Student Loan Refinancing: The Advantages and Disadvantages

By: Emily Ferreira, Managing Editor
After graduation, having lots of debt can seem a bit overwhelming, but it doesn’t have to be! There are certainly options to help you get rid of that debt, including your college student loan debt. Student loan refinancing can be a very helpful option when trying to eliminate your college debt. The world of student loan refinance may be intimidating, but with a little research, you can become well versed in the ways of student loan refinancing! The goal of student loan refinancing is usually to reduce your monthly college student loan payments. Student loan refinancing may be of particular benefit to you, if you have more than one student loan. These different student loans often carry a variety of different interest rates. Student loan refinancing works by combining a college student loan with the other student loans you carry. This way, you will end up with one low interest rate. A better interest rate through student loan refinancing will help lower your monthly repayment amount as well as lowering the total balance that will need to be repaid over the life of the college student loan.

When considering student loan refinancing, there are several things to be aware of. First, you need to know what types of student loans you have: federal or private loans. If you have both types, student loan refinance should be done separately. The way federal loans are structured, you can get a significantly lower interest rate on them than you can on private college student loans. Private loans are essentially personal loans made with the assumption that your income will increase with more education. If you mix the two different types of college student loans together when choosing student loan refinancing, you will end up paying a higher interest rate on the combined principal than you would if you financed the two loans separately. This may seem counter-intuitive to have two separate refinanced college student loans, but remember, the ultimate goal of student loan refinance is to lower your monthly loan payments, unlike student loan consolidation where you will only end up with a single student loan payment per month.

The second thing to keep in mind when considering student loan refinancing is that student loan rates vary by lender and by your credit history. Before you think about student loan refinancing, make sure your credit history is in good shape. Once you have cleaned up your credit report, compare rates from different student loan refinance lenders. Rates for student loan refinancing of federal loans change once a year (typically near July 1). Repayment of a college student loan that has been refinanced is easier as there is only one student loan to worry about as opposed to several varying interest rates and repayment schedules to keep track of. An added benefit is that, even if you’re already consolidated or previously worked with student loan refinancing, you still have the option of student loan refinance.

When you opt for student loan refinancing, there are two ways to reduce your student loan payments. The first is to reduce your monthly payments by getting a lower interest rate and, the second, is to extend the duration of your loan. Between these two methods, getting a lower interest rate is the preferred way since you would also be reducing your long-term student loan debt. However, if you find that your monthly payments are too high, extending the duration of your loan can help dramatically. Essentially, you are extending the period over which you repay the loans, so each payment becomes smaller. However, longer-term loans typically mean higher interest rates in addition to more interest payments. This option actually presents an issue as you end up paying more money, though the payments are more manageable.

Student loan refinancing institutions are plentiful. You can obtain student loan refinancing from traditional banks and credit unions or even an online lender. Though a lending institution that can’t physically be visited may put off students, online lenders can often have rates that traditional banks or credit unions simply can’t beat for student loan refinancing. The online lending market is extremely competitive, which is why this is the case.

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