What Exactly Does It Mean to Refinance Your Student Loans and What Are the Pros and Cons?

April 8, 2014

For most types of debt, you can usually refinance if you’re not happy with your terms and conditions. Credit card balances can be rolled over onto new cards with more favorable rates. Car loans and mortgages can be refinanced with new lenders at lower interest rates. But for student loans – particularly federal student loans – what you got when you signed up was what you were stuck with until you paid them off. But this is starting to change.

Thinking about refinancing your student loans

Things to consider when considering a student loan refinance

How refinance is different from consolidation

With federal loans, as it stands, the only thing you can do is consolidate your loans to stay under the federal debt umbrella. But consolidation does not offer any financial benefits in terms of your interest rate or repayment terms. Your new interest rate will be a weighted average of your existing loans, so payments on a consolidated loan will be close to the sum of payments on existing individual loans. Consolidation is a tool that can be deployed to get you out of default – and it can only be played once. Refinancing is a whole new loan with completely new terms.

Refinancing is becoming more readily available

Where previously, there were not many options for refinancing student loans (and currently the government doesn’t offer any), more banks, credit unions and crowd funding organizations are beginning to offer refinancing programs. If your bank or credit union offers a student loan refinance program, you should look at these to see if existing clients can get more favorable rates. SoFi and CommonBond are also worth considering for those with graduate degrees, and both are alumni-funded.

Pro: Who can get the best deals on a student loan refinance

As with any refinancing deal, the higher your credit rating, the lower the interest rates you’ll be offered. If your credit isn’t stellar, you may not get a better deal than you currently have. Those whose current loans are at high interest rates would do well to investigate refinancing. This may seem counter-intuitive, but those who are in a good financial position and can afford their monthly payments are most likely to benefit from and get the best deal on a student loan refinance.

Con: Who would not benefit from a student loan refinance

If you are behind on your student loans, you may not be a candidate for a refinance simply because your credit will be lower as a result of missed payments. If you are so behind that you’re in default, you will likely not be approved for a refinance. If you are struggling to make payments and are using Income Based Repayment or Pay As You Earn repayment plans, you need to stick with your federal loans and the protections they offer. If you are working toward Public Service Loan Forgiveness, you will need to stick with federal loans because private loans aren’t forgiven under this program.

The bottom line is that whether or not you’ll benefit from a student loan refinance is dependent on your unique circumstances, including how much you owe, what interest rates your loans are at now, how far you are into your repayment period, how solid of a credit history you have, your income, prospects for income growth and your personal financial goals. There is no one-size fits solution. If you’re considering a refinance, weigh both your current situation and what it will be if you refinance, in both the short and the long term.

Sign up today for Tuition.io’s free student loan tool to track and optimize your debt. Read our blog often for tips on dealing with your debt and check out our Student Loan Help Center for more information on refinance, consolidation and other student loan matters.