With student loan payments restarting, you may have already started seeing offers to refinance your student loan debt from private companies. And if you haven't yet, it's likely you will soon.
However, student loan refinancing is a bit more complex than, say, mortgage refinancing, which is mainly a question of whether you'll lower your interest rate enough to make refinancing worthwhile. So before you consider refinancing your own student loans, here are three things to keep in mind.
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It's not easy to lower your interest rate anymore
It wasn't too long ago that private student loan refinancing companies were advertising interest rates of 3% or even less for borrowers with strong credit. Millions of borrowers have federal student loans with rates in the 6%-7% range, so it's not hard to see why refinancing could have been very tempting.
Unfortunately, that's no longer the case due to the rising-interest-rate environment we're in.
That's not to say that there aren't competitive student loan refinancing rates to be found. One of the top private student lenders offers refinancing loans with rates as low as 5.99% as of this writing. However, many borrowers won't qualify for the lowest rates, and the number of borrowers who can significantly lower their interest rates is likely to be relatively low.
You may have limited repayment options
One of the biggest benefits of federal student loan debt is the repayment flexibility that comes with it. There's the standard 10-year repayment plan, extended plans, graduated plans with payments that start low and get larger, and of course, income-driven repayment (IDR) plans. These limit the amount you're required to pay on your student loans to a certain percentage of discretionary income, and the new SAVE Plan is the most generous IDR plan that has ever been introduced.
If you refinance your student loans, you're likely to lose your repayment flexibility. Private lenders generally offer some variety of repayment term options, but not nearly as much as you'll find with federal loans. And for millions of student loan borrowers, access to IDR plans is an extremely valuable perk of having federal loans.
Private student loans can't get forgiveness
Student loan forgiveness has been in the news quite a bit lately, but many people don't realize that any existing or proposed forgiveness plans only apply to federal student loans. If you refinance with a private lender, you'll lose any eligibility for student loan forgiveness, even if your loans started out as federal loans and you've already made a bunch of payments on them.
This includes but is not necessarily limited to:
- Public Service Loan Forgiveness (PSLF)
- Forgiveness for paying for 20 or 25 years on an income-driven repayment (IDR) plan
- Teacher loan forgiveness
Who should refinance student loans?
The short answer is that most people shouldn't refinance, especially federal student loan borrowers. However, it can be worth refinancing federal loans if all of the following apply:
- You can lower your interest rate by refinancing.
- You don't anticipate becoming eligible for any loan forgiveness programs.
- Because of your income, IDR plans don't help you.
It can also be worth refinancing if you have private student loans and something has significantly changed about you since your original loans were taken. Maybe you needed a cosigner at first and can now get loans on your own, or maybe you have a high interest rate because your credit wasn't great when you got your loans.
The bottom line is that while most federal student loan borrowers, and even many private borrowers, won't find refinancing worth it, it's certainly worth a look in some situations. Some of the top private student lenders will allow you to check your offers without a hard credit check, so there's no harm in looking. Just keep the three things discussed above in mind before you commit.
