National student loan debt is on the rise, totaling $1.52 trillion according to the latest findings. Without a doubt, college is expensive. Graduates experience financial burden when it comes to alleviating their debt. A common option for lowering monthly expenses is to refinance your student loans. Refinancing your student loans means consolidating your current federal and private loans into a single personal loan with a new lender. Refinancing your student loans is a great option if you want to lower interest rates and payments; however, there are some drawbacks. Here are the pros and cons of refinancing your student loans with a personal loan.
1. You can apply with a cosigner to lower interest rates
Refinancing your student loans can be difficult if you are not creditworthy. However, some lenders allow you to enlist the help of a cosigner to achieve a lower rate. A cosigner is a relative or creditworthy adult, with the ability to repay the loan. Once you have made a certain number of consecutive timely payments, you can remove your cosigner from your loan agreement.
2. Major savings through a lower interest rate
The more qualified you are for refinancing, either through excellent personal credit history or a cosigner, the lower your interest rate will be. A lower interest rate means paying less overall. Refinancing also gives you the option of a variable interest rate, which is useful if you’re looking to repay your loan over a short period of time. Variable rates increase or decrease your payment according to market influences.
3. One monthly payment with the lender of your choice
When it came to taking out loans for school, you were assigned to a federal loan service; you could even have federal loans from a variety of different services. On top of this, you could have additional private loans. The variety of lenders could make staying on top of your debt difficult. Through refinancing your student loans, all these loans become consolidated into one single monthly payment to one lender. Even better, the lender is of your choosing.
1. You must meet eligibility requirements
Lenders who offer student loan refinancing have certain criteria that must be met. Basic requirements include being a legal resident and holding a college degree. However, you must also have good or excellent credit to qualify.
2. Loss of access to federal loan protections
If you lose your job or experience a money-related setback, the Department of Education has several ways you could qualify for up to three years of mandatory forbearance. Many refinancing companies also award forbearance, but it is not nearly as flexible as the federal government’s options. Generally, refinancing companies allow you to pause your payments only for up to 24 months.
3. Your repayment plan is locked
One benefit of federal loans is that you can alter payment plans, such as switching from the 10-year standard repayment plan to the 20-year income-based payment plan. However, once you’ve refinanced your loans, you’re locked into the same payment plan until the loan is paid off.