Refinancing student loans isn’t the right choice for everyone. A careful examination of personal circumstances can help borrowers decide whether they should refinance their student loans.
Reasons Not to Refinance Student Loans
- The borrower loses eligibility for federal student loan forgiveness programs.
Borrowers who have federal student loans may qualify for one of the federal government’s programs that forgive a portion of student loan debt. Refinancing disqualifies borrowers because students loans have to be refinanced with a private lender. Most of the forgiveness programs are based on the borrower’s career. There are loan forgiveness programs for public servants, military personnel, certain health professionals, and certain teachers.
- Refinancing eliminates federal repayment options.
Since refinanced loans are private, federal repayment plans cease to be an option. Borrowers with federal student loans can apply for income-driven repayment plans to make their payments more affordable. While there are several repayment plans, they limit the borrower’s monthly payment to 10 to 20 percent of after-tax income.
- The borrower doesn’t have good credit.
Usually, lenders approve refinance loans for people who have good credit. Recent graduates who don’t have credit at all or those who have bad credit may have trouble qualifying for a student loan refinance.
- Refinancing doesn’t always yield significant savings.
Saving money with a lower interest rate often is the motivation behind refinancing student loans. However, borrowers need to do their research to make sure the savings merit a refinance. An online student loan calculator can help borrowers compare their current loans to the potential refinance. Borrowers who have fixed-rate loans should be cautious if the refinanced loan has a variable rate.
Reasons to Refinance Student Loans
- The student loans are expensive.
A borrower with a large balance of student loans or with high-interest rate student loans may be a good candidate to refinance those loans. Steady income and good credit are also necessary to refinance student loans. It’s still important to check the numbers with a student loan calculator to ensure the expected savings will materialize.
- The borrower isn’t going to take advantage of federal forgiveness or repayment programs.
Borrowers who aren’t eligible for a federal loan forgiveness program or aren’t interested in federal student loan repayment programs are also potential candidates for student loan refinancing.