Across the United States, consumers are struggling with student loan debt. While some states have a bigger problem than others, overall student loans have become a growing problem. The total amount of student debt has been steadily rising for decades, now totaling $1.75 trillion.
Some people might consider student loan refinancing as an option to reduce the burden of these loans. This, however, is not the right call for everyone. Here are some alternatives for refinancing student loans.
What is student loan refinancing?
Student loan refinancing is a very common process that can help people better manage their debt. But what is student loan refinancing?
The refinancing process is one of the most common practices in the money world. As you can tell from the name, refinancing is simply getting new financing terms on your loan. By taking out a new loan, either from the same lender or a different one, to completely replace your current loan, you will achieve this.
You might be nervous about this idea, and that’s totally reasonable. The concept behind a student loan refinance may seem scary. Those who have already found themselves struggling with debt will especially sweat at the thought of playing with it too much. The reality, however, is that refinancing is one of the best ways to get a better interest rate on a loan. Interest rates are an essential part of the composition of a loan, because they determine the amount you must repay beyond the amount originally borrowed.
It’s important to know, however, that refinancing a student loan has a few implications that make it a little more nuanced than other forms, such as refinancing a mortgage. Some borrowers may actually want to avoid refinancing altogether because of these conditions.
Consumers should understand that a student loan refinance can only be done through a private lender. This is great information for one key reason: if you choose to refinance your federal loans, you will end up losing some of the attractive benefits like loan forbearance and advantageous repayment plans. Although there is nothing wrong with private lenders, especially with student loans, the federal government loan program offers certain advantages that cannot be matched by the private market. It is wise to think long and hard before choosing to give up these benefits.
Alternatives to student loan refinancing
Now that you know a little more about student loan refinancing and why it might not be right for everyone, it’s time to consider some alternatives. If you’re struggling with student loans, you need to find a solution. Here are some choices:
- Loan consolidation – Those who do not want to give up their federal loans via a refinance can consider consolidating via a direct consolidation loan. Consolidation is like a sibling of refinancing. Instead of replacing one loan with another, consolidation takes multiple loans and combines them into one. Consolidation simplifies the repayment of your loan since you will only have to worry about one bill instead of several. However, consolidating through the federal government will not actually reduce your net interest rate. Debt consolidation can reduce your monthly payments by extending the repayment period of your loan. This can be invaluable for those who are seriously struggling to pay their payments. At the same time, it can cause you to pay a lot more over time. Everyone must assess whether this compromise makes sense to them.
- Using Federal Reimbursement Plans – One of the main advantages of federal student loans that has already been mentioned is the fact that they come with great alternative repayment options. Not everyone will be eligible for these. However, those who do can significantly improve their debt situation. For example, your loan repayment can be tied to your income, making it much more affordable for those who don’t earn a lot of money.
- Talk to your loan officer or the Department of Education – Whether you want advice on the best repayment plan for your personal situation or are doing anything else related to your loans, speaking directly to the experts can help you find the ideal solution for you.
Refinancing student loans can be a great decision for those who already have private loans or for people with unattractive federal loans. But for others, refinancing might not put you in a better position. Understanding the intricacies of student loan refinancing can help you make an informed decision about whether it’s right for you.