Borrowing money to pay for school is an investment in yourself that pays major dividends down the road. And one way to expedite the payback on your investment is to minimize the amount of interest you pay on that borrowed cash.
Interest rates, by historic comparison, are low, and that means you could trim costs from your budget by refinancing a student loan — or any loan, for that matter. When you refinance, you’re simply trading an existing loan for a new one, typically to lock in a lower interest rate or get more favorable terms.
Locking in a lower interest rate can help you pay the loan off sooner or lower the minimum payment you need to make each month. However, when you refinance a federal student loan with a private lender, you’ll give up certain federal benefits that could help you manage that debt easier.
Here are a few questions to consider before you refinance your federal student loans.
WHY DO YOU WANT TO REFINANCE?
If you’re like most people who refinance, you probably want to:
- Lower your interest rate, potentially saving you money over the life of your loan.
- Lower your monthly payment, potentially freeing up money in your budget for other expenses (that may result in lengthening the pay-off period).
- Convert a variable rate loan into a fixed-rate loan. Many federal student loans disbursed before July 1, 2006 carry variable interest rates, which fluctuate depending on the underlying market rate. A fixed rate will never change.
Once you understand your goal, closely review your student loans and take note of what you owe, the interest rate on each loan, and any other benefits that your federal loans might be offering you (such as financial assistance).
WOULD YOU BENEFIT FROM FEDERAL ASSITANCE?
Federal student loans include protections that borrowers can leverage if they find themselves facing economic hardship. Those include full deferment or forbearance, flexible payment options and more.
Deferment and forbearance allow a borrower to stop making payments on their federal student loans for a length of time. An unsubsidized federal student loan placed in either deferment or forbearance will accrue interest while payments are not being made, while a subsidized federal student loan will not accrue interest when placed in deferment.
The federal government also offers eight different repayment plans that borrowers can opt into. These plans can lower your monthly payments, which makes it easier for you to keep your loans from becoming delinquent.
Private lenders, on the other hand, aren’t required by law to offer these options (although they may offer a range of customizable financing options and terms). In general, refinancing your student loan means losing those relief benefits.
ARE YOU WORKING TOWARD FORGIVENESS?
It’s possible to have a portion of your student loan debt forgiven. For example, individuals employed by the government or a non-profit organization can qualify for forgiveness through the Public Service Loan Forgiveness (PSLF) Program after making 120 qualified monthly payments. Similarly, teachers who are in the classroom five consecutive years at a low-income school can qualify to have up to $17,500 of certain federal student loans forgiven, as a part of the Teacher Loan Forgiveness Program.
If you are actively working toward any type of student loan forgiveness, refinancing your federal student loans with a private lender will end the forgiveness program. Still, keep in mind, the amount of money you save reducing your interest rate by refinancing could still be a better deal.
That’s why, before making a decision, you should crunch the numbers to find the best fit for your situation. If you’re having trouble getting started, a financial advisor can help you develop a plan to pay debt efficiently while saving for the future.