It’s a dilemma. You want to start your business and also pay down your student loans. But both options have their pluses and minuses.
In fact, a financial war is going on in the banking industry, and it’s a battle between the banks willing to finance you with student loans and those who aren’t. So is it best to refinance your student loans before starting your business?
Here are five pros and cons of refinancing student loans before you start your business.
Pros
1. No Additional Fees
When you refinance your student loans, there are no additional fees like those from private student loan providers. As a result, student loan refinancing is a low-risk way to lower your monthly payments and save money over time.
2. Lower Interest Payments
One of the most significant benefits of refinancing your student loans is that you’ll pay less interest over time than what you would have paid had you taken out a new loan at the time it was due.
Suppose I were a student, for example. In that case, I’d take advantage of today’s cost-saving options for refinancing my student loan as that would mean more money available for other expenses and investments, such as equipment and supplies for your business.
3. Flexible Repayment Options
With student loan refinancing, you can choose from different payment options that fit your budget and lifestyle — such as graduated repayment or extended repayment plans (ERPs).
That means that if you can’t afford to make the full monthly payment, you can still get help from your loan repayment program and save money in the long run.
4. You Can Consolidate Multiple Loans
If you’re taking out multiple student loans, consolidating them into one loan could help reduce the overall cost of borrowing and take advantage of additional business funding options by spreading out payments over time instead of making large monthly payments or paying off the entire loan balance at once.
5. It Can Improve Your Credit Score
A good credit score is essential when trying to get approved for a mortgage or any other loan, so refinancing your student loans before starting can help improve your credit score and make it easier for you to qualify for other types of loans in the future.
Cons
It’s not all sunshine and roses, however. Here are some potentially negative aspects of student loan refinancing that you’ll also need to be aware of before you take the plunge.
1. You May Lose Access to Income-Driven Repayment Programs
IDR plans cap monthly payments at 10% of your discretionary income and forgives remaining balances after 20 years of payments. Unfortunately, if you switch lenders between signing up for IDR plans and another type of loan, you may have to wait until 20 years have passed for the forgiveness period to begin.
2. Lenders Might Not lower your Interest Rates
You could be charged similar interest rates than you were with the old loans. If you’re refinancing federal student loans, you might end up with an interest rate that’s not much lower than what you initially paid on your old loans.
3. You May Lose Your Federal Loan Benefits
You may be unable to refinance your student loans if you have federal loans. That’s because federal student loans are guaranteed by the U.S. government and cannot be discharged in bankruptcy like private student loans.
4. You Can’t Refinance Some Types of Loans
Not all types of federal loans are eligible for refinancing. These include Perkins Loans and Stafford Loans, which are available only to parents who borrow from the Direct Loan program and have completed at least one year of repayment on their Direct Loans before enrolling in school.
5. You May Need To Get a Co-Signer
Refinancing student loans can help you save money, but it also comes with risks. For example, you may need to get a co-signer willing to repay your loan if you don’t.
Make Sure to Research Your Student Loan Refinance Options Before Starting a Business
Refinancing is a viable option to consider with student loans and, in some cases, can even put you ahead of the game. That said, you should still manage your finances carefully, consider what types of debt you take on, and keep a positive attitude about whatever challenges the future may bring.
