When you refinance your student loans, you borrow a new loan to pay off your current student debt. With this process, you could take advantage of a lower interest rate, a more favorable repayment schedule, or a lower monthly payment.
While student loan refinancing can help make your debt more affordable, carefully consider the benefits and drawbacks before starting. Here’s what you need to know about refinancing your student loans.
How student loan refinancing works
When you refinance your student debt, you take out a new loan from a private lender and use that money to pay off your original student loans. Ideally, the new loan will have a lower interest rate, better terms, or other benefit. Then, you’ll start paying back the new loan to the refinance lender.
In many cases, borrowers refinance to pay off multiple student loans at once. This ensures that you will now only have a single loan to manage moving forward, rather than juggling several debts with different servicers, interest rates, repayment terms, and monthly payments.
See Also: Is It Worth It to Refinance Student Loans?
Refinancing vs. consolidation
While refinancing and consolidation are sometimes used interchangeably, these are two different processes in student lending. Although both strategies replace your original loans with a new one, they have different pros and cons.
Student loan refinancing can be used for any education debt, including private and federal student loans. However, you can only refinance via a private lender. That means that refinancing federal student loans will result in a private debt, and you’ll lose access to federal protections such as income-driven repayment plans and forgiveness opportunities.
Student loan consolidation, on the other hand, occurs when you combine your federal student loans into a Direct Consolidation Loan. Converting your existing federal loans into a consolidation loan can combine your debts into one account and reduce your monthly payment, but it won’t lower your interest rate.
Unlike private refinancing, federal loan consolidation maintains your eligibility for federal perks like income-driven repayment, loan forgiveness, and forbearance and deferment options.
Benefits of student loan refinancing
There are a number of reasons why you may choose to refinance your student loans. Potential benefits include:
- Lowering your interest rate: Borrowers with good-to-excellent credit may qualify for a better interest rate on their refinancing loan than they received for their original debts. A lower rate can reduce the lifetime cost of the loan, potentially saving you a lot of money.
- Adjusting your repayment terms: Extending your repayment timeline is one of the simplest ways to lower your monthly payment — though it will likely increase your loan’s lifetime costs. Alternatively, if you shorten the repayment term, it will typically increase your monthly payment but lower the overall cost of your debt.
- Simplifying your debt: If you have multiple loans, refinancing can be a useful way to streamline the repayment process. Rather than tracking several different due dates, payment amounts, repayment terms, interest rates, and servicers, refinancing can combine your debt into a single loan to manage.
- Removing a cosigner: Applying for a private student loan with a cosigner can get you a lower interest rate than you might qualify for on your own, but not all loans allow the primary borrower to release the cosigner later. Refinancing your loan offers the chance to remove a cosigner and take over the loan entirely on your own.
- Changing loan servicers: Different loan servicers offer different perks and support. If you’re unhappy with your current lender or think another company could do the job better, refinancing allows you to switch.
Check Out: When to Refinance Student Loans
