Pros and Cons of Refinancing your education loan

If you had a 50 lakh student education loan for 20 years at a 9.5% rate of interest, you’d pay about ₹61,85,574 in interest.

Now, if you could secure the same education loan at a 9% rate of interest, your interest payment would be down to ₹57,96,711.

This reduces your overall cost of education and your monthly repayment burden too.

But once you have received an education loan, you cannot keep shopping around for better options. What you can do though is: Go for education loan refinancing later on.

Refinancing – as the name suggests – means getting another loan to prepay your existing education loan. These second loans are usually at a lower rate of interest and with better repayment terms. 

However, refinancing isn’t a one-size-fits-all solution. It can be a smart move for some and a costly mistake for others. 

Note: If you’re considering refinancing your education loan to reduce your interest burden or lower your monthly EMIs, GradRight can help simplify the process. GradRight enables you to transfer your existing education loan to new lenders offering better interest rates and improved repayment terms. This means you can enjoy lower EMIs, reduce your overall interest payments, and gain more flexibility in managing your loan. To explore whether refinancing is the right choice for you, simply reach out to a GradRight expert at grad@gradright.com or call 09240209000 for personalized guidance. They’ll help you understand your options and make an informed decision.

What is education loan refinancing?

Refinancing your education loan means replacing your current loan with a new one. The new loan comes with better terms like a lower interest rate, different tenure, or better service. The new loan pays off the old one, and you begin repaying the new lender.

If you’re an Indian student who studied in the USA, you can refinance your education loan in either:

• India: Switch your existing INR loan or pay off a dollar-denominated loan using a new INR loan.
• USA: Switch to a new USD loan with a USA-based lender, usually requiring a good credit history and income in the USA.

Here’s a quick comparison between education loan refinancing in India and the USA:

Refinancing might seem like an easy way to save money, but don’t rush into it. Before making a move, take a closer look at its pros and cons of education loan refinancing. 

Also Read: Refinancing Student Loans for Working Professionals in the USA

Pros of education loan refinancing

Refinancing your education loan can offer significant financial advantages. Whether you do it in India or the USA, here are the top benefits:

Lower Interest Rates = Long-Term Savings

If your current loan has a high interest rate (say, 13%), refinancing to a lower rate (say, 9%) could save you lakhs over time. For example, on a ₹40 lakh loan over 10 years, a 4% drop in rate could save you about ₹11 lakh in total payments. You might have taken a loan during their studies without a strong credit profile or co-signer. But now that you are now eligible for better terms after securing a job and building a repayment history, you should bank on this opportunity.

Original Loan:

Also Read: How refinancing your education loan can save money

Lower Monthly EMIs

Just started working and cash flow is tight? Refinancing can help reduce your monthly EMI by either lowering your interest rate or extending your tenure. As seen in the example above, a ₹59,000+ EMI could become ₹50,000, giving you more room to cover rent, bills, or savings.

Just remember: longer tenure = more interest paid over time, so weigh the trade-off.

Switch Currency to Match Your Income

Many Indian students with USD-denominated loans find it hard to manage. Especially, when they return to India and earn in INR. In such cases, refinancing into an INR loan can eliminate currency fluctuation risks. Conversely, if you’re working in the USA, refinancing into a USD loan ensures you don’t lose money on currency conversion. Plus, you can access competitive interest rates offered by American lenders.

Improved Terms and Flexibility

Your original loan might have come with:

• Inflexible repayment terms
• Poor digital access
• No prepayment options

Refinancing lets you tailor your loan to your current needs. For instance, some lenders in the USA allow autopay discounts. Some Indian NBFCs offer flexible prepayment without penalties.

Better Customer Experience

Not all lenders are created equal. So student loan refinance can help you escape poor service like slow responses, confusing interfaces, or unhelpful staff. Upgrading to a lender with a better mobile app, automated billing, and proactive support can make a big difference in your loan experience.

Remove Co-signer or Collateral

You may have needed a parent’s guarantee or property security to get your original loan. Once you have a stable income, some lenders allow you to refinance independently. This protects your parents’ finances or property and gives you more control.

Cons of refinancing your education loan

Refinancing is not always a win-win. Here are the key risks and drawbacks of refinancing education loans:

Loss of Government Protections (For USA Federal Loans)

If you refinance a U.S. federal loan with a private lender, you lose access to benefits like:

• Income-driven repayment (IDR)
• Public service loan forgiveness (PSLF)
• Deferment
• Forbearance

These safeguards are valuable, especially during uncertain times. If you’re working in a nonprofit or plan to pursue PSLF, refinancing could cost you those benefits permanently.

Upfront Costs and Documentation Requirements

Most lenders advertise “zero fees”. But they still charge processing fees, GST, legal charges, or loan insurance. So when you get education loan refinancing, you’ll have to pay all these charges again.

Also, refinancing is not instant. It requires updated KYC documents, income proofs, credit checks, and maybe collateral valuation. This can take days or weeks and may be overwhelming with your routine workload.

Eligibility is Not Guaranteed

Refinancing is only an option if you qualify for it. Lenders in the USA typically require a credit score above 650, proof of employment, and valid visa status. Indian lenders might demand a high CIBIL score or a co-applicant. For instance, if your H1-B visa is nearing expiration or you recently switched jobs, lenders may see you as risky. Even if your income is decent.

Longer Tenure Could Mean Higher Total Interest

Extending your loan from 10 to 15 years might reduce your EMI. But you could end up paying much more in interest over the full term. This is especially important if you’re already in a financially stable phase. In such cases, opt for shorter tenures if you’re confident in your ability to repay faster.

Impact on Credit Score (Temporarily)

Applying for refinancing typically involves a hard credit inquiry. This might temporarily reduce your credit score by a few points. This is one of the key risks of refinancing education loans. 

While this dip is usually short-lived, it’s important to avoid applying to too many lenders at once.

Also Read: 5 Mistakes to Avoid During Education Loan Refinancing

Is it a good idea to refinance your education loan?

Refinancing can be a smart strategy. But only if it suits your financial profile and future plans. 

So, should you refinance your education loan after graduation? Find answer to that question by considering the following:

You should go for education loan refinancing if:

• Your current interest rate is higher than what you’re now eligible for.
• Your income has stabilized and your credit score has improved.
• You want to switch loan currency or lenders for better service.

You should not go for education loan refinancing if:

• You rely on borrower protections like deferment or subsidies.
• Your credit profile or income is not strong enough for approval.

Ultimately, don’t rely on random advice. Learn how to decide if you should refinance your student loan on your own.

Compare your options, use GradRight’s EMI calculator to see your savings over time. Also, make sure you don’t forget factors beyond just EMI. Check what are the fees you’d have to pay, what flexibility the new loan offers, and the long-term impact on your finances.

FAQs

1. How does FundRight help students secure the best loan deals?

FundRight, the smart loan search platform from GradRight lets you compare multiple loan offers. All you have to do is submit your details once. Then Indian and international lenders bid on your profile. Plus, you see all these offers on one single dashboard. With that, you can compare interest rate, tenure, and other terms and pick the best one.

You can also connect with the GradRight team for education loan refinancing tips and advice

2. What are the benefits of refinancing an education loan?

Education loan refinancing can help:

• Reduce your interest rate
• Lower your monthly EMI
• Give you better terms
• Let you switch to a different currency or lender
• Remove a co-signer or collateral, in some cases.

3. How do I know if refinancing my education loan is a good option?

Have your income and credit score have improved since taking the original loan? Do you now have better offers available? If yes, refinancing may save you money. Use an EMI calculator and compare all factors before making a decision.

4. Can I refinance my federal student loans?

Yes, but only with a private lender. But remember: once you refinance a federal loan, you lose federal benefits like income-driven repayment plans, forbearance, and forgiveness programs.

5. What are the risks associated with refinancing an education loan?

Some of the risk associated with education loan refinancing include:

• Loss of borrower protections
• Need to pay processing fees
• Facing eligibility issues

6. How does refinancing affect my credit score?

Initially, refinancing may cause a small dip in your credit score due to a hard credit inquiry. Over time, making regular payments on the new loan can improve your credit score.