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Should You Refinance Your Student Loan Debt?

My Strategic Dollar Guest Posts, Student Loans 5 Comments

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Today, I have a guest post from Drew at The Student Loan ReportDrew Cloud started The Student Loan Report when he found it difficult to find student loan news and information in one place. In his free time, you can find Drew playing basketball, reading other blogs, or playing with his Great Dane named Rudy. Enjoy! 

Should You Refinance Your Student Loans?

If you hold student loan debt, you may have received offers to refinance your debt with a private lender with the opportunity to lower your interest payments. If you’re carrying loans of $25,000 to $30,000 or more and juggling half a dozen loans with various rates, terms, and servicers, refinancing into a single, consolidated loan has to sound pretty tempting. Not only could it reduce your monthly payments, it could simplify your life by dealing with just one servicer. But, before jumping head first into the deep end of the refinancing pool, you should consider your future to see whether it might actually make your situation worse.

Refinancing Can Leave You Exposed

Although federal student loans can be refinanced by a private lender, once they are converted, you lose all of the protections available with federal student loans, such as loan deferment, forbearance, and forgiveness. Deferment and forbearance allow student borrowers to postpone or reduce payments during periods of financial hardships.

Your biggest consideration in exploring the use of refinancing should be whether you see yourself ever needing to use a federally authorized Income-Based Repayment Plan which can lower your payments by extending your payment term. While lowering your interest rate can provide some immediate relief in the form of lower payments, you leave yourself exposed should your financial situation change in the future.

When Student Loan Refinancing Might Make Sense

Not every borrower is a candidate for refinancing. There are several factors to consider in determining whether you would be better off with refinancing or preserving your federal loan repayment options and protections.

When you have a good job and steady income: If you are confident in your job security and are earning a good steady income, you may not have to worry about repayment options. However, life could change on a dime, so give it some serious thought.

When you don’t think you will ever need an income-based repayment plan or loan forgiveness: If you are able to see into the future and figure you won’t even need access to an income-based repayment plan, then go for it. But, it’s tough to have that much certainty in your future. Also, if you don’t plan on going into public service, you won’t have a need for the Public Service Loan Forgiveness program, even though PSLF is pretty much up in the air at the moment (LINK).

When you have a good credit score: Generally, you need a very high credit score to meet the underwriting requirements for refinancing, though some applicants have been approved with credit scores as low as 560. However, the likelihood is you wouldn’t qualify for an interest rate low enough to substantially reduce your payments without great credit. Unless your refinanced interest rate is 1.5% to 2% lower than your student loan debt, it is probably not worth it. However, using a cosigner who has great credit may help.

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When Student Loan Refinancing Doesn’t Make Sense

If you’re currently experiencing or think you might experience any of the following, you probably shouldn’t refinance:

  • Job insecurity or poor job prospects
  • Unstable or irregular income
  • You’re considering a career in the public sector, such as teaching, nursing or law enforcement that qualifies for PSLF
  • Your credit standing is questionable
  • The interest rate on your student loan debt is already low
  • You think there is a possibility you might need to access an income-based repayment plan in the future
  • You would do just as well using a federal consolidation loan

Just remember, if you think you might need income-based repayment in the future, you must be able to show a partial financial hardship. To qualify, your monthly bill on a 10-Year Standard Plan must be more than what you would pay with an income-based repayment plan. If you don’t meet the income-based plan threshold, you can still lower your payment to 10% of your income using the REPAYE (Revised Pay As You Earn) plan, which doesn’t have a financial hardship requirement.

Check out more student finance resource here.

Have you considered refinancing your student loan debt?

Comments 5

  1. We went with just the consolidation option as all our loans were federal and we’re currently on the PSLF track. Although that plan has been nerve wracking the last few months given all the govt uncertainty. Luckily it looks like most people with loans will be grandfathered in to the program.

    The had looked into a couple refinancing options and most had upfront costs that ate into any real savings we’d see from a lower rate.

    1. Post
      Author

      Interesting. None of the options I’ve seen have any sort of fees. I’m curious what company you looked into?

  2. This is some great information. I did not refinance my loans (>$100k) until I made them a priority and knew I would be getting a great rate. There are many great reasons I never considered why you might not want to refinance, and I hope this articles makes it to those who need it. Great work!

    FYI, I refinanced to a low (<3% rate) hoping to free some cash flow. In the end I just kept packing money into the loans and got them out of the way. Maybe not optimal, but emotionally relieving.

    1. Post
      Author

      Debt payoff is an emotional thing. I know many people who would rather sock away their cash into debts, then invest. And I know plenty who would pay the minimum of their student loans (after refi) and sock away into investments. Do what feels right for you. As long as you’re prioritizing based on your needs, then more power to ya!

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