Refinancing vs. Income-Driven Repayment Plans: Which is Best for You?

refinancing student loans

Student loans default to a standard 10-year schedule when they enter repayment.

Yet, with larger student loan balances, payments on 10-year plans can be high and unaffordable. Even student loan payments on low balances can be too expensive for borrowers struggling with unemployment or low income.

Two common solutions are refinancing student loans or enrolling in an income-driven repayment (IDR) plan.

Both options lower monthly student loan payments, but each through different ways. Read on to find out which option is best for your student loans.

Income-driven plans match payments to earnings

Income-driven repayment plans are programs administered by the Department of Education to help ease the burden of student loans. IDRs cap your monthly payments based on a certain percentage of your discretionary income and costs of living.

An IDR is ideal for borrowers struggling with their monthly payments who need something more manageable.

Borrowers can submit forms to enroll in an income-driven repayment plan.

The IDR will reset your monthly payments and lower them to an affordable amount. Monthly payments can be adjusted any time your income changes. So if you become unemployed with no income, your IDR payments will be lowered to $0 to match.

There are several different income-driven plans you can enroll in, so choose carefully.

Important: You must “recertify” your income and family size every year so your payment can be recalculated. Your lender will send you a reminder and you’ll provide updated information on your income and family size.

You will still have to recertify even if nothing has changed.

Refinancing replaces your old loans

Refinancing student loans, on the other hand, changes monthly payments by changing the terms of your debts.

With this method, you will sign an agreement for a new private student loan to replace any former debts. Your lender will fund the payoff of your student debts, and re-amortize your debts over the agreed-upon term.

Monthly payments might be lowered by refinancing, but this will depend on the terms you choose for the new student loan. The longer your repayment period, the smaller your monthly payments will be.

Depending on the types of federal loans you have, you could also refinance to a lower interest rate, which could lower monthly payments. So for some borrowers, refinancing student loans can be a smart option.

Wondering if refinancing is a good idea for you? Answer a few questions below and we’ll help you find the right solution! Otherwise, scroll down to read on.

Important: When you apply to refinance your loans, there are certain requirements that must be met. Most banks and lenders will review your credit score, income, savings, and college degree (certificate of enrollment if still in school).

If you don’t think you meet the requirements, you can apply with a cosigner to increase your chances of approval.

Refinancing student loans vs. IDR: which matches your goals?

So is enrolling in an income-driven repayment plan or trying to refinance student loans a better move for you? Well, that all depends on your student debt goals and financial needs.

Get clear on what you’re hoping to accomplish by restructuring your student debts. Then, properly evaluate the features of each option and choose the one that will get the result you need.

The chart below lays out some common student loan goals and needs — along with whether an IDR plan or refinancing will get your closer to that goal.

Goal for student debt IDR Refinance Reason
Lower monthly payment. Both income-driven repayment and refinancing can result in lower monthly payments. But if this is your main concern, an IDR might be a simpler way to achieve this goal.
Save on student loan interest. Lenders offer some rates on student loan refinancing that are below even federal student loan interest rates. Refinancing student loans can help you take advantage of lower rates and reap savings. An IDR, on the other hand, doesn’t affect interest rates.
Lower the total cost of your student debts. While an IDR lowers monthly payments, it sets back your payoff date and won’t lower your balance as quickly. This means more interest will accrue. To pay the least amount to get out of student debt, refinancing student loans to cheaper rates or a shorter term is the way to go.
Credit isn’t good. Most private student lenders require good to excellent credit for to qualify and get low rates. Income-driven repayment plans, however, do not even look at your credit and are unaffected by your score. So an IDR makes more sense while you rebuild your credit.
Income is low or unstable. Income-driven repayment plans are based on your income. So if your main problem with student debt is that you don’t earn enough to make monthly payments, stick with an IDR. It will be more affordable, and can be adjusted if your income drops.
Take advantage of federal student loan benefits. On an IDR plan, your student loans will continue to be classified as federal student loans. Choosing an IDR will preserve important protections for federal student loans like deferment, forbearance, and public service loan forgiveness. But refinancing will switch you to private student loans, and you’ll lose access to these options.
Temporarily lower student loan payments. Maybe you want to stay on-track to repay student loans, but just need a temporary relief from this debt. An income-driven repayment plan is a more flexible option for this — you can use it to lower your payment, and then switch back at any point.
A clear student debt payoff schedule. If your ultimate goal is to just get rid of student loans, refinancing is probably the way to go. It will put you on a set repayment plan with a clear payoff date, at which you’ll be free of these loans. IDRs, however, can set debt repayment back and increase the amount of time you’re repaying loans.
Student loan forgiveness. If you don’t see yourself ever being able to realistically pay off your student loans, you might be interested in IDRs for the loan forgiveness. IDRs will forgive any remaining balance after you’ve made consistent payments for at least 20 years. However, this could come with a tax bill on the forgiven amount. But refinancing student loans does not offer the option for forgiveness.

You can also plug some numbers into our Student Loan Hero income-driven repayment calculator and refinancing calculator to see how your payments will shake out. Then, compare your results.

With this information, you’ll be well-equipped to decide whether refinancing student loans or choosing an income-driven repayment plan is best for you.

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