The rising cost of higher education means more and more students are leaving university with not just degrees, but a bundle of debt as well. The average student borrower has $37,172 in loans to pay off.
And the student debt crisis shows no signs of disappearing anytime soon. As of February 2018, the Federal Reserve reported that “between 2001 and 2016, the real amount of student debt owed by American households more than tripled, from about $340 billion to more than $1.3 trillion.” And currently, Americans owe a grand total of $1.5 trillion in student loan debt.
It seems that dealing with student debt is an almost universal problem for those graduating from college and grad school these days. So, what options do these borrowers have?
One of the best things a borrower with student debt can do is craft a plan for repaying their student loans. While it can seem tempting to avoid the problem, that will only make it worse. One option available to student loan holders is refinancing.
First, let’s explain what student loan refinancing is. Student loan refinancing is a process by which your existing loans are paid off by a new loan from a private lender, usually a bank or online refinancing company, like SoFi. The new loan will have a new term, interest rate, and monthly payments.
The Pros of Student Loan Refinancing
When it comes to student loan refinancing, it isn’t always an easy decision. Here are some of the most notable pros for student loan refinancing:
Getting a Single Monthly Payment
When you refinance your loans, you’ll combine them into a new loan with one single monthly payment. This can make your student loan payments easier to manage.
It’s important that you make your payments on time every month, and having just one loan to pay off can make that much easier. And, when you refinance through a private lender, like SoFi, you can sometimes combine both federal and private student loans.
Lowering Your Interest Rate
One of the biggest potential benefits of refinancing student loans is securing a lower interest rate than the ones your loans currently have. If you’re paying a high interest rate, refinancing could be worth considering.
Since you’ve graduated, you may have significantly improved your earning potential, thanks to that new degree. If you took the opportunity to build credit while you were in college, you could qualify for a lower interest rate when you refinance. And, when you refinance to a lower interest rate, you could end up reducing the amount of money you spend over the life of the loan. This is not necessarily true if you end up extending your loan term—but if you do opt to extend your repayment timeline, you could instead lower your monthly payments.
Customizing Your Repayment Term
When you refinance your existing student loans, you are given the option to adjust your repayment term. Instead of the standard 10-year plan for federal loans, you could shorten or lengthen the term of the loan, giving you more control over your repayment plan.
Lowering Your Monthly Payment
When you refinance, you could potentially to lower the monthly payments on your loan by extending the term of your loan. Note that extending the term of your loan could mean you pay more money in interest over the life of the loan.
Choosing Between Variable and Fixed Rate Loans
When you refinance your loans, you might have the option to choose a fixed or variable rate loan. If you prefer the security of a stable rate over a longer period of time, you might consider choosing a fixed rate loan.
If you plan on repaying your student loans ahead of the term (just make sure there are no prepayment penalties), you might consider choosing a variable rate, which may start lower than the fixed rate loans, but could increase over time.
You Can Apply with a Cosigner
If you’ve recently graduated and haven’t built up much credit yet, you could potentially benefit from applying with a cosigner. If your cosigner has better credit and a higher income than you do, they may look more favorable to the lender, which could ultimately help you qualify for a lower interest rate. Even if you aren’t required to borrow with a student loan cosigner, some lenders might still give you the option to have one on the loan.
The Cons of Student Loan Refinancing
While refinancing your student loans might end up lowering your interest rate or making payments easier to manage, it’s not the right decision for everyone. Here are some of the downsides to consider before you refinance your student loans:
Losing Access to Federal Repayment Plans
When you refinance your federal student loans with a private lender, you will lose access to federal repayment plans . This includes the Standard, Graduated, and Extended Repayment plans. This could be especially important if you are planning on taking advantage of any income-driven or income-sensitive repayment plans , which you also won’t be able to access.
And you won’t have the opportunity to qualify for the Public Service Loan Forgiveness program. It’s best practice to review your student loans in detail and determine which plans you qualify for and which plans you intend to take advantage of before you considering refinancing.
No Longer Eligible for Federal Repayment Protections
You won’t be eligible for federal repayment protections like deferment or forbearance when you refinance your federal student loans with a private lender. Both deferment and forbearance might give you the opportunity to temporarily pause or lower your monthly payments.
When your loan is in deferment you may or may not be responsible for paying the accrued interest on the loan. However, if your loan is in forbearance you will be responsible for paying the accrued interest on the loan.
Some refinancing lenders, including SoFi, do offer unemployment protection which allows qualifying borrowers to pause their monthly loan payments in the event they unexpectedly lose their job. At SoFi, members also gain access to a career coach who can help as they search for their next job.
Losing Any Remaining Grace Periods
Most federal student loans have a grace period—usually the first six months after you graduate—where you don’t have to make any loan payments. If you refinance your loan shortly after graduation, you might lose out on that benefit if the private lender doesn’t honor existing grace periods.
Federal Student Loan Consolidation
Student loan consolidation is different from refinancing. A Direct Consolidation Loan allows you to combine multiple federal student loans into one federal loan, resulting in a single monthly payment.
When you consolidate your loans into a Direct Consolidation Loan, you won’t necessarily lower your interest rate. The new interest rate will be a weighted average of the interest rates on your previously existing loans, rounded up to the nearest one-eighth of 1%.
However, on the plus side, when you consolidate your federal loans through the federal government, you should still have access to most federal loan benefits like income-based repayment, deferment, and forbearance.
Student Loan Refinancing With SoFi
Everyone’s financial situation is different and it’s important that you make the best decisions for your individual circumstances. When you refinance, lenders will review your current financial situation, earning potential, and credit score (among other financial factors) to determine your new interest rate.
If you’ve decided to move forward with student loan refinancing, consider SoFi, the leading student loan refinancing provider. When you refinance with SoFi, there are no origination fees or prepayment penalties. See what you could save by refinancing with the SoFi student loan refinance calculator.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website on credit.