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Should I refinance my student loans?

One way to either lower your student loan payments or pay them off faster at the same payment you're using today is to refinance them. However, before you start looking in to the various options that are out there offering lower rates, you want to be very clear on the benefits you may be giving up, particularly when you're refinancing federal student loans.

Q&A: What's the difference between federal and private loans?

Federal loans can be consolidated into a Direct Consolidation Loan, but generally speaking, doing so won't help you to pay less in interest or pay your loans off faster, although it may make your life easier since you'll be making one payment versus several. Refinancing is different – you're actually taking out a new loan to pay off the old loan(s) at, presumably, better terms.

It's important to understand that anytime you are refinancing a federal student loan, you are basically turning it into a private loan. What that means is that you give up the benefits that are available to most federal loan borrowers, including:

  • A variety of repayment options, including income-based
  • Federal student loan forgiveness programs
  • The ability to defer payment on your loans (which means you stay in good standing without making payments) under certain circumstances

When does it make sense to refinance?

Reasons it may make sense:

  • You are able to obtain a lower interest rate and repayment terms that would have you paying less interest overall by refinancing than if you kept them as-is.
    • Beware that if you are, for example, 3 years in on paying your federal loans on the standard repayment plan and you refinance to a new 10 year loan, your payment will automatically be lower because you'll be adding 3 years to your pay-off timeline. Even if your interest rate is lower, double check the total interest paid over the life of your loan against the interest you'd pay if you stick with your federal standard repayment to make sure you'd truly be paying less interest.
  • You are able to lower your required payment so that you can accelerate the pay-off of your loans faster than if you didn't refinance (usually this means you obtain a lower interest rate).
  • You are comfortable giving up the option to place your loan in deferral in case of job loss, illness or other disruption to your income, or forbearance in the case of underemployment or other special circumstances.
  • Refinancing will make your payments more manageable so that you can direct more money towards other goals such as saving for retirement, buying a home, paying off credit cards or starting a business.

Reasons it might not make sense:

  • You are a teacher that works in a lower income community for five years. If you do, you may qualify for the Teacher Loan Forgiveness Program. Refinancing may lower your rates, but it may also disqualify you from these programs.
  • You work for a government organization, a non-profit tax-exempt organization under 501(c)(3) or a private, not-for-profit organization that provides services such as public safety, military service or any of the other employers that you can get certified. If you work for one of these “qualified employers,” you may qualify for a Public Service Loan Forgiveness Program.
  • If you experience a financial hardship or have low income. The forbearance or deferment programs are pretty much exclusive to federal loans, so if you have fluctuating income or are in an unstable profession or concerned about a layoff, you may not want to refinance right now.

As you can see, it's a nuanced decision, so just be sure you're aware of all the pros and cons as they apply to your life before you decide. And if you need additional help making the decision to refinance, consider speaking with a CPA.