of refinancing education loans. If you’re interested in doing so, check out more blog posts on how to refinance student loans.