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Pros and Cons of Refinancing Student Loans

Okay, so you have your degree, and now you must turn your attention to your student loans. You’ve heard about refinancing, which can save you cash over time through a lower interest rate. While there are few downsides to the strategy, it’s not a great fit for everyone. To help you figure out what you should do, here are some pros and cons of refinancing student loans.

What is Student Loan Refinancing?

This is a process that swaps out your existing student loans for a new loan with a better interest rate, with the purpose of saving you money at length. In many cases, you can save tens of thousands of dollars.

Pros of Student Loan Refinancing

A better interest rate can save you big time. Those high student loan interest rates are what’s killing you. You can do much better, but you’ll need a good credit score to pull it off. In fact, the better your score, the better your rate, in general. With that lower rate, you can pay off your loan faster, saving you money in interest.

Here’s a scenario: If you finance loans that come to $40,000 and which carry a 6.00% interest rate over the traditional 10 years, you’d fork over some $13,290 in interest. However, if your interest rate were 4.00%, you’d shell out just $8,598 in interest, allowing you to save nearly $5,000.

Note that a student loan refinance can decrease your debt-to-income ratio, which can improve your credit. What’s more, you get to select your lender, allowing you to find the best fit for you.

You’ll have streamlined payments. It can be difficult to keep track of all your various loans from various servicers. What is refinancing to you? In addition to a lower interest rate, it could be that you get to make just one payment each month.

You can use a cosigner. This is a good benefit, especially if you can’t meet refinancing requirements, such as the credit history or income (you likely will be able to do a refi, however, since you are employed and therefore are less risky in the eyes of lenders).

If you must enlist the help of a trusted friend or relative with good financial bona fides, keep in mind that that they’re on the hook for repayment if you somehow default.

Cons of Student Loan Refinancing

Loss of federal repayment protections. Yes, if you refinance, you may lose deferment or hardship benefits offered by the federal government. But the lower interest rate and ability to pay off your loan faster could still make refinance worthwhile.

Credit requirements. We’ve already discussed that the better your credit score, the better your refi interest rate. In general, you’ll need a score in the middle 600s to qualify for refinance. But remember: if you don’t have that, you can always use a cosigner.

No repayment flexibility. With federal loans, you can forego the standard 10-year plan and go with, say, a 20-year income-based plan. With refinance, unless you do a second refi, you’re pretty much stuck with the repayment plan you get with your new loan.

Now that you have the pros and cons of refinancing student loans, you can make an educated decision regarding loan repayment. One thing we do know is that if you’ve come down on the side of refinancing, especially for private loans, you should enlist the help of Juno, which, for one thing, doesn’t make you refi all your loans at once, and can get you the best interest rate possible.


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