College has become one of the biggest investments you can make if you’re living in the US today. Recent figures show that the total amount owed in student loans is over $1.5 trillion and is set to keep increasing. Parents start saving for their children’s college costs as soon as they are born to try to cut down the amount they will have to borrow and to help ensure them a good career and a comfortable life. Once you start paying off your student loan, you may think about refinancing it to lower the monthly payments. There are several positives and potential issues that should be considered first, though.
What’s refinancing and how does it work?
Refinancing can be done on any loans, and it’s the process of going to a new lender and consolidating or reviewing your current loans to see if you can get a better deal. This is a great option for people that have already paid off some of their loan, or if their credit has improved since the loan was taken out, as there’s a good chance you’ll be able to get a better interest rate and repayment terms when compared to your current loan.
Pros and cons
Another way that refinancing your loan can help lower your monthly payments is to negotiate for a longer payment term. This means that a loan that was originally set up to be paid off over 25 years can be extended to 35 years, which will naturally make the monthly payments lower. This may be beneficial in times where your monthly salary is lower because of job changes, for example. The issue with this is that you will, of course, be in debt for a longer period of time. Over these extra years, you’ll naturally accrue more interest and will pay back far more in the long run. ELFI is a great resource to check out which details refinancing student loans in particular if this is something you’re interested in.
Releasing a cosigner
When you first apply for a student loan, there’s a chance that you may need to add a cosigner to the loan to be accepted. This is someone that agrees to assist with the payments if there are any issues, and may be a parent or partner, for example. This is a significant risk for both parties, and you may reach the point where you want to take on the loan yourself. Refinancing is a great time to do this as you can have the other party removed from the loans.
Consolidating your payments
Having loans from several different sources can be challenging to manage. If they come out at different times of the month, you may find that you don’t have enough monthly cash flow to cover other costs. If you can have your loan leave your account in one go, you’ll be in a much better place to manage the rest of your finances throughout the month.