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Refinancing your student loans may sound like a good deal. As a borrower, you may be tempted to lock in lower interest rates, pay less interest over time, and even pay off your debt faster. But, if you have federal student loans, refinancing your loans with a private lender could mean that you miss out on income-based repayment options, interest-free forbearance, and even potential loan forgiveness.
Read on to learn how student loan refinancing works, when it’s a good idea to refinance, and what other options borrowers have for managing their student loan debt.
When should you refinance your student loan?
Refinancing your student loan could be a good idea in a few different situations. If you have private student loans, refinancing your loans can mean that you’re able to qualify for lower interest rates, which could make it easier to pay off your loans over time. Since private student loans aren’t eligible for any government programs, most borrowers have little to lose and a lot to gain by refinancing private loans, as long as they qualify for lower interest rates when they apply.
In some cases, there are advantages of refinancing federal student loans, but borrowers should be aware of the potential drawbacks. For example, refinancing could be a way to lower your interest rates and pay off your debt faster if your income is too high for income-based repayment rates to be advantageous and if you don’t plan on ever pursuing public service loan forgiveness (PSLF). Keep in mind, however, that refinancing your student loans with a private lender cannot be reversed and you will not be able to access federal student loan options, including income-based repayment, forgiveness, or forbearance in the future.
When should you avoid refinancing your student loan?
If you have federal student loans, in most cases it doesn’t make sense to refinance. This is because the federal government offers a variety of different programs that can make it easier for borrowers to afford their student loan payments. These include:
- Income-based repayment options: Borrowers with federal student loans may qualify for a variety of different repayment plans based on their loans and income. For example, under the Revised Pay As You Earn Plan (REPAYE), monthly payments are capped at 10% of discretionary income. If you have a low income or are unemployed, your payments may even be as low as $0 per month.
- Public service loan forgiveness: Borrowers who complete ten years of qualifying public service may be eligible to have their loans forgiven through the Public Service Loan Forgiveness program (PSLF). Some examples of qualifying employment include working for federal, state, or local government, or working for a tax-exempt non-profit.
- Other types of loan forgiveness: President Biden’s student loan debt relief includes up to $20,000 in debt relief for qualifying borrowers.
- Loan forbearance: Interest-free forbearance for federal student loans has been extended until litigation surrounding student loan forgiveness is resolved or until August 2023.
- Loan deferment: You may be able to request loan deferment if you’re having trouble paying your student loans because of economic hardship, illness, or because you’re enrolled in school. While you won’t make any progress on repaying your loans while in deferment, it can provide some financial breathing room until you’re able to resume making payments.
How to qualify for student loan refinancing
Qualifying for student loan refinancing is often more difficult than qualifying for student loans themselves. Lenders will review factors including your borrowing history, income, credit score, and other assets to determine whether or not they will approve you for student loan refinancing.
Some lenders allow borrowers to prequalify for student loan refinancing without affecting their credit. In this case, borrowers can submit an application to see whether or not they will prequalify. While prequalification is not a guarantee that their application to refinance will be accepted, it’s a good sign that the lender is likely to approve it.
If you’re not sure whether your application for student loan refinancing will be approved, there are a few steps you can take. Since a higher credit score can improve your odds of approval and lower your rates, it’s a good idea to make moves to improve your credit score however you can, including maintaining a history of on-time payments, reducing your credit utilization, and keeping old credit card accounts open if possible, even if you no longer use them.
In order to increase your odds of approval, you should also wait to refinance your loans until you have a stable income and are gainfully employed. In some cases, borrowers with poor credit may need a cosigner when refinancing a student loan.
How much can student loan refinancing save?
How much you’ll save on student loans if you refinance depends on a variety of factors, including your student loan balance, your current interest rates, your current payment plan, and the term length and interest rates of your refinanced loan.
Keep in mind that refinancing federal student loans means that you won’t be eligible for federal student loan forgiveness or alternate repayment plans. With this in mind, you should think carefully about whether or not refinancing makes sense for your financial situation.
Student loan refinance alternatives
In addition to refinancing your student loans, there are several options that may help you manage your student debt.
Student loan consolidation
Many students have multiple student loans over the course of several years of study. These loans may each have different balances and interest rates. Students with federal student loans may be able to consolidate their loans into one loan with a fixed interest rate.
Income-based repayment plans
If you’re looking to refinance your federal loans because you’re struggling to make monthly payments, you may be a good candidate for an income-based repayment plan. These plans are based on your income, which means that your payments will increase or decrease depending on how much you earn.
Deferment or forbearance
All federal student loans are currently in forbearance. If student loan payments resume and borrowers are unable to make monthly payments because of a qualifying circumstance, such as economic hardship or illness, they can request for their student loan payments to be deferred for a period of time.
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