What Happens If I Refinance My Loans Before Graduate School?

refinance-back-to-school

When I graduated from college, I was ready to be done with school. No more studying, exams, or professors to make me stress. Just the freedom of being a working adult with a grown-up salary.

But not too long after, I was ready to go back for an MBA. I knew that an MBA would help my career for the long-haul, and while I only had a year in the workforce at that point, I knew that going back to school would only get harder as I got married, had kids, and dealt with other responsibilities.

If you have student loans and are considering going back to school, you have some important financial decisions ahead. Here’s what happens when you’ve refinanced your student loans and decide to head back to school.

The basics of student loan refinancing

When you refinance, you pay off all your old student loans using a new, lower-interest loan from a different lender.

Refinancing student loans is a big decision, especially if you have federal loans. Once you refinance with a private lender, you lose your federal loan protections such as loan forgiveness and income-based repayment programs.

Before you refinance, calculate the potential savings and shop around for the best deal. You don’t want to get stuck paying thousands of dollars more by not checking around for the best interest rate. Compare rates from some of the best lenders here.

Preparing to go back to school

Maybe you’re heading back to school for a Master’s degree, law school, or Ph.D. Along the way, you’ll be filling out your FAFSA, and that’s where things are going to start looking a little different from the last time around.

Now, you are most likely independent with your own job, so you’ll use your own income information to qualify. Your FAFSA will determine the financial assistance you are eligible for. To make sure you can afford everything, you may want to work with your university’s financial office to make sure you are getting as much aid as possible.

Dealing with your existing loans

Unfortunately, once you have refinanced your student loans, heading back to school can become more complicated.

If you are able to afford it, it’s always best to continue making your payments as usual even after you’ve enrolled in classes. However, if making your full payments is not financially possible while you’re in school, you have a few options to choose from.

Deferment

Deferment means you can pause your student loan payments for a period of time. Eligibility depends on your loan servicer, and whether they offer a deferment program.

For example, SoFi has the following policy for deferment:

“SoFi does offer loan deferment for borrowers who return to graduate school on a half- or full-time basis, undergo disability rehabilitation, or serve on active military duty. At the end of any deferment, the total loan balance will be reamortized over the remaining term of the loan.”

Other lenders with a deferment policy include CommonBond and Earnest. It’s important to note that different lenders will allow you to defer your payments for different periods of time. Make sure your lender will let you defer for the entirety of your school program.

If you are approved for deferment, interest will still accrue on your loan. If you can afford it, it’s best to continue making interest-only payments while you’re in school. This will prevent your loan from growing.

You should also discuss your loan term with your lender. Your final payment date will likely not be extended, and you will still be expected to fully pay off your loan by the original date. This means that if you defer your loan for a few years, you will have a higher monthly payment when your loan resumes.

Forbearance

If you don’t qualify for deferment, you might be eligible for forbearance. Despite the name containing the word “bear,” there is nothing grizzly about it.

Forbearance means reducing or pausing payments for a period of time, often up to one year. Typically the interest will capitalize at the end of the period, adding onto the principal balance when repayment begins.

Most lenders have strict eligibility requirements surrounding forbearance and may require proof of economic hardship, unemployment, or even involuntary severance from your past job before approving you for this option. In addition, forbearance may only apply for a number of months and might not cover your entire school program.

Don’t assume your lender will approve you for forbearance if you head back to school. Read the fine print closely and discuss with your lender before you count on this method to help you cover your payments.

Here is information on forbearance from a few lenders:

As with deferment, it is best to pay interest if you are able to keep your loan from growing while the loan is in forbearance.

The best option for you

Like all other personal finance decisions, there is no 100 percent right or wrong answer. It’s a personal decision. Whatever you do decide, don’t solely focus on short-term loan payments — look at the long-term repercussions of any decision.

Anything you do that lowers your payments is a step away from having everything paid off completely. Deferment and forbearance both delay your journey to get out of debt, so weigh that carefully and consider if you can afford to continue making payments on a tighter budget.

Interested in refinancing student loans?

Here are the top 6 lenders of 2017!
LenderRates (APR)Eligible Degrees 
Check out the testimonials and our in-depth reviews!
2.34% - 6.74%Undergrad & GraduateVisit SoFi
3.64% - 7.20%Undergrad & GraduateVisit DRB
2.55% - 6.74%Undergrad & GraduateVisit Earnest
2.35% - 7.74%Undergrad & GraduateVisit CommonBond
2.22% - 7.26%Undergrad & GraduateVisit LendKey
2.38% - 8.24%Undergrad & GraduateVisit Citizens
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Published in Graduate School, Refinance Student Loans, Student Loan Repayment