Student loans are one of the most significant financial obstacles that young individuals in the United States face. In 2015 and 2016, college graduates with a bachelor’s degree had an average student loan debt of USD$31,800. They could buy a brand-new car or equip an empty apartment with that much. (1) It takes most people years to repay their college debts, and while they’re doing so, they have less financial capacity and freedom to take on additional commitments. They can’t apply for more loans, start a new business, or, at the very least, relax after graduation because of their debt—a it’s major setback.
Whether the debt you incurred as a result of your education is causing you significant hardship, see if you may refinance your student loans to make them less burdensome. Unfortunately, refinancing isn’t something you should take lightly because it comes with a number of benefits and drawbacks. These will be discussed in this post.
Benefits of Refinancing
Before you do anything else, keep in mind that the benefits of refinancing are contingent on your present financial circumstances. Refinancing your student loan debt can be a sensible choice if you already have a solid credit score, a good income, and a stable work.
The following are some of the advantages you can get from it:
- Lower Interest Rate: You can lower your interest rate by refinancing your loan. You can choose between variable and fixed interest rates. Furthermore, depending on the lender you choose, you may be able to take advantage of substantially cheaper interest rates.
- Remove or Add Cosigners: When it comes to student loans, parents are frequently signed as cosigners. You can refinance and remove them as cosigners if you want to free them of the debt. You can, on the other hand, add new cosigners if you have insufficient income or a poor credit history yet want to lower your interest rates.
- Streamlined and Consolidated Payments: If you have many student loans, refinancing can help you combine them into one monthly payment. Most commercial companies provide this service, but you can also use the Direct Loan Consolidation program of the federal government. Keep in mind that consolidating your debts has both advantages and disadvantages. Make sure you know everything there is to know about that process.
- Change or Adjust Payment Duration: Depending on your current financial capability or goals, you can change or adjust the repayment term. Student loans usually have a maximum repayment duration of ten years. Most refinancing companies can extend it for up to 20 years. Most people, on the other hand, refinancing their loans to make them shorter and save money by lowering the interest rate. (2)
You may find that refinancing provides you with a number of benefits. However, there are a number of drawbacks to acquiring one, which will be covered in the next part, that may or may not be suitable for your objectives. Nonetheless, if the advantages are too good to pass up, go for it.
Because of the numerous drawbacks, refinancing is not for everyone. Nonetheless, it is up to you to decide whether or not you can work around these limits. And, if you don’t have student loans yet, keep in mind that you have other ways to pay for your education. You don’t have to limit yourself to student loans to be successful.
In any case, here are the disadvantages and restrictions of student loans.
- Not Everyone Can Refinance: Keep in mind that a low debt-to-income (DTI) ratio (below 50%) and a strong credit score are the basic prerequisites for refinancing (higher than 650). Of course, you must also make certain of the following:
- You have a steady employment or a reliable source of money.
- You still owe at least USD$5,000 on your loan.
- Your loan can’t be in arrears.
- You have received your diploma or completed your degree.
- A Low Credit Score Has An Impact On Interest Rates: Some refinancing institutions accept clients with credit scores as low as 650 without requiring a cosigner. However, the worse your credit score, the fewer interest rate possibilities you’ll have.
- You Might Be Tempted to Extend Your Loan Term: People often choose to extend their loan terms in order to obtain financial relief. Always keep in mind that the longer the period, the more interest you’ll have to pay. When you have the financial means to do so, it’s best to pay off your debts as soon as possible.
- It Doesn’t Always Mean Savings: Some refinancing businesses can allow you to save money. However, this is not the case for all of them. Most refinancing providers charge higher interest rates in exchange for the numerous benefits of refinancing. Use their prequalifying tools to check whether you’ll receive a fair offer if you’re seeking for a refinancing institution that may supply you with better interest rates.
- Conversion of Federal Student Loans to Private Debt: If you have federal student loans, refinancing will turn them into private debt. And you’ll lose federal protections, programs, and benefits including Public Service Student Loan Forgiveness (PSLF) and Income-Driven Repayment (IDR) if that happens (IDR).
- Disqualification from Deferred Payment and Forbearance: With the exception of PSLF and IDR, refinancing will take away your ability to defer your federal student loans, allowing you to cease paying for a specified period of time. In addition to postponed payments, not refinancing gives you the option of putting your loans into forbearance once you’ve used up all of your deferred payment options.
It’s important to remember that refinancing when you don’t have a steady income is a recipe for disaster. If you have federal student loans, it’s far preferable to restructure your payment schedules if you’re having financial difficulties.
Remember that private institutions aren’t as lenient as the government when it comes to debt repayment, and they will expect you to pay regardless of your financial circumstances.
Refinancing has various advantages that can help relieve some of the stress that student loans can cause, especially if you locate a business that offers good rates. However, before you apply for one, think about the disadvantages listed below.
Also, keep in mind that, aside from refinancing, there are other options for helping you get through your student loan obligation. Make sure you read them as well.