7 Things to Consider Before Refinancing Your Student Loans

Most college graduates will walk the stage with at least some form of educational debt. Generally, this is in the form of student loans, which are often used to help pay for tuition, books, housing, meal plans, and even certain materials (like a new laptop for class).

Student loans typically have a grace period of six or nine months from the time that you either graduate or reduce your enrollment, to when you have to begin repaying the debt as agreed. And, regardless of when you graduated , juggling those loan payments each month can be both expensive and confusing.

Refinancing your student loans can be a great way to cut your overall costs, lower your monthly payment, release a co-borrower, and even just simplify the loan repayment process. But before you go refinancing your college debt, there are some important things to consider.

7 Things to Note Before Refinancing Student Loan Debt

If you only have federal student loans, you can use a no-cost Direct Consolidation Loan to combine your accounts into a single  balance with one monthly payment and due date. This type of loan’s interest rate is calculated by averaging the rates of the loans you’re consolidating, so you won’t be saving any money per se.

Many borrowers, however, choose to refinance some or all of their existing loans using a private refinance loan, or refi. This personal loan can be used to consolidate any combination of federal and private loans, enabling you to simplify the loan repayment process while often snagging better terms in the process.

Whether you’re refinancing federal loans, private loans, or a blend of the two, there are seven key considerations to keep in mind.

You’ll lose certain benefits that are only offered on federal loans

Federal student loans are backed by the Department of Education (ED), and offer specific benefits to borrowers. These include loan deferment and forbearance options, if you find yourself dealing with a financial hardship and are unable to make your full payments. 

Private lenders are not federally required to offer any such option, even if you are struggling. While most private lenders will still work with you if you contact them about your hardship, refinancing into a private loan means losing that guaranteed safety net from Uncle Sam. 

Federal loans also qualify for income-driven repayment (IDR) plans. This ensures that your monthly loan payments never account for too much of your monthly discretionary income. Private student loans and refis have no such feature.

You won’t have access to (potential) student loan forgiveness programs

Federal student loan borrowers may also qualify for certain student loan forgiveness programs. For example, borrowers who work in a qualifying public service profession and make at least 120 payments on their loans may be able to have any remaining balance forgiven. 

If you take out private loans in college — or refinance your federal loans into a private refi loan — you’ll lose this potential benefit.

Approval will depend on your creditworthiness

Getting approved for a private refinance loan is heavily dependent on your credit history. If you are a young adult with a limited history, low credit score, or even a reduced income, you may find it difficult to qualify (especially without a cosigner). 

By contrast, qualifying for many federal loans — and even the Direct Consolidation Loan program — is not credit-based.

You can release a cosigner

Most college students will need a co-borrower to sign for their loans initially. This person, often a parent or grandparent, has a financial obligation to the debt until it’s repaid. 

Removing a cosigner from a loan can be done two ways: through a cosigner release, if allowed, or by refinancing. If you want to release your cosigner from their obligation to your college debt, a private refinance loan in your own name could be the answer.

You’ll often avoid added fees

It’s uncommon for private loans these days to charge any sort of application or origination fees. Because of this, there are typically no extra costs involved with refinancing your student loan debt into a new private loan.

You can adjust your monthly payment amount

Refinancing can be a great way to shift your monthly loan obligation. You can choose a refi loan that has longer terms, better rates, or both — which can help you reduce your payment requirement. 

Just note that if you choose to extend your loan repayment term, you may end up paying more over the total course of your loans, even if your monthly obligation is lower.

You might get a lower interest rate

The government sets the interest rates on federal loans, which are standard across the board regardless of your credit score, income, or other factors. When consolidating, the interest rate on a federal consolidation loan is simply the average of the loans being consolidated. And, chances are, the private loans you may have taken out as an 18- or 19-year-old don’t have the most competitive rates and loan terms available.

With all of that said, a private refinance can sometimes help you snag a much lower interest rate than what’s currently being applied to your loan(s). You can shop around from multiple lenders until you find one offering the best rates, repayment terms, and loan features for you and your budget.

This could potentially save you thousands of dollars over the course of your repayment.

Should You Refinance?

The decision to refinance your student loans is a personal one, and whether or not it makes financial sense depends on your loans, total debt, and your creditworthiness. If you do choose to refinance some or all of your loans, though, be sure to shop around with multiple lenders. This can help you find the best possible offers and save the most money.