Managing student loans can take a huge bite out of your monthly budget. You may want to explore other options to pay down your loans faster or to reduce your payments but still keep the loan in good standing. Refinancing can help you meet your short- and long-term financial goals, but you should take into account the possible drawbacks of these arrangements.
What is Refinancing?
A private company may offer you a personal loan to replace the existing private and federal student loans you currently pay. This is a bit different from consolidation through the government, where your federal loans are combined into one payment.
What You Gain By Refinancing
You no longer have to make several payments a month to different lenders. Your debt is combined into a single loan which means one monthly payment. Depending on your circumstances, you can get an interest rate deduction or extend the length of your repayment period to reduce the size of your monthly payment. If you are able to sign for the new loan yourself, you may release a cosigner on your student loans from any further obligations.
What You Lose By Refinancing
By shifting your federal loans to a private refinancing company, you lose out on any repayment programs offered by the federal government and are no longer eligible for loan forgiveness or cancellation. If you run into financial difficulty somewhere down the road, the option to switch payment plans may come in handy, and that disappears when you refinance.
Also, if you extend the length of your repayment, you may end up paying more in interest than if you had left the original terms in place.
Are You a Candidate for Refinancing?
By applying to refinance, you are asking the new lending company to extend you credit. For that reason, you may have to provide information including your employment status, income and credit score in order to secure approval. If you are ready to get started, you can research the refinancing options of companies such as Earnest, SoFi and LendKey. Read our reviews and compare different online loan companies to see if they’re a good fit for you.
Whether you want to reduce your monthly payment, lower your interest rate or streamline your loans by combining them into one easy-to-pay amount, refinancing may help improve your financial situation. It’s essential, however, to look into the fine print so you understand the pros and cons of any new arrangement.