Should I Refinance My Student Loans?

Do student loan payments take a big bite out of your budget? If so, refinancing could turn that bite into more of a nibble.

Refinancing involves trading one or more student loans for a new loan with a different interest rate, a new term and one monthly payment. Depending on your circumstances, it may save you money, time or both.

If refinancing sounds appealing, your first step is determining whether it’s a good fit for your goals and your financial situation. Start that process with this list of pros and cons.

The pros: Reasons to consider student loan refinancing

Pro #1: Refinancing could lead to lower monthly payments.

Interest rates may have dropped since you took out your loans, or your credit may have improved, making you eligible for a lower interest rate. This could mean smaller monthly payments—and, by extension, more flexibility in your budget.

Pro #2: Refinancing may provide more time to repay your debt.

If you’re concerned that the term is too short for of one or more of your original loans, refinancing offers an opportunity to change it. A longer term can also give you smaller monthly payments if you need them. You can always make larger monthly payments when you’re able. This can help you pay off the loan faster and save money in interest.

You can also shorten the term of your loan by refinancing. This can also help you pay off the loan faster and save money in interest.

Pro #3: Refinancing can make your payments easier to manage.

Do you find it stressful to keep track of an array payment deadlines? Having one loan, one lender and one due date could ease this stress. It might also prevent you from incurring fees for late payments or damaging your credit with a missed payment.

The cons: Reasons to pass on student loan refinancing

Con #1: You could lose benefits attached to your current loans.

Some federal loans come with benefits like deferment, income-based repayment plans and forgiveness programs. If you refinance, you may lose these benefits. Carefully consider your situation to determine if the benefits of refinancing outweigh the benefits of your original loans.

Con #2: If you choose a longer term, you’ll pay more interest over time.

A longer repayment term can be a good thing for a borrower who needs a smaller monthly payment, but it’s not the right fit for everyone. Plus, stretching out the repayment period means you’ll pay more interest in the long run.

Con #3: You might end up with a higher interest rate or a variable interest rate.

Do your homework about the rates you’re being offered for refinancing. First make sure you know the rates of each student loan you currently have. Then look for refinancing offers with lower rates. Be aware that all low rates are not created equal. As the name suggests, a variable rate can increase over time, increasing your monthly payments in the process.

Finally, keep in mind that an excellent credit score (typically 781 or above) and several years of credit history are likely to give you the best possible rates for refinancing. If your credit score and history could use some improvement, consider finding a cosigner for your new loan.