Pros and cons of private student loan refinancing

Weigh the options before deciding how to manage your student loans.

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As today's college graduates leave school laden with historic levels of student loan debt, the promise of lower payments via refinancing becomes an ever-more tempting proposition. It's not without its risks, however, and each lender has different eligibility requirements.

Here's what you need to know:

Pros:

You'll likely pay lower interest.

The biggest—and most obvious—benefit of refinancing your student loans is a lower interest rate, which has the potential to not only reduce your current monthly payment but also lower the total amount that you'll pay over time. Reducing the interest rate on a 10-year, fixed-rate, $35,000 loan from 4.45%t to 3.45%, for example, could save you nearly $2,000 in interest payments over the life of the loan.

You can consolidate and have only one payment each month.

If you have more than one student loan, you can roll them into one loan during the refinancing process. This will make it much easier for you to track and pay your loan—not to mention reduce the likelihood of a missed payment. Pro tip: Set up an automatic payment for the minimum amount due on the loan, so you don't have to worry about late fees or personal credit-harming memory lapses.

There are more options available.

Refinancing provides an opportunity to shop around for the best rate and your preferred loan term, whether that's taking a longer-term loan with lower payments or a shorter-term loan that potentially reduces your debt more quickly. Some lenders also offer innovative perks, such as the option to skip a payment without penalty or access to a career coach.

Cons:

They're not eligible for income-based repayment.

If you have federal student loans now, you may be eligible for income-based repayment programs that cap your monthly payments based on your current income. Federal loans also have protections for borrowers who hit financial hardship, such as loan deferment or forbearance. Many private loans don't offer any such protections, so be sure to look into the details of your lender's policy before signing on the dotted line.

Your rates could rise in the future.

Private loans with the lowest interest rates are often variable rate loans. Translation: The rate—and your monthly payments—could go up. It may still make sense to get an adjustable-rate loan, but be sure you understand exactly how much higher your payments could go and have a plan to adjust your budget accordingly.

You may need a cosigner.

Many new grads don't have the income or credit history to qualify for private loan refinancing on their own. If you require a cosigner, the loan will appear on your credit report and your cosigner's. If you run into trouble making payments in the future, your cosigner will suffer the consequences, too. If you can't get a cosigner, focus on boosting your credit score. You may be able to qualify for a loan in a few months.

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The statements and opinions expressed in this article are those of the author. Neither Fidelity Investments nor your employer can guarantee the accuracy or completeness of any statements or data.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

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