Student loan refinancing is often billed as a way to expedite and simplify student loan repayment. And it certainly can be: By replacing your existing loans with a new one, you can potentially score a lower interest rate, and you will have just one payment due date to keep track of. But refinancing is not the right strategy for everyone.
In general, it’s a move that tends to make sense if you have private student loans and if your credit score and income are “high enough to qualify you for a lender’s lowest interest rates,” said NerdWallet. However, in the following four instances, you may want to reconsider or at least think twice.
1. You have federal loans and may want those benefits
While technically you can refinance either private or federal student loans, refinancing federal loans is “riskier” because when you do, “you’re no longer eligible for federal benefits and repayment options,” said U.S. News & World Report. This includes options like income-driven repayment plans, where your payments are modified based on your income and family size, as well as temporary repayment relief options like student loan forbearance.
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Even if you do not need those options right now, it is important to consider whether there is any chance you will down the road. For instance, “if you lose your job or have to take a pay cut, making student loan payments can become more difficult, especially because private lenders don’t offer much support in times of need,” said Student Loan Planner.
2. You are pursuing student loan forgiveness
Also under the umbrella of federal benefits you will lose if you refinance — though worth calling out on its own — is student loan forgiveness. “Refinancing federal loans makes them ineligible for federal loan programs including Public Service Loan Forgiveness and Teacher Loan Forgiveness,” said NerdWallet.
If you are progressing along on either of those options — or if you are far along on an income-driven repayment plan, which will wipe away any remaining debt after 20 or 25 years of payments — then refinancing is likely not in your best interest.
3. Your interest rate would not change much
For refinancing to make sense savings-wise, the interest rate you get on your new refinance loan needs to be noticeably lower than it is on your current loan(s). If your student loan “already has a decent rate or you don’t qualify for the lowest rates, the savings with your new loan may not be significant enough to bother with refinancing,” said Student Loan Planner.
Generally, the biggest factor in landing a much better rate when you refinance is solid credit, though lenders will also take into consideration your overall financial situation, including your income and your other debt obligations.
4. You are close to paying off your loans
While you might think refinancing could help push you over the finish line on paying off your student loans, it may not work out that way. At this point in the game, “it doesn’t make sense to do something as risky as refinancing,” where you are changing up your loan terms entirely, and “because you’re close to paying down your debt, any refinancing benefits would be minimal,” said U.S. News & World Report. Instead, stay the course and relish the fact that the end is near.