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“Should I refinance my student loans?” You might be asking yourself this if you’re looking to save money on your college debt. The true answer is: It depends on your situation — there are both pros and cons to refinancing student loans.
For instance, refinancing could snag you a lower interest rate and save you a good bit of money on your debt. But refinancing federal loans also means sacrificing federal repayment plans and protections that you might need later.
Let’s take a look at the “con” side of refinancing and times when refi is a risky or unwise move.
Should I refinance my student loans? 6 cases where the answer is ‘no’
You can learn all about the benefits of refinancing student loans here. In this guide, though, we’ll focus on reasons not to refinance.
If any of the following conditions apply, you might be better off sticking with your current repayment plan:
1. Your income isn’t secure enough to refinance student loans
2. You have weak credit (or no creditworthy cosigner)
3. You might need an income-driven repayment plan in the future
4. You’re working toward federal loan forgiveness
5. Your average weighted interest rate is already low
6. You’re almost done paying your loans
● Plus: Consider your personal situation before you refinance student loans
When you refinance student loans, you take out a new loan from a private lender. The lender repays all your loans, whether federal or private, so you don’t have to deal with your old loan servicers anymore. In place of the old debt, it issues you a new loan with — hopefully — better terms.
Typically, people refinance to lower their interest rates or adjust their monthly payments. But even if you get more appealing terms, you still need the means to pay back your new loan. If you run into financial hardship, the private lender might not be flexible about your options.
If you’re worried about losing your income in the near future, you might not want to refinance just yet. Before turning all your student loans into one private loan, make sure you feel confident about your ability to make monthly payments.
Along with evaluating your income, refinancing lenders take a look at your credit (or your cosigner’s credit) before approving you for a student loan. Earnest, for example, requires a minimum credit score of 650.
If you don’t have strong credit, you can try applying with a cosigner who does. But that cosigner will become just as responsible for your debt as you are, which is a responsibility they may or may not want to take on.
And if neither you nor your cosigner have strong credit, you could have trouble getting approved at all. Or you might get mediocre rates on your refinanced student loans, which wouldn’t save you much money in the end.
Fortunately, lenders like Earnest, SoFi and Laurel Road offer an instant online rate quote so you can see if your credit is up to par before submitting a full application. If it’s not, then you might be better off spending some time building your credit before applying to refinance student loans.
Since you can currently only refinance with a private lender, you’ll no longer hold federal student loans. As a result, you’ll lose access to helpful federal programs, such as income-driven repayment or emergency forbearance, like the one offered during the COVID-19 pandemic. Losing eligibility for federal plans and protections is one of the major cons of refinancing student loans.
Income-driven repayment plans adjust your monthly payments when you’re having trouble making them. Income-based repayment (IBR), for instance, caps your payments at 10% to 15% of your monthly income. The Revised Pay As You Earn (REPAYE) plan makes sure you’re not spending more than 10%.
Some of these plans even let you spread out repayment over 20 to 25 years and forgive any remaining balance after that time.
Most private lenders set a repayment cap at 15 to 20 years and typically don’t offer income-based protections. Before refinancing, consider whether you’ll need access to an income-driven repayment plan. If you will, then it’s best to wait to refinance your federal student debt.
The federal government offers several loan forgiveness programs, such as Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness. These programs cancel your remaining debt balance after a certain number of years of service.
However, if you refinance your federal loans with a private lender, they will no longer qualify for federal loan forgiveness. You might still be eligible for loan repayment assistance programs and other forgiveness options from individual states or universities, but you won’t be able to participate in a federal program such as PSLF.
Refinancing can save you lots of money over the life of your loan — if it lowers your interest rate. Let’s say you owe $30,000 in student loans with an average weighted interest rate of 7%, and you have nine years left of repayment.
By refinancing, you lower the interest rate to 5% and choose a 10-year plan. Even after adding a year of repayment to your loan, you’ll save $2,336 in interest in the long run.
Student loan interest accumulates on a daily or monthly basis. If you can lower the rate significantly, you could save a lot of money. But if your average interest rate is already low, a refinancing lender may not be able to beat it.
Browse what’s available, and see what interest rates lenders will offer. SoFi, for instance, has variable APRs of 2.25% – 6.39% and fixed APRs between 2.74% – 6.74% . If these APRs aren’t much lower than what you have now, it might not be worth it to refinance.
And if you’re not sure how much you’d save or spend, check out our student loan refinancing calculator. After entering your student loan debt and interest rates, you’ll see a full comparison of one student loan with another.
Refinancing may not help you very much if you’re nearing the end of your repayment. When you refinance, you’ll choose a new plan, whether it’s five, 10, 15 or 20 years. If you’re almost out of debt, switching to a new lender may not be worth the trouble.
Plus, you want to make sure you’re not accidentally adding time to your repayment plan. Unless your interest rate drops significantly, adding years onto your repayment schedule would just make your debt more expensive.
Refinancing is most beneficial for those with a steady income who don’t need federal income-driven repayment plans, forgiveness programs or other federal protections. However, if you’re worried about affording your monthly payments, your answer to “Should I refinance student loans?” should probably be no at this time, at least when it comes to refinancing federal loans.
Before you decide to refinance, make sure that the pros of student loan refinancing outweigh the cons. Whether it reduces your interest rates or monthly payments, refinancing should make your student loans more manageable.
Even if you’re not a strong candidate now, you might be better suited for refinancing in the future. So before changing to a new loan servicer, consider the full implications of your decision.
If you’re still not sure, ask yourself these questions before refinancing your student loans.