Should You Refinance Your Student Loans?
Student loans are growing and young Americans are drowning in a sea of debt exceeding $1 trillion. 18-29 year-olds find themselves borrowing money for their education and nearly 1 million student borrowers default payments each year, so most of that money is not being repaid. However, some student loan borrowers are seeing the benefits of refinancing their student loans.
How do you know if refinancing your student loans is the right move for you?
This is a common question, especially as student loan debt rises among Americans who continue to make payments and feel no closer to having their debts paid. So, what could the problem be? Most likely, it has to do with their interest rates.
What Does ‘Refinancing Your Student Loans’ Mean?
Basically, you can save money on interest that make payments more manageable. All you have to do is consolidate and refinance your student loans. This would allow you to lower your percentage, which can help save money and (hopefully!) become debt-free in a timely manner.
Sounds perfect, doesn’t it?
Even though there are cost-saving benefits, this can be risky for federal student loan borrowers (Forbes).
When Should You Refinance Your Student Loans?
This depends on your situation. If you have student loans and want to save money on interest by refinancing, you need to first evaluate your current financial situation. What benefits and protections will you lose by refinancing? Confirm that the pros outweigh the cons before jumping ship. These savings can be worth it for some borrowers, but not all.
If you have private student loans, then student loan refinancing probably makes sense. Private student loans are more likely to have higher interest rates and don’t qualify for student loan forgiveness or federal repayment plan.
However, if you’re considering refinancing your federal student loans, then please research what protections you will lose to determine if it’s worth the risk. For borrowers who have a steady job, heavy cash reserves, and can pay off their debt in a short period of time – refinancing may make more sense. As a result, their interest payments would lower so they can pay off their debt faster. CNBC demonstrates what makes student loan refinancing so successful through real stories, but they also make it clear that this can be a major risk for federal student loan borrowers.
Consequences of Refinancing Federal Student Loans
First of all, the biggest consequence of refinancing federal student loans is that you’re removing your safety net. Federal student loan borrowers are offered many repayment plan options that make paying back loans plausible: Income-Based (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE), among others. These plans are meant to help you pay off your student loans depending on your situation. For example, their IBR plan sets up a monthly payment plan based on your income. And if you’re a borrower who uses an income-driven plan to pay back federal student loans, you may also qualify for student loan forgiveness. Of course there are advantages and drawbacks to every program, so you should draft a pros and cons list of each one to determine your best option.
Will You Refinance Your Student Loans?
Unfortunately, there’s no set guidelines that indicate who should refinance their student loans and who shouldn’t. That decision falls onto the borrowers themselves. So research is important!
If you think refinancing is the right choice for you, we have just the place for you to get started here!
For more information on America’s rising student debt, check out Millennials Are Facing $1 Trillion in Student Loan Debt.