Refinancing Student Loans

Next stop on adventures in living with student loans is the wonderful world of refinancing.

The process of refinancing means that you are going out to a new lender and arranging for a new loan to cover your existing student loan(s). This new loan will be on new terms, with a new interest rate (variable or fixed), and with a new provider. You can use the process of refinancing to consolidate your loans.

Refinancing – Pros

  • Refinancing typically lowers your monthly payments. This is due to securing a better interest rate (which can lower your monthly payment and save you money in the long run) and potentially extending the life of your loan (which saves you money in the short term but not in the long term).
  • Refinancing could mean releasing a co-signer from the original student loan. If you had family members co-sign any of your loans, removing them from your debt through refinancing could alleviate any strain they may have on their financial situation or your relationship generally. Being released as a co-signer from your student loan will give your co-signer to access other lines of credit and to improve their credit score.
  • Refinancing usually goes hand in hand with consolidation in that it allows you to condense multiple payments into one simple payment. There are even private lenders that incentivize enrolling in automatic payments by offering a lower APR.
  • Refinancing will usually allow you to access not only a lower interest rate, but also lock in a fixed rate or choose to go with a variable rate of interest. For the difference between the two – click here.

Refinancing – Cons

  • If refinancing means extending the duration of your loan, you could end up paying more, even if you get a lower interest rate. No bueno.
  • If you have only US Federal Student Loans, you can only consolidate those loans with the US government. If you would like refinance your federal loans, you would have to do so through a private company – but beware – you will lose any advantageous terms and conditions (including income-based repayment or loan forgiveness programs) under your federal student loans.
  • If you are still in school or planning on going back to school, refinancing may not be the best option. Student loans usually allow for grace periods either while still in school or if you go back to school which means you don’t have to pay back the loans while studying (only after you are no longer full-time student). If you refinance, you typically lose this sort of arrangement and are therefore liable for payments right away without any grace period.

If you have private student loans, you can consolidate and/or refinance those loans with private lenders. If you have federal student loans, you are better off exhausting your options with the current loan before looking to refinance the loans, including deferment or forbearance, which is our next stop on this crazy adventure. Excitement abounds!

Sincerely yours in harmonious fun and fiscal responsibility,

Rachel

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