Introduction

The student loan industry in the United States has an insidious reputation for their borderline advertising practices preying upon young adults, and as a result some may make the decision shortly after turning 18 to take out student loans that they later find to have interest rates that are unsustainably high for their situation, or they may have fallen victim to a financial crisis before or after their graduation. Often, students may have had no choice but to have taken these loans if they wanted to go to college due to rising tuition costs, the prevalence of need-only based scholarship policies at private colleges, and/or limits on government-subsidized loans. For whatever situation a lender might be in, there are thankfully ways in which they can re-empower themselves in securing their financial future. There are a variety of options for borrowers still paying back large loans, including refinancing, which has granted many post-college graduates the opportunity to pay back their loans faster, get back to and stay on their feet in rocky times, and save money in the long-term.

What Does it Mean to Refinance a Loan?

Refinancing a loan sounds like a very sophisticated accounting term, but the concept behind it is actually really simple: it just means taking out another loan, using the money to pay back your original loan, and reaping the benefits of either lower interest rates or lower payments in the new loan compared to the old one. For example, according to calculator.net, if you were paying back a loan of 30,000 USD that had a monthly payment of $545 after graduation and an interest rate of 9%, the borrower would pay off the loan in 6 years and would pay $8,837.75 in interest alone. Most private student loans offer interest rates that are much higher than that, and tuition fees at private institutions can even exceed $30,000 USD per year, depending on the college.

However, if, after graduation the borrower needs a lower payment while they secure their employment or saw a dramatic increase in their credit score that could merit them a lower interest rate on a loan, they might be interested in refinancing their original loan or loans, as doing so could allow them to change those values even after the original loan. The conditions which account for potential changes in available loans are countless, from changes in the overall economy to the borrow entering into a different financial status from which they were in when they took out their original loan or loans.

Student loans can also allow borrowers to consolidate multiple loans—perhaps different ones they took out during different academic years during their studies—into one single loan with easier-to-track monthly payments and interest rates. They can also impact by either shortening or lengthening the period of time for which the borrower is expected to make payments, depending on the refinancing loan conditions.

What Kind of Loans Can Be Refinanced?

Technically, any kind of loan could be refinanced later, as there’s no formal requirement for which type of loan the refinancing loan is affecting: one may, of course, choose to refinance a private student loan for all of the reasons explained above, but it is also an option for credit card debt, business loans, auto loans, or mortgages. However, certain lenders may have restrictions which are important to consider for refinancing loans.

What are the Drawbacks of Loan Refinancing?

 Loan refinancing can be good or bad, they are not unilaterally one or the other, as that determination depends on the situation for which they are used. Loan refinancing might not be a good idea if the original loan was taken out during an economic boom where interest rates overall tended to be lower and the borrower chooses to refinance during an economic recession, as interest rates overall can be expected to increase during a recession.

One important consideration for loan refinancing is whether the loans you’re refinancing are federal and whether it is important to you to keep the protections that come with federal loans such as forbearance options. One may avoid this by asking their refinancing lender what options are offered to borrowers who might in the future need forbearance or deferment.

Another consideration for borrowers who have federal student loans is that federal loan programs often allow borrowers to change their repayment plan term: for example, they may choose to change their 20-year repayment plan to instead last 10 years and be able to do so without interrupting their current loan. However, as this article very well displays, borrowers aren’t fully locked in after refinancing their student loans. Though private lenders may not allow borrowers to change their payment plan midway through paying their loan back, lenders may refinance loans more than one time if their financial situation allows for it and doing so could save them even more money.

Who Should Refinance Their Loans, and When?

In general, college graduates are in better financial situations at the end of their journey in higher education than they were at the beginning of it, so if a condition like their credit score or annual salary get a big increase, refinancing may be a good idea. The biggest stipulation is that graduates should ensure they have stable employment before refinancing, because it can often come with some extra fees, and financial requirements.