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When it comes to paying off your student loans, chances are pretty good that you’re looking for every edge and advantage you can get so that you can pay them off as quickly (and cheaply) as possible. That’s just what you do when you want to, you know, be able to afford a life after college.
There’s also a pretty good chance that you’ve heard about student loan refinancing. Maybe one of your friends mentioned to you that they refinanced their student loans and saved a lot of money. Maybe your parents are telling you to look into it because interest rates have been so low. Maybe you’ve read an article online telling you that it’s what all the smart college grads are doing.
Not entirely sure what we mean by student loan refinancing? Check out our complete Student Loan Refinancing Guide, where you can learn more.
Whatever the case may be, you’re now wondering to yourself: Is refinancing my student loans really the smart move to make? Or is this all too good to be true?
The truth is, under the right circumstances, student loan refinancing has the potential to do a lot of good. But it certainly isn’t for everyone, and before settling one way or the other, you should weigh the pros and cons of refinancing your student loans so that you can make an informed decision.
That’s why we pulled together this list of the pros and cons of student loan refinancing.
Pros and Cons of Student Loan Refinancing
| Pros of Refinancing Your Student Loans | Cons of Refinancing Your Student Loans |
|---|---|
| 1. Refinancing may get you a lower interest rate. | 1. You might give up powerful federal protections and benefits. |
| 2. Refinancing can lower your monthly payments. | 2. You lose the ability to place your loans into deferment or forbearance. |
| 3. Refinancing can make your payments simpler. | 3. You may end up paying more over the life of your loan. |
| 4. Refinancing may allow you to release a cosigner. | 4. Private student loans follow you into death. |
| 5. If you have bad credit, it can be difficult to qualify. |
Pros of Refinancing Your Student Loans
Here are some of the most common positive reasons that people often choose to refinance their student loans.
1. You may get a lower interest rate
One of the main reasons that college graduates tend to be interested in refinancing their student loans is the fact that doing so has the potential to save them a lot of money by reducing their interest rate.
If you borrowed your student loans when interest rates were high (for example, before the great recession hit and tanked the US economy in 2008) then there’s a very good chance that you can find lower interest rates through refinancing. Reducing your rate by even just a single point can translate into savings of thousands of dollars, so it’s an important consideration.
2. You can lower your monthly payment
Making your student loan payments on time every month is a critical part of keeping your credit score healthy. But doing so can be a real challenge, especially if you find yourself underemployed. How can you afford to pay off your student loans while also paying for things like rent, groceries, health insurance, and the other trappings of modern life?
If you have federal student loans, you’ve got some options at your disposal (like a number of income-based repayment plans) that can help make your loan payments a little more manageable.
But if you’ve got private student loans, you don’t have the same options. Refinancing is one way that you can possibly lower your monthly payment amount so that your check stretches a bit further. (Though the lower monthly payment comes with some tradeoffs, as we’ll see below.)
3. Your payments may become simpler
If you currently have multiple student loans with multiple lenders, it can be a real hassle to keep track of your student loans. And that makes missing a payment much more likely.
Need help keeping track of your student loans? Download our free Student Loan Spreadsheet!
When refinancing your student loans, it is often possible to essentially consolidate multiple loans into a single new refinanced loan. This means that instead of making multiple payments and keeping track of multiple loans, you have a single payment to worry about each month. That being said, student loan consolidation and student loan refinancing are two entirely different processes. If you’re unsure which is right for you, make sure you understand the pros and cons of student loan consolidation before moving forward either way.
4. You can release a cosigner
When you originally took out your student loans, there’s a pretty decent chance that you did so thanks to the help of a cosigner like your parents or grandparents. Cosigners more or less act as a safety net for your lender: If you can’t pay back your loan, they will turn to your cosigner, whoever that may be.
Hopefully, you haven’t given your cosigner any reason to worry about being on the hook for your college debt. But still, knowing that you’re tied to tens of thousands of dollars of loans can be stressful, and some cosigners would like nothing more than to be released from their duty. Refinancing your student loans may allow you to make this a reality, possibly reducing tension in your relationship, reducing stress for all involved, and even raising the credit score of your cosigner (since they are no longer liable for your debt).
This is not always possible, though, and will depend on your own unique financial situation. Factors like your credit score, your debt-to-income ratio, and other things will determine whether or not your new lender will require a cosigner. Even if you don’t need one, refinancing your student loan with a cosigner might also help get you lower interest rates, so it’s still something you should consider.
Cons of Refinancing Your Student Loans
Most of the time when people think about refinancing their student loans, it’s because the positive just sound too great to pass up. But refinancing can come with some pretty serious downsides, so it pays to keep those in mind as well.
1. You might be giving up powerful benefits and protections
If you’re refinancing private student loans, then you probably aren’t going to be giving up anything glamorous. But if you are refinancing federal student loans, unfortunately, you’re going to be giving up a lot.
There is no mechanism in place to refinance federal student loans so that they stay federal. The only way that you can refinance your federal student loans is by converting them into private student loans. But by doing so, you’re giving up a lot of benefits and protections that federal loans carry: Things like income-based repayment plan options, student loan forgiveness, and more.
Whether or not the benefits outweigh these sacrifices is something that only you can determine. Just remember that once you convert to a private student loan, there’s no going back, so you need to make sure that it is indeed right for you.
2. There’s no pause button
Technically this should have been rolled up into the point above, but I think it deserves its own spot on the list because it’s so important: Refinancing federal student loans into private student loans means you lose the ability to place your student loans into deferment or forbearance.
That means that if you lose your job, go back to school, or find yourself having difficulty making your loan payments, you won’t be able to pause payments while you straighten out your finances, which is something that a lot of borrowers don’t realize when they begin the refinancing process.
3. You might end up paying more
Do you want to refinance your student loan so that you can lower your monthly loan payment? That’s a common reason that people choose to refinance.
But it’s important to realize that a lower monthly payment comes with a tradeoff: Typically, it means you’re paying more over the life of the loan. Why? Because by stretching out your loan repayment, you’re paying interest on the loan for a longer period of time.
This isn’t necessarily a bad thing. But it’s certainly not a good thing either. Just keep this in mind when looking for refinancing options.
4. The loans follow you into death
Federal student loans carry a benefit that a lot of people don’t realize, and hopefully, it’s a benefit they never have to use: If a student borrower dies, then the balance of the student loans are essentially forgiven. This means that your estate (if you have one) and your cosigner does not have to worry about paying them off in your absence.
Private student loans typically are not forgiven upon death (though each lender, of course, has their own policies in place). This means that, should you die, the lender can go after your estate and/or your cosigner in order to get their money back, which is bound to only make a difficult time even more difficult for your loved ones.
5. If you have bad credit, it can be difficult to qualify
People, especially those who are currently struggling to make their student loan payments, often view refinancing as THE THING that will make everything better. If only I refinance my loans, they think, I can get cheaper monthly payments. I can have an easier life.
And though it’s true that refinancing has the potential to make life a little easier, it also isn’t always an easy thing to qualify for. There are a lot of factors that go into whether or not a lender will agree to refinance your student loans (debt-to-income ratio and credit score being high on the list).
If you approach refinancing as a silver bullet that will finally make everything better, and then you are rejected, then it can feel as though your last hope has been pulled out of reach. It can be heartbreaking.
Does this mean that you shouldn’t try to refinance your student loans? No, not at all. But you need to be realistic about what they can achieve and about the fact that you may not be approved.
Deciding What is Best for You
Only you can determine whether or not refinancing your student loans makes sense for your unique financial situation. Though refinancing can bring a lot of good, it also has negatives which must be considered. Before rushing into any decision, it’s important that you weigh the pros and cons so that you can be absolutely sure that it is, indeed, the right move for you.
If you’re thinking about refinancing, the first step will, of course, be to shop around to find the best lender and rates for you. While you can do this on your own by hand, I typically recommend borrowers turn to a student loan marketplace, which will allow you to compare multiple lenders side by side to choose the one that makes most sense for you.
