Refinancing Student Loans? Don’t Just Chase Lower Rates, Consider the Benefits, Too

Learn the pros and cons of refinancing student debt

Making monthly payments on student loans is a daunting task if you’re struggling financially. If you’re looking for a way to reduce your monthly payment and improve your cash flow, refinancing your student loan is one strategy.

However, before you decide to refinance, it’s important to consider your situation and determine whether it makes sense. Other options might be a better choice to help you better manage your student loan debt and your overall budget.

Key Takeaways

• Refinancing lets you combine several student loans into a single monthly payment, possibly with a lower interest rate, which may reduce your payment.
• You can combine federal and private student loans when you refinance.
• Refinancing federal student loans means losing access to government programs and benefits, such as the SAVE plan that lowers monthly payments based on income.
• Refinancing variable-rate private student loans will help you avoid interest rate increases.

How to Lower Your Federal Payment

The federal freeze on student loan payments, a COVID-related benefit, ended on Oct. 1, 2023. A new program, called SAVE, helps those struggling to repay their federal student loans by adjusting monthly payments based on income. The application is online.

What Is Student Loan Refinancing?

Student loan refinancing means taking out a new loan to pay off an existing loan or loans. Shifting your debt to a new loan can change the interest rate, terms, and other loan features.

You can combine multiple loans into a single loan. You can refinance both federal and private student loans. You can choose to refinance all your loans or just some of them.

Refinancing means you are taking out a new, private loan. Depending on your situation and the lender, you might be able to get a sufficient loan to pay off both federal and private student loans and combine them all into one.

Pros and Cons of Student Loan Refinancing

Refinancing multiple loans into one loan can make the debt easier to manage.

The new loan might come with a lower interest rate that reduces your overall costs or a longer term that lowers your monthly payments.

Refinancing any loan generally requires a good credit score. If you don’t meet the credit and income criteria to refinance your student loans, you might need a co-signer.

If you refinance your federal student loans, you’re replacing them with a private loan. You lose access to federal benefits and programs that are designed to help borrowers who are struggling to pay off their student loans.

Pros

• Possible lower interest rate

• Probable lower monthly payment

• Easier to manage a single loan

• Can save money over the life of the loan

Cons

• Need good credit to qualify

• May need a co-signer

• Lose any federal loan benefits

Does It Make Sense to Refinance Your Student Loans?

As you review your situation, there are some things to consider as you decide whether it makes sense to refinance your student loans. Often, this can depend on the type of loan you’ve taken out.

Federal Student Loans

If you’re having trouble paying federal student loans, you might explore alternatives to private loan refinancing that are available through the U.S. Department of Education. These include:

• The SAVE program reduces your monthly payments to a level you can afford, based on your income. If you’re out of work, this can be $0 per month. If you make payments to your loan in a timely manner and still have a balance, you may qualify for forgiveness of the remainder in about 10 years.
• Loan forgiveness is available to some public service workers, employees of non-profits, and those who have become totally and permanently disabled. This program survives despite the Supreme Court’s rejection of the Biden administration’s much more ambitious plan to forgive loans for millions of borrowers.

If you’re eligible for either of these programs, the benefits could far outweigh refinancing your federal student loan with a private lender.

However, the programs are only available for federal student loans, not loans obtained through private lenders.

If you’d still prefer one payment, you might look into a direct consolidation loan through the Department of Education. This type of loan combines all your federal loans into one payment to make it more manageable. You can also choose a loan term of up to 30 years to lower your monthly payments.

If you make too much money to qualify for income-driven repayment, it might make sense to refinance your federal student debt if you can get a lower interest rate.

Private Student Loans

If you obtained your student loans through a private lender, refinancing or consolidating the loans may be worthwhile.

If your current loans have a variable interest rate, you can consider locking in a fixed interest rate when you refinance. You’ll save money over the long term and avoid sudden increases in your monthly bill. This strategy works, of course, only in periods during which interest rates are relatively low. Interest rates in general have risen throughout 2022 and 2023.

If you have both private and federal student loans, you can refinance the private debt and consolidate the federal student loans separately. This still simplifies the situation but you retain eligibility for federal programs and benefits for managing the federal loans.

Important

Some government, tribal government, and nonprofit employees with federal student loans qualify for the Public Service Loan Forgiveness program.

Student Loan Forbearance

The Biden Administration enacted protections for federal student loan borrowers in 2020. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law in March 2020, paused student loan payments.

The three-year forbearance on student loan payments and interest that began back in 2020 ended on October 1, 2023. Student loans began accruing interest again on September 1, 2023, and the monthly bills started flowing in October. If you have a federal student loan you should get a bill at least 21 days in advance of the due date.

Does Refinancing Student Loans Lower Payments?

Depending on your financial situation and your credit score, refinancing could lower your interest rate, extend the repayment schedule, or both. This can lower your monthly payments and may reduce the total you pay over the life of the loan.

Should I Refinance My Federal Student Loans?

You can refinance your federal student loan, but you might have better options for reducing your monthly payments. First determine if you’re eligible for relief through the SAVE plan.

The application takes about 10 minutes.

If your income is too high to qualify for SAVE relief, refinancing is an option if you can get a better interest rate or other benefits by doing so.

But remember you’re taking your debt out of the government’s hands and putting it in a bank’s hands. You’ll no longer be eligible for SAVE or any other student loan debt relief program.

How Can I Lower My Monthly Federal Student Loan Payments?

There are a few options to lower the monthly payment on federal student loans:

• The SAVE program lowers your payment to a manageable amount based on your income.
• A direct consolidation loan through the federal government could allow you to extend the term of the loan and thereby reduce your monthly payment.
• A consolidation loan through a private lender may get you a lower interest rate, a longer loan term, or both, reducing your monthly payments. Remember you’re putting your debt in private hands and losing access to any future programs for student loan relief.

The Bottom Line

Refinancing your student loans can reduce your monthly payments and help you manage your budget. Your strategy for refinancing depends on whether your loans are federal, private, or a mix of both. If you want to qualify for federal programs and benefits, consider consolidating your federal loans separately and only refinancing your private student debt.

Read the original article on Investopedia.