Refinancing Federal Loans

Is Refinancing the Best Option for You? 

Refinancing can help a lot of people; however, you shouldn’t assume it’ll be best for you until you’ve done your research. If you’re financially stable with a good credit score then refinancing can help you get a much lower interest rate.
If you’re aiming to receive forgiveness on your student loan or extend your repayment plan, then you shouldn’t refinance your federal student loan. Think carefully about your motivations for refinancing and whether this move will benefit you in the long run, once you’ve made the switch you can’t go back.

The Benefits of Refinancing a Federal Student Loan

• Lower interest rates:
  • You may be able to refinance to a private loan with a better interest rate. This is based on if you have a good credit score, which would save you money in the long term.
• More manageable monthly payments:
  • By refinancing your loan, you can switch to a loan that has a longer repayment term. This will alow you to lower your monthly payments. Although this will generate more interest in the long term, it makes payments more affordable in the short term.
• Consolidate your student loans:
  • When you refinance multiple loans into one, it simplifies your monthly payments
• Release your co-signer
  • While private loans often lock the co-signer into the contract for the long term, you can usually refinance a federal loan and release your co-signer from their responsibilities

Downsides to Refinancing

When you refinance a federal student loan, or switch to a private loan, you give up all of the following benefits which are guarunteed on federal loans:

1. Income Driven Repayment Plans (IDRs)
   IDRs are a useful option for when you run into financial trouble. There are different types of plans which gives you some flexibility. There is the income-based repayment plans and pay as you earn plans, which stretch your repayment term to 20-25 years and cap your monthly payments at 10-15% of your income.
2. Student Loan Forgiveness
   Student loan forgiveness programs allow you to wipe a portion of your debts when you work within certain fields. Keep in mind that while many people qualify for forgiveness, it is uncommon to get this opportunity with private loans. However, there’s no guaruntee that you’ll receive forgiveness- particularly with the PSLF program.
   Some examples of these federal and state programs include:
   1. Public Service Loan Forgiveness (PSLF)
      Employees of specific government and non-profit agencies are often eligible for this plan. Once you’ve met 120 months of their monthly payments on time, the remainder of your federal student loan debts are wiped.
   2. Teacher Loan Forgiveness
      This program allows teachers who are employed at low-income schools or other educational institutions to have up to $17,500 of federal student loan debt forgiven.
   3. Income Driven Repayment
      After completing between 20-25 years of payments on an IDR, you become eligible for forgiveness and your remaining balance will be forgiven.
3. Deferment and Forbearance on Federal Loans
   In the event that you become unable to keep up with loan payments, protections like deferment and forbearance can provide the help you need. Both of these measures allow you to suspend payments for a certain amount of time, which helps you gain back control over your finances.
   During these periods, those with subsidized loans will have their interest paid for them by the government. However, those with unsubsized loans, their interest will continue to accumulate. Some private lenders do offer versions of these protections, but by law, they aren’t required. Make sure you do your research prior to refinancing.

The Process of Refinancing a Federal Loan

1. Check that your credit score is abover 680 as an initial indicator of eligibility for refinancing
2. Research a variety of private lenders to find the one that matches your needs. Get quotes from them by allowing them to conduct a soft credit check (this does NOT affect your credit score)
3. Make sure that you have all of the information that you need to apply. This includes but is not limited to your income, social security number, and details of your current loan.
4. Once you’ve received quote , compare and decide which loan is best for you. Submit your application for this loan and await approval. Dont forget, continue making payments on your current loan until you’ve received confirmation of your new loan!