Read this if you’ve heard a lot of buzz about student loan refinancing but don’t think it’s right for you. Refinancing isn’t for everyone so if you think it’s not for you, you’re probably right. Estimated read time 4 min.
When you already have Federal loans with a low fixed interest rate.
If you have federal student loans that already carry a low fixed interest rate refinancing won’t offer you much.
For example if you have interest rates between 3-4% it’s unlikely refinancing is going to significantly reduce that rate.
The real benefit of refinancing is the reduced interest rate and the thousands of dollars that can save borrowers. Refinancing comes with a tradeoff of less payment flexibility, the loss of loan forgiveness options, and sometimes other federal loan benefits.
If you’re not saving money by getting a significantly lower interest rate, student loan refinancing isn’t helpful and there are still negative tradeoffs.
When you’re considering loan forgiveness.
Refinanced student loans are private student loans. Private student loans aren’t eligible for federal loan forgiveness programs like Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness, or Income Driven Loan Forgiveness.
If you refinance your federal loans you can no longer get your student loans forgiven.
If you’re considering loan forgiveness at all, student loan refinancing isn’t helpful and cancels any hopes of loan forgiveness.
Caveat: If you have private student loans already, you can definitely consider refinancing those loans. Your private student loans are already ineligible for loan forgiveness so you may be able to lower their interest rate by refinancing.
When you don’t have consistent income.
Payment flexibility is one of the things you lose when you refinance a federal student loan. Payment flexibility varies by refinancing company but none are as flexible as the federal repayment plan options.
If you don’t have consistent income refinancing your student loans isn’t helpful because if you experience income instability there aren’t flexible income-driven repayment plans to fall back on.
When you’re struggling to make your monthly payments on Federal loans.
If you’re struggling to make your monthly payments with your Federal loans it may be tempting to look at refinancing as a way to lengthen your repayment term and lower your monthly payments.
Federal repayment plans are your best choice in this situation. You can arrange an income-driven repayment plan and pay as little as $0 per month based on your income. All the while qualifying for income-driven student loan forgiveness.
If you’re struggling to make your monthly payments on Federal student loans, refinancing isn’t helpful because you lose many important borrower protections that keep you out of default.
What do you think?
Have you been enamored by the appeal of student loan refinancing only to decide it’s not very helpful for your situation? I’d love to hear about it. Leave me a comment below or on the Repayable Facebook Page.
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