Since the United States entered into a recession in Dec 2007, the total student debt accumulated in the country has now increased by 130%. Thus amounting to about 1.56 trillion dollars. Yes, that’s right, move over the billion-dollar bracket we’re in a different league entirely. You can refinance federal student loans but at the cost of losing your federal protection and other benefits attached to it.
But in the midst of this crisis of debt and repayment, the loan refinancing companies have stepped in. They help student loan borrowers by providing better interest rates and ease the pressure on the payments to be made.
But can these refinancing companies help the 44 million Americans seek refuge for their issues with student loan debt?
Refinancing helps borrowers with a high-interest rates score a lower interest rate which can result in savings which can be directed towards getting rid of the loan faster.
With the array of benefits associated with your federal loans, when one goes ahead for refinancing he/she gives up certain benefits but he/she gets certain other benefits. So the question lies on whether it's worth giving up certain benefits to gain other benefits.
Table of Contents
- How do you refinance your federal loans
- When you be able to refinance
- Risks of refinancing
- Factors to consider before refinancing
- Is it worth refinancing
- Alternative options
How do you refinance your federal student loans?
Federal student loan borrowers have either Stafford, PLUS Loans (like Grad PLUS), and more, and with these loans come to a lot of benefits that would have inspired the borrowers to go for them in the first place.
If you as a borrower are comfortable with giving up the federal loan benefits then you should consider looking out for the various offers associated with refinancing. It should be noted that refinancing is only done by private lenders and not by any government entities.
You can refinance your federal loans after you decide which private lender to refinance with.
You can contact them or check their website for further queries and details.
A credit check is performed and credit history is verified to check your creditworthiness, your income, cosigner credit score all are checked, which varies from lender to lender.
Once approved you can login to their web portal to check the repayment options available and choose the favorable one.
Please make a note to keep making your repayments until your loans are refinanced.
In terms of getting qualified for refinancing most private lenders have their own way of checking for qualifications of a borrower. Some lenders will prequalify a borrower by conducting a soft credit check and this can give the borrower an idea of the new interest rate.
Always remember you are refinancing your current loans so that you can save money. So how do you go about saving money? By getting the lowest interest rate. To get a low-interest rate, you will have to have excellent credit, strong prospects of a good income, and a college degree.
So to successfully refinance your student loans first find out how much you are planning to save, check the various available to you and go about getting qualified for the refinancing plan.
Look out for terms like the interest rate you can avail and term of payment which will play a huge role in helping you to save.
You cannot refinance your student loans with the federal government. Through the federal government, you can consolidate your loans but this will result in an interest rate which is the weighted average of interest rates of the loans which are being consolidated. You won’t necessarily save much money through consolidation.
To refinance you will have to be eligible, most private lenders have different criteria to be able to refinance. Some private lenders like First Republic Bank provide low rates but have strict requirements to be met.
The most common criteria all lenders look at is your credit score
It is the most common criteria to be met with, usually, a good credit score ranging from 650 to 700’s is what they look for
If your credit scores are poor, some private student loan lenders let you include a cosigner. In this case, the cosigner's credit history is verified
Another important criterion that is considered is your income, a person with a high income is usually cleared for refinancing some or all of his/her loans
Once these eligibility criteria are met, you can refinance your loans with the new private student loan lender.
Risks of refinancing federal student loans
Here are the potential risks of refinancing your federal loans which you should consider
1) Loss of access to forgiveness programs
For those borrowers who are working with a public service organization or nonprofit, they have access to public service loan forgiveness and teacher loan forgiveness which can help forgive all your outstanding loans after making the number of qualifying payments. But with refinancing, you lose access to these programs. Many loan forgiveness programs have been established for nurses, military servants, etc, if you have borrowed federal loans and made consecutive payments, it is unwise to refinance your federal student loans with a private lender. You can apply for forbearance or deferment in cases of a temporary financial crisis but refinancing to private loans may not be worth the effort.
2) Lose out on flexible repayment plans
During the repayment journey, borrowers will look for all sorts of relief, one such relief which helps in adjusting the payments to make them more manageable is income-driven repayment plans. These plans basically adjust your monthly income based on your discretionary income and family size. In addition to this adjustment, you can get the remaining debt forgiven after 20-25 years of repayment. Sounds great, doesn’t it? Well if you refinance your student loans you don’t get it. Federal student loans have multiple options that are feasible for your repayment plans. Private student loan lenders may not provide standard repayment plans, therefore consider these factors before you refinance your student loans.
3) Lose out on interest-free postpone payments
Anything can happen in the future, hence the saying always is prepared for the worst. In those terms, what if you lose your job during the repayment term or you run into a financial issue you will need to postpone the payments to be made. For a temporary delay in payments, you will have to go into deferment and forbearance. These options are available as benefits associated with federal loans. In deferment, the interest does not get accrued. Federal student loan payments can be suspended or the interest rate can drop to 0% during a national emergency, natural calamity, etc, which are not applicable to private lenders.
4) Lose out on loan discharge options
In the case of federal loan debt, you can get it removed if your school shuts or in the case of the death of the borrower or co-signer. But this option is not available for private loan borrowers. Private lenders have their criteria for discharge options. If you qualify and be eligible, the federal government can consider your financial situation, retirement age, disability, death, and discharge your student loans. Permanent disability and on death, there are cases where the full amount or portion of your loans are canceled by the federal government which may not happen in the case of private student loans.
Learn more about Best student loan refinancing lenders
Should you refinance some of your federal student loans?
When you decide on refinancing your loans there is no hard and fast rule that you have to refinance all of your loans, you can select a few loans and get them refinanced. Let us consider the following example-
Let's say you have a Grad PLUS loan that has a high interest, all though it is a federal loan and it comes along with all the federal benefits. The high interest is really hurting the monthly payments to be made. But along with this Grad PLUS loan, you also have a few loans from your undergraduate which are direct loans.
It is advised to have an in-depth understanding of all the benefits associated with federal student loans. In this situation, it would be advisable to refinance the Grad PLUS loan and keep the direct loan as it is. To have the federal protections to safeguard any unexpected situations in the future.
Learn more about federal student loans
Factors to consider before refinancing?
Still, debating whether it is worth refinancing your federal student loans? It's hard going ahead, especially if you have to consider the benefits you will be giving up. Here are a few questions you should ask yourself to give yourself as a borrower more clarity to go ahead with refinancing.
1) New repayment terms after refinancing?
Refinancing can help lower your interest rate but it can help get new repayment terms, some of the crucial ones to look out for are
Monthly payment to be made
The repayment period for federal loans ranges from 10 to 30 years when you refinance your loans the lender will provide a longer range to choose from. This range varies from 5 to 20 years.
Apart from private student loans which provide both variable and fixed rates, the federal loans only provide fixed rates. Feel like you are missing out on options? Thing again. Variable rates may seem lower in the beginning but later on, they can increase by multi-folds as they are subjected to market conditions. So when you take a federal loan the interest rate remains fixed till the end of the term of the loan.
But it should be noted that a variable rate can help you save a lot of money in a low-interest market.
The repayment term must also be observed closely as a shorter repayment may seem to have high payments to be made. But they can help get rid of the loan faster. While loans with a longer repayment term may seem to have payments with lesser amounts to be met each month in the overall life of the loan you would have spent a lot more on interest payments.
2) Federal repayment options
If you do have federal loans then there are high chances of you considering a federal repayment option. One of the repayment options which are worth considering is the income-driven repayment plans these include the Income-Based Repayment plan, Income -Contingent Repayment Plan, PAYE, and REPAYE which aim to lower the monthly payments to be made and make the payments more manageable.
These programs must be need-based and are specific to certain eligible borrowers. There are some drawbacks with income-driven plans as they tend to pay higher interest payments and the recipients of loan forgiveness through an income-driven repayment plan are hit with a huge tax bill for the forgiven amount. These plans do make your loans manageable but are prepared for a high tax bill at the end.
Loan forgiveness is either public like the PSLF or are specific like:
Loan Forgiveness for Teachers
Loan Forgiveness for Doctors
Loan Forgiveness for Lawyers
If you choose to refinance your federal loans and you are working in a profession mentioned with the forgiveness programs above then you will no longer be eligible for them.
If you are a borrower with a high debt load, then it is advisable to keep your federal loans as it opens up the options for you to take up other repayment plans offered along with the federal loans.
Refinancing is a good option to go for if you have a high-income source and a good credit history and you are seeking to increase your savings.
3) How much can you expect to save?
Analyzing the risk-reward for refinancing is important so that the borrower will know if he/she can go ahead without the help of the federal benefits. Everyone’s situation is different so what makes sense to one borrower will not make sense to another.
Federal loans like that of GRAD PLUS and Parent PLUS loans are the ones that are to benefit the highest from refinancing. These kinds of loans have a higher interest rate which is sometimes in double digits.
When you apply to refinance student loans you have the option to check a prospective rate before you go ahead and fill up a full application. So you get an opportunity to check what interest rate you have qualified for, this helps you shop for the best refinancing option for you out there.
Is it worth refinancing your student loans?
Asked yourself for about the hundredth time if refinancing is worth it? Well, it is but it depends. As an overall picture, you do lose out on certain federal loan benefits which would prove useful in case you need for forgiveness and repayment options to make your loans more manageable.
However, there may be situations where taking up refinancing can be in your favor. If you have a steady job, good cash reserves, and are looking to clear your debt as soon as possible, refinancing your loans and giving up the benefits which come along with the federal loans.
Again there is no clear definition of who and who shouldn’t refinance. It all depends on each one's individual financial situation and if he or she is comfortable with what’s lost when refinancing. If you have private student loans and would like to refinance for a lower interest rate, it is worth the effort you take to refinance.
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Alternative options to lower interest
Is lowering your interest rate the reason why you want to go for refinancing? If that is the case there are plenty of other ways to try and lower your interest rate.
You can sign up for autopay with your servicer which will help you get a 0.25% discount. Some services provide the option for borrowers to get a discount on their interest if they make several on-time payments.
Another option is that there is no prepayment penalty for federal loan repayments so if you make payments earlier and larger in the amount it will go towards your principal amount which will further reduce the interest payments to be made.
There are several options available for a borrower to lower his interest rate and payments towards the interest amount. It is important to know all the options out there and go ahead with the one which suits the borrower's individual financial condition.