Should I Refinance My Student Loans If I’m Going Back to School?

student loans going back to school

When you have student loans, going back to school can be a financial challenge.

While getting a new degree may be a winning strategy for making that next career move, you’re probably still in the midst of paying for your first degree. How are you going to pay for those student loans when you’re back in school?

One option is to refinance those federal or private student loans you took out initially. If this is the path you want to take, here are some things to keep in mind before you get started.

1. Your future income situation

Are you going back to school with student loan debt and plan to quit your job to focus on school? If so, refinancing your student loans will need to happen first.

Your income is an important factor when it comes to qualifying for approval on a refinancing offer. Once your income drops to zero, your chances for approval go down significantly.

The good news? You can shop for student loan refinancing offers now without taking a hit to your credit score. Many top student loan refinancing lenders start with a soft credit check, which won’t affect your credit score.

A lender will only do a hard credit check if you officially apply for one of their offers, which will ding your credit score by only a few points.

So go ahead and shop for the best offer now while you’re still employed full-time if you want to improve your chances of being approved for student loan refinancing later on.

2. Deferment options while in school

Before you move forward with a refinancing offer, it’s important to note that you might not be able to defer your student loan payments when you go back to school. Deferment can come in handy when you’re looking to pause your student loans payments temporarily.

In the world of private loans – including refinanced student loans – benefits and options vary by lender. So if deferment is a feature you were counting on, check with the lender you want to apply with to ensure they offer it.

3. Loss of federal student loan repayment benefits

If you want to refinance your federal student loans, you will lose access to federal benefits. That’s because once federal student loans are refinanced, they become private student loans. What’s more, private student loans don’t offer federal repayment benefits such as income-driven repayment plans and federal forgiveness programs.

Again, this is only the case with refinancing. If you consolidate your federal student loans via Direct Loan Consolidation, you still have access to federal benefits.

So if you were counting on these benefits while you’re in school or afterward, you might want to think twice about taking that refinancing offer.

4. Choosing the right type of interest rate

If your number one priority is lowering your interest rates, refinancing can help you do just that.

Plus, a lower interest rate can mean lower monthly payments, too. This is a great benefit if you think you’ll be able to make these payments when you’re going back to school with student loans.

That said, a refinancing offer will come with variable or fixed interest rates. Keep in mind that lenders will often list variable interest rates at a lower rate than fixed interest rates.

However, if you choose a variable interest rate, it’s possible your rate might increase during the life of your loan. If it happens smack dab in the middle of your new educational endeavor, that could spell trouble for you.

Also, don’t forget that rising federal interest rates can affect private student loans. When the federal rate increases, banks can increase the interest rates at which they lend to one another. These increases are then passed down to the consumers via the rates banks charge them.

In short, the interest rate on most types of debt can potentially increase when the federal interest rate goes up.

If you want to refinance for a lower rate, consider opting for a fixed rate, so you’ll know what you have to pay per month while going back to school with student loan debt.

When you have student loans, going back to school can be risky

If you think refinancing is the best way to decrease your interest rates and monthly payments for your student loans before heading back to school, make sure you fully understand the risks involved such as:

  • Losing access to federal benefits for federal student loans, including deferment or income-driven repayment plans.
  • Taking on a new monthly payment amount you might not be able to handle if you lack a source of income while you’re in school.

The good new is these risks aren’t insurmountable as long as you’re aware of them and prepared. If you plan your finances carefully before you enroll, you can always minimize the risks you take on. That way you can focus on what matters: improving your education and career prospects.

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