Refinancing student loans is a common piece of advice for people looking to escape debt or simply save money on interest rates. But how much do you really know about the process? Here are a few things you might want to learn about refinancing student debt.
3 Things You Might Not Know about Refinancing Student Loans
- It could mean the end of your federal loan benefits: Refinancing with a private lender means losing your federal student loan benefits. These benefits include flexible repayment options, public service loan forgiveness programs, deferment options and other important benefits. Make sure you understand the benefits you might be sacrificing to get that better rate. It may still be worth it, but it’s always better to know before rather than after you make a deal.
- It’s not the same as consolidation: People often have a hard time knowing the difference between refinancing and consolidation. Consolidation is when you combine all your loans into a single federal loan with only one payment. This can be great for organizing your finances and staying on top of payments. Refinancing is when you take a loan from a private lender to replace your federal loans. This can actually land you a better rate, but it can also have strings attached that a federal loan won’t.
- Lower rates don’t always mean less expensive: It’s easy to assume that a lower interest rate will mean you are going to pay less. This is not necessarily the case. You will need to watch out for the length of the loan and other important factors. For instance, some loans have variable interest rates, which may start low and then creep up over the course of the loan. This can lead you to accept a deal that looks good on the surface, but ends up costing thousands of dollars more. Take a look at the total debt expense in the deal, and compare it to your current loans. You may be surprised.
Student debt can be a major financial struggle. Refinancing is one of many viable options for reducing the size of that struggle. It’s always better to go into any financial dealing knowing both the advantages and disadvantages of what you are about to do. These tips can serve as a great starting point for your research into refinancing.
Kevin D. Judd is a DC bankruptcy lawyer with the mission of providing his clients with a path to financial freedom.