Refinancing Student Loans

If your student loans are private and have unusually high interest rates, it could be in your best interest to refinance them to a lower interest rate and lower monthly payment. However, there is no simple answer to the question of if you should refinance your student loans. This is because refinancing could affect someone with private loans differently than someone with federal loans. The CGS Team is sharing a few things to consider and look into before you decide to take the plunge and refinance your student loans.

You May Lose Your Loan Forgiveness Perk

If you work in a certain industry or make consistent payments every month for 10+ years, you may be eligible for a forgiveness of the remaining debt you have at the end of the term. This is a great perk (although not available to everyone) and it would be a shame to lose it for lack of paying attention. Refinancing your student loans could cause you to lose that perk. Be sure to carefully review the criteria required from your Forgiveness Program before moving forward with any refinance.

The Original Terms of Your Loan Will Change

When you refinance, you are essentially changing the terms of the loan. Obviously the advantage of refinancing is to reap the benefits of a lower interest rate, but it’s important to understand just what you are getting for that.  For example, a lender could cut your monthly payment in half, but in doing so might be required to extend the length of your loan. In this situation, you could wind up paying thousands of dollars more in interest in the long term. Make it a point to carefully review the new terms of the refinance and do the math to see if it really is a smart financial move.

Refinancing is Different from Consolidating

If you’re confused on the difference between refinancing and consolidating your student loans, we’ll help you understand. Refinancing is a process that allows borrowers, based on their credit, to take advantage of lower interest rates, lower payments, and better repayment terms. According to GoBanking Rates, federal and private loans can be refinanced together, however the new term will become private and you will likely lose out on any benefits you were getting from having federal loans.

Consolidating refers to the combining of all your student loans into one so that you only have one monthly payment to make. Consolidating does not lower your interest rate, it simply takes the average of all of your interest rates and makes that the single rate moving forward. Federal and private loans cannot be consolidated together, but they can be separately.

Pay Attention to the Rates

If your lender is offering you a variable rate that starts incredibly low, be cautious. Variable rates are just that, variable. This means the rate can be changed based on the prime rate of the economy. You may think you are getting a steal with a variable rate, but it could go up to higher than what your original interest rate was. Take into consideration the risks of a variable rate loan before making a move.  Note that a fixed rate means you will have the same interest rate for the entire life of the loan. It may be higher, but at least you know it will never change.

Related: Handling Student Loan Debt

 

If you do decide to make the jump and refinance (especially those of you with federal loans), make sure you know exactly what will be changing so that you can make the best decision. Have you refinanced your student loans in the past? How was the experience for you? Leave a comment below to help other readers who may be struggling with the decision.

-The CGS Team

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