When you have student loans, going back to school can be a financial challenge. While getting a graduate or doctoral degree may be a great career move, you might still be paying for your undergraduate degree. In that case, refinancing (as well as deferring) student loans while going back to school may be an option to help you avoid major financial problems.
With refinancing, you swap your existing loans for a new one. This might allow you to lower your monthly payment, and maybe your interest rate as well. But there are drawbacks, such as potentially limiting your ability to get deferment, which pauses your repayment while you’re in school.
If you’re headed back to school, here are some things to consider before you go down the refinancing path — specifically:
- Your future income situation
- Deferment options while in school
- Loss of federal student loan repayment benefits
If you’re going back to school with student loan debt and plan to quit your job to focus on school, then any refinancing move will probably need to happen first.
This is because your income is an important factor when applying for student loan refinancing. If your income drops to zero, you’re unlikely to be approved (unless you have a cosigner with very solid credit, however this is no guarantee for approval).
Fortunately, however, you can shop around for student loan refinancing offers now and get something in place before you return to your studies. And with some lenders, you can find out what interest rates and terms you’re likely to get without having to undergo a hard credit check — meaning that your credit score won’t be affected until you formally apply for the loan on offer.
As you compare refinancing offers, note whether the rates quoted are variable or fixed. Fixed loans keep the same interest rate for the whole term; however, with a variable loan, you could see your interest rates climb based on the economy and financial market environment.
Before you move forward with a refinancing offer, it’s important to find out whether you’ll still be able to defer your student loan payments when you go back to school.
With federal student loans, deferment is generally available when you attend grad school, but in the world of private loans — including refinanced student loans — benefits and options vary by lender. If you’re counting on the ability to pause your student loan repayment, check with your prospective lenders to ensure they offer it.
You should also be aware that interest may pile up while you’re in deferment, and this will be “capitalized,” meaning it gets added to the total you owe. This is the case with many private loans, but also with some federal student loans as well.
Suppose, for example, your student loan balance is $25,000 at 5.25% interest over a 10-year repayment period and you defer payments for 12 months. When the deferment period ends, your new balance will be $1,312 higher. (You can run the numbers on your own loans with our deferment calculator.)
One way around this problem is to make interest-only payments on the refinanced loan (or any other loan that accrues interest in deferment) while your in school. If you can afford it, these small payments could save you a significant amount of money in the long term.
While there are many advantages to refinancing your federal student loans, there is one big disadvantage: You will lose access to federal benefits.
Consider, for example, whether you might ever need income-driven repayment — which caps your monthly payment at 10% to 20% of your discretionary income. If you don’t expect your graduate or professional degree to result in a comfortable salary, or have some other reason to worry about being able to make you student loan payments, then refinancing could be risky.
With student loans, going back to school requires planning
If you think refinancing could decrease the interest rate or monthly payment (or both) on your student loans, heading back to school may provide the impetus to act. But before you sign for a new loan, make sure you fully understand the possible consequences.
Think about your timeline for paying off your debt. Will lower interest rates help retire your debt more quickly? Or are you seeking to lower your monthly payments, even if you stay in debt longer?
You’ll also want to make sure you or a cosigner have the credit to qualify for a good refinancing rate. By law, you’re entitled to a free copy of your credit report every 12 months from each of the three main credit reporting companies — you can get this online by visiting annualcreditreport.com.
And as mentioned, consider whether you’re OK giving up federal student loan benefits, such as income-driven repayment plans and certain forgiveness programs. You should also think about whether you’d want to defer repayment or make some in-school payments to keep your interest costs lower.
At the end of the day, refinancing can save you serious money, though it’s not right for everyone. If you’re still unsure, here are some questions to ask yourself as you decide on whether to refinance student loans when going back to school.
Steve Santiago contributed to this report.