When you graduate from college, you most likely want to start a free life without large debts, which you will need to pay back a few more years after you finish your college studies. However, the amount of debt and your current income does not allow us to expect that this can happen quite quickly. If you have already asked this question and wondered if it was worth the refinancing student loans, then you probably heard from different people or read about it somewhere.
To understand this in more detail, we conducted our own research, learning the possibilities of conducting refinancing student loans, to find out how this is done and whether it is worth it at all. If you are interested in the answers to these questions, read on.
Before making any conscious decision in your life, especially regarding such things as finances, you need to know all the details, all the pros and cons, in order to weigh everything to begin to act confidently. To do this, we have compiled two lists in which everyone will have the same opportunities or disadvantages, depending on your personal circumstances.
Disadvantages refinancing student loans
Many people think that refinancing student loans is just a release from their student debt, which they can then forget once and for all, but you also need to take into account the shortcomings that cannot be ignored.
- Difficult refinancing qualifications if you have bad credit
Many students begin their credit history rather late or at the very beginning make mistakes that prevent their credit rating from growing. Especially those people who need refinancing student loans usually have a low credit rating because of a fairly large debt that they find it difficult to pay. At the same time, the ratio of your total debt to your income is the first after your credit score that the lender will pay attention to when he considers your application for refinancing loan. In such conditions, as you understand, you are at high risk of being refused, or you will be offered such conditions that will make senseless refinancing your student loan. Go seriously to your chances of getting approval, considering all the above mentioned factors.
- You risk losing government benefits
If you have taken advantage of one of the federal student loan programs, then you most likely have various benefits, such as forgiveness of student loans, no need to pay interest while you study, or the possibility of a student loan payment plan depending on your income. These are all the advantages that you will lose if you are thinking of refinancing a student loan received under one of the federal study funding programs. That is why, if you took the government student loans, then it should be refinanced only as a last resort, when the lost benefits overlap for you with the benefits received.
- There will be no way back
If you already make a decision on refinancing student loans, you will no longer be able to suspend your payments, get a loan vacation, or otherwise wait out temporary financial difficulties. Federal loans can still provide you with this opportunity in many cases, depending on the federal program that you used to get a loan to study. When deciding on refinancing your student loan, it is important to take this factor into account.
- Private loans for refinancing usually do not end with the death of the borrower
Federal student funding programs for college education in the event of a student’s death are most often written off and closed without exposing your family members or guarantors, as opposed to private refinancing student loans. If you suddenly die without repaying a completely private loan, the loan is not forgiven and your property, your family members or cosigners will have to repay the loan in full.
- The total amount of the student loan may be higher
Most often, refinancing student loans interest people because they want to spend less each month to pay the loan. This natural desire, however, has a downside. Even if you pay the same interest rate as you did before, a reduction in the monthly payment is possible only due to an increase in the loan term, which means that you pay the interest rate more. This is even in the case of the same interest rate, private lenders usually take a higher interest rate for refinancing student loans than for federal student programs. You risk ultimately, instead of saving, to pay a higher price, although of course it will be easier every month to pay.
Advantages of refinancing student loans
Now let’s look at the advantages of refinancing student loans, because of which it is still worth doing this, and why such loans are of particular popularity among students and those who graduated from college.
- Reduced monthly payment
Typically, college students and graduates have little experience and therefore work in small positions or low-paid jobs. Often, they also do not have the possibility to work full time due to the need to attend classes and complete tasks. This is the reason that any financial difficulty may not leave opportunities in the budget of such a person for the timely monthly payment on a student loan. Violation of the timing of payments and missed payments adversely affect the credit rating, which is undesirable for future financial capadilities. In addition, you must pay for rental housing, food and much more for life support. In the case of federal student loans, students have more options to solve this problem, but private lenders usually do not provide any options for suspending or reducing monthly payments. The refinancing student loans becomes the option number in this case to solve the problem with the monthly payment, although most likely, the loan term will increase, as will its total amount. But the credit rating along with the reputation of a reliable borrower and future financial capbilities will not suffer.
- The ability to get a lower interest rate
The ability to pay for a student loan is noticeably less due to a lower interest rate. This is one of the main reasons why graduates of educational institutions have a considerable interest in refinancing student loans. The economic situation in the country and in the world as a whole is constantly changing, which is reflected in the interest rates of the Federal Reserve System and, after it, of banks and other lenders. Over the past couple of years, the economic situation has begun to show a positive trend and interest rates have in many cases decreased. It turns out that those who took student loans since 2008, when the global financial crisis broke out, took them at high interest rates. For such people, it often makes sense to lose the benefits provided by federal government student programs by taking a private loan to refinancing student loans now, because the interest rate on loans is significantly different and the benefits cover losses. In some cases, the savings can amount to several thousand dollars only on interest rate.
- Manage loans will be easier
Federal student loans never cover all student expenses for tuition and accommodation, therefore many students often have several student loans. When you have several different ones, it is easy for you to get lost in payments, when and how much you need to pay. Such a situation can easily lead to late payments, penalties of creditors and an increase in debt. Refinancing and consolidating your loans will help to avoid such problems, because one payment is much easier to manage than several. However, please also note that refinancing student loans and their consolidation are the two different processes in essence and it is worth deciding which one suits you best in your situation.
- Free your loved ones from further cosigner responsibility
Most likely, when you took your first student loan, someone from your family acted as your cosigner. It turns out in such a way that you have obliged a person in the amount of several tens of thousands of dollars, which can adversely affect his health because of stress, especially if he is already an elderly person. You can refinancing your student loan without a guarantor, thereby relieving your family member of undue stress and saving him an additional amount of health, and possibly several years of life. On the other hand, you cannot expect for certain that the refinancing of your student loan will become available to you without a guarantor (cosigner) if you do not have a high enough credit rating and debt to income ratio.
The decision is always yours
To determine for you and decide exactly whether refinancing student loans is suitable for you or whether you should look for another alternative, you need to take into account all the factors we have described here, and also need to operate on your specific numbers. Take into account all your personal circumstances, income, expenses and the total amount of your debt if you want to clearly understand whether it makes sense for you to refinance. When it comes to financial decisions, haste is not appropriate, weigh the pros and cons and then act. If you want to consider options for refinancing student loans, then start by searching for offers from different lenders. To do this, you can use the loan application form located on our website to get preliminary decisions and offers from different lenders in minutes.
Read our financial blog to learn more about credit, loans and personal finances as much as possible, to effectively manage them and build a prosperous financial future for yourself. Leave your comments and questions below. You can also write to us to get advice from our experts.