Refinancing Student Loan Debt: What Is It?

Refinancing a student loan is a financial process that allows for lowering your interest rates on outstanding loans. It is usually done with a private loan servicing company.

Unfortunately, you can’t just shoot your current loan servicer an email saying:

Refinancing requires you to go window shopping! You can scour the internet and find some companies that popularly advertise their student loan refinancing programs (SoFi, Earnest, etc). You can also check with your financial institution (orothers as well!). The end goal is to find a new interest rate so you can save money in the long run!

If all goes well, you will find a new lender and run into their arms. They’ll embrace you, pay off the old lender, and ease your pain…by giving you a lower interest rate.

 It’s still painful, just a bit less. And you still owe the same principal on the loan…just to this new lender.  

All jokes aside, it’s a great way to save money over the lifetime of your loan.

Refinancing can seem a little overwhelming because it’s usually a first-time thing for graduates. Most of us have never refinanced anything before this. So, when you make the decision to refinance, do not hesitate to ask questions. You can also consult with friends and family who may be more well versed in handling refinancing loans. Also, always compare interest rates before settling with a company/bank.

Refinancing can seem like a no brainer when you are interested in lower your uninteresting interest rates, but like everything else in the finance world, you must weigh your options. Student loan refinancing has its good and bad aspects.

So, What Are Some Pros?

Saving Money!

The most obvious pro of refinancing your loan is the drop in your interest rate. Having a high interest rate can really make paying loans back feel impossible. You feel like everything you are throwing at the loan goes straight towards interest. Well, having a lower interest rate can help you mitigate that problem a bit.

For example, let’s say you have a $10,000 student loan out at 7%. You have to pay that back in 10 years.

Your minimum payment per month would be $116.11. After 10 years, you would have paid $3,933 in interest on top of the principal. That’s $13,933.

Now, let’s say you decided to refinance that $10,000 with a 5% interest rate within the same 10-year term.

Your minimum payment a month would be $106.07. After 10 years, you would have paid $2,728 in interest. That’s $12,728.

By refinancing, you would have saved $1,200 for the same principal with the same 10-year term.

You can use this calculator to check out how much you could save by refinancing your student loans!

    One Big Happy Payment!

Many people take this refinancing opportunity to consolidate their loans. Consolidating throws all of your loans into a cute little expensive package. This can make tracking and paying your loans much easier; You no longer need to sign into 3 different loan servicing sites to make payments.

What Are The Downsides?

You Need Decent Credit

Refinancing a student loan requires you to take out another loan. Another loan means you have to have decent credit: minimal dings, current with payments, an income, etc.

For most of us, the government started chucking us thousands of dollars by the age of 18.

 

When I got older, everyone had all these crazy stipulations for lending me credit! Do I have a job? Do I have a steady income? Do I have enough credit history? Why are you asking me all of this? The government just funneled $5,000 into my account without any questions aside from “Are you in school?”.

Turned out that when “normal” entities give you loans, they need proof you will pay them back.

No Federal Loan Perks ☹

If you decide to refinance your federal student loan, you will no longer be eligible for any of the direct loan programs “perks”. These include flexible repayment (extended repayment plans, income-based repayment plans, etc.) and the Public Service Loan Forgiveness (PSLF) options. Refinancing with a private institute will cause you to forfeit these backup options. For that reason, refinancing should only be considered when you believe you will have the financial stability to pay your loans back with limited flexibility.

You cannot un-refinance your private loans back to federal loans.

PLEASE WATCH OUT FOR SCAMS!

There are many individuals that utilize the student debt crisis to prey on recent graduates. You may get phone calls from some scamming “Student Loan Grant Officer” in another country, requesting you buy Best Buy gift cards to pay them for their assistance. Other scams may circulate online and through social media.  They may offer consolidation or refinancing for a fee, feeding you false promises of Harry Houdini-ing your loans. It does not work that way. Do not get taken advantage of!

Happy refinancing (or not)!