Conquer your student debt. Refinance now.
If you’re currently making monthly payments on student loan debt, you may be wondering how to lower those payments or save money over the longer term1. Fortunately, there may be ways to reduce your interest rate and simplify your payments by refinancing with a private lender. Here’s what you need to know about the pros and cons of refinancing student loans before you move forward.
What is student loan refinancing?
When you refinance loans, you’re effectively taking out a new loan with a potentially lower interest rate to pay off your existing loans. Over time, you can save significant money by doing this as interest will accrue more slowly over the new loan term, and you’ll be able to pay down your principal balance faster.
Student loan refinancing vs federal student loan consolidation2
There are two main options for federal student loan borrowers to explore when considering ways to simplify their monthly payments. The first is to apply for a Direct Consolidation Loan, a federal program that allows borrowers to combine their existing federal education loans into a single new loan. You can only consolidate federal loans, so if you have any private loans, you’ll have to continue to pay those individually or refinance them separately.
The second is to refinance your loans with a private lender such as a student loan refinancing company like Earnest. Refinancing for a lower interest rate can help you save up to thousands of dollars over the life of your loan by decreasing the amount of interest you need to pay over time.
For example, say you have $50,000 of remaining student loan debt with an interest rate of 7%, a monthly payment of $580, and 10 years remaining on your loan term. If you refinance for a 2% interest rate without changing your repayment term, you could decrease your payment by $120 per month and save $14,486 over the life of your loan.
The pros of refinancing student loans
Refinancing your student loans can save you thousands of dollars in interest over the life of the loan. Once you refinance, you can’t undo the decision and send your loans back to the companies that originally serviced them. So, it’s important to make sure it’s the right decision for you before moving forward. These are some of the benefits of refinancing.
Pro: You may be able to save thousands of dollars in interest
When you refinance your loans for a better interest rate, you may be able to save thousands of dollars over the life of your loan. Interest will accrue more slowly and you’ll be able to pay down the principal balance faster.
Pro: You may find more flexibility in loan repayment terms
When you refinance your current loan with Earnest, you’ll be able to choose between a loan with a variable interest rate or a fixed interest rate.
- Variable-rate loans have interest rates that fluctuate over time and may be lower at the outset than a fixed-rate loan.
- Fixed-rate loans do not change during the life of the loan, regardless of external factors.
Earnest lets qualifying borrowers in good standing reevaluate their interest rate after a certain point in their student loan repayment process. This means you may be able to access even better rates later on.
Pro: You have the control to choose which company services your new loan
When you take out loans from the federal government, you don’t have any choice over which lender or credit union will service your loans. If you refinance with private student loans, however, you’ll be able to choose a company with the best rates that suit your specific needs.
Pro: You may be able to release your cosigner from your loans
If you have private student loans, you may have a cosigner attached to your promissory note, which means that person is responsible for your loans in the event you can’t pay. If you have built a good credit history since originally taking out those loans, you may now be able to refinance completely on your own — releasing your cosigner from responsibility. This may help ease tension between signer and cosigner if the loan repayment process has caused stress in the relationship.
Pro: You may be able to access lower interest rates with the help of a cosigner
If you can’t refinance for a lower interest rate on your own, you have options. If you have access to a cosigner with a much higher credit score than you — such as a spouse, parent, guardian, sibling, or really any qualified individual — you may be able to enlist their help.
While cosigning is a serious responsibility and it’s not a conversation to take lightly, lower interest rates can help you save thousands of dollars over the long term. Eventually, if you get a higher-paying job or build up a strong credit history, you may be able to refinance again later down the line to release your new cosigner from the loan.
Pro: You can refinance both federal and private student loans together
Borrowers with good credit may be able to refinance all of their private and federal student loans with a single loan application. Unlike Direct Consolidation Loans, which only work for Department of Education financial aid programs such as Parent PLUS Loans and Stafford loans, refinancing with a private lender can get all your loans rolled into one.
Pro: You may be able to repay your debt faster
You may be able to get out of debt much faster if you refinance for a lower rate and don’t extend your repayment term significantly. Earnest allows borrowers to make auto payments biweekly instead of monthly if they choose, which means more of each payment is going to pay down the principal balance versus interest.
The more money that goes toward your principal each month, the faster you’ll pay down the overall balance, and the faster you’ll be debt-free. Earnest has a student loan calculator to help you determine how your payoff date may change by increasing your payments voluntarily by an extra $5, $10, $15 or more each month.
Pro: You may have lower monthly payments by choosing a longer repayment term
When you refinance your loans with a new company, you’ll have the ability to choose loan repayment terms that fit your needs. For example, you may choose a 5-year term or a 7-year term3. Choosing a longer loan period will spread out your repayment over more time, meaning your payments each month will be lower. Beware, however, that longer loan terms will likely result in paying more interest over time.
Pro: A company like Earnest may have perks or repayment options that work better for your needs
When you choose who to refinance your loans with, you have a lot of options. Earnest offers some of the best interest rates on the market and works to help its borrowers make smart repayment plans.
Even though Earnest is a private lender, and can’t offer income-based repayment or student loan forgiveness, it does offer perks to make repayment easier, including the ability to skip a payment4 once a year if you’re a borrower in good standing. Earnest also offers an interest rate discount to people who sign up for and maintain an automatic payment5.
The cons of refinancing student loans
While refinancing can save you significant money and help you pay off your loans faster, it isn’t the right choice for everyone. Here are some of the downsides of refinancing with a private lender or credit union.
Con: You’ll lose access to federal student loan protections
If you want to refinance federal student loans, you’ll be giving up your right to federal protections that can help you in the event you become unable to pay your loans, such as deferment and forbearance. And while Direct Consolidation Loans offer a grace period — a short period after the disbursement of your new loan where you’re not required to make payments — private lenders generally do not offer the same.
Con: You’ll lose eligibility for Public Service Loan Forgiveness
If you work in a public service career and you’re aiming to receive Public Service Loan Forgiveness at the end of your loan term, refinancing is likely not for you. You’ll lose access to these benefits if you refinance with a private company.
Con: You may need a cosigner to get a better interest rate
If you want to refinance for lower interest rates but have a high debt-to-income ratio or a low credit score, you may find it tricky to refinance on your own. Adding a cosigner can help you get better rates, but if you don’t easily have access to one, or don’t know how to ask, you may not be able to refinance.
If you want to work on improving your credit score so you can access better rates in the future, you may find it useful to request a full credit report so you can understand what’s impacting your score. For example, sometimes having too many credit cards can lower your score, and sometimes not having enough credit cards means you don’t have a long enough credit history to show prospective lenders you’re trustworthy and able to pay.
Con: You may have higher monthly payments
When you refinance your loans, your lender may only offer shorter repayment terms than your current loans. That means your loan payments may be higher each month, even if you are saving money in the long term.
Is refinancing student loans worth it?
Is refinancing right for you? Here’s the rundown:
Refinancing may be worth it if…
- You want to save money on interest rates and have a high credit score.
- You want to pay off your debt faster and have the flexibility to make higher monthly payments in order to do so.
- You don’t need to use deferment or forbearance options from the federal government.
- You have a good credit history and can access lower interest rates.
- You want to add or remove a cosigner from your loans.
- You’re not currently eligible, and don’t plan to become eligible, for federal student loan forgiveness programs like PSLF.
Refinancing may not be worth it if:
- You work in a public service career and you’re eligible for Public Service Loan Forgiveness, or you intend to work in such a career in the future.
- You don’t want to lose access to federal student loan protections.
- You’re not able to make payments right now and need to defer your loans or seek forbearance.
Alternatives to a student loan refinance
If student loan refinancing isn’t for you, you may have other options. You can review the terms of your federal student loans with your loan servicer and learn more about the federal protections available to you at studentaid.gov. Alternatives to refinancing your student debt include:
Direct Consolidation Loans
If you have multiple loans through the federal government, you can roll them all into one payment with a Direct Consolidation Loan. These loans only work for federal loans—any private loans or personal loans you have will remain separate.
Your new interest rate will be calculated based on a weighted average of the interest rates of your existing loans. It’s important to note that any outstanding interest on your loans will be capitalized when you consolidate them, meaning it will become part of your new principal balance and may increase the amount of interest you pay over time.
Public Service Loan Forgiveness
If you work in a qualifying public service career, such as some teaching jobs, you may be eligible for Public Service Loan Forgiveness, or PSLF. This is a program that allows the government to forgive some federal loans after a certain number of qualifying payments are met. President Joe Biden has recently made changes to the program in an attempt to streamline eligibility and make it easier to meet the conditions to qualify for forgiveness.
If you’re struggling to make your student loan payments and want to lower your monthly bills, you may be eligible for an Income-Driven Repayment program. These options allow borrowers to decrease their minimum required payments based on their annual income and family size.
Your interest rate will stay the same, so you’re likely to pay more over the life of the loan — and potentially significantly more. However, these options can relieve financial stress in the short term and help borrowers avoid default by capping payments at 10 to 20 percent of their discretionary income.
See how much you could save with Earnest
You can potentially save thousands of dollars while simplifying your loan repayment process by refinancing with Earnest. See how much you can save—and how much faster you can get out of debt—by checking your rate today. It only takes two minutes to get a quote and it won’t hurt your credit score.
1 Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for total cost of your refinanced loan.
2 You may lose benefits associated with your underlying federal and/or private loans if you refinance such as federal Income-drive Repayment Plans, Economic Hardship Deferment, Public Service Loan Forgiveness, or other determent and forbearance options. If you file for bankruptcy, you may still be required to pay back this loan.
3 Earnest’s Loan Cost Examples: These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $XX) and a X.XX% APR would result in a total estimated payment amount of $XX,XXX.XX. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $XX) and a X.XX% APR would result in a total estimated payment amount of $XX,XXX.XX. Your actual repayment terms may vary.
4 Earnest clients may skip one payment every 12 months. Your first request to skip a payment can be made once you’ve made at least 6 months of consecutive on-time payments, and your loan is in good standing. The interest accrued during the skipped month will result in an increase in your remaining minimum payment. The final payoff date on your loan will be extended by the length of the skipped payment periods. Please be aware that a skipped payment does count toward the forbearance limits. Please note that skipping a payment is not guaranteed and is at Earnest’s discretion. Your monthly payment and total loan cost may increase as a result of postponing your payment and extending your term.
5 You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment from a checking or savings account. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay.
Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.
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