Making payments on student loans can feel like a daunting task, especially if you're struggling financially. If you're looking for a way to reduce your monthly payment and improve your cash flow, refinancing your student loan is one strategy.
However, before you decide to refinance, it's important to consider your situation and determine whether it makes sense to choose to refinance over other options that might help you better manage your student loan debt and your overall budget.
- Student loan refinancing allows you to combine several student loans into a single monthly payment and possibly a lower interest rate, which may reduce your payment.
- You can combine federal and private student loans when you refinance.
- Refinancing your federal student loans means losing out on government programs and benefits, such as Public Service Loan Forgiveness (PSLF) and income-driven repayment.
- Refinancing variable-rate private student loans may make more sense because they become more costly if the Federal Reserve implements additional rate hikes.
- The Biden administration has pledged to forgive up to $20,000 of federal student debt per borrower. However, the rules for this debt relief are very specific; it is worth checking in detail to see if your loans qualify.
What Is Student Loan Refinancing?
Student loan refinancing is the process of taking out one large loan to pay off your smaller student loans. You can refinance both federal and private student loans. Depending on your situation and the lender, you might be able to get a sufficient loan to pay off both federal and private student loans and combine them all into one, leaving you with a single monthly payment and a lower interest rate.
However, you also need to consider that student loan refinancing often requires a good credit score. If you don't meet the credit and income criteria to refinance your student loans, you might need a cosigner. However, not all lenders allow you to release a cosigner from their obligation, and that can make it difficult to find someone willing to take on the responsibility for your student loan debt.
If you refinance your federal student loans, you're replacing them with a private loan. You lose access to federal benefits and programs associated with federal student loans when you refinance.
Benefits and Drawbacks of Student Loan Refinancing
Potentially lower interest rate
Lower overall payment
Easier to manage a single loan, rather than several
Potentially save money over the life of the loan
Might need a good credit score to qualify
May need to find a cosigner to qualify
Replaces federal loans, and you lose any potential benefits
Does It Make Sense to Refinance Your Student Loans?
As you review your situation, there are some things to consider as you decide whether it makes sense to refinance your student loans—depending on the type of loan you've taken out.
Federal Student Loans
Before you refinance federal student loans, consider whether you might need access to the programs and benefits associated with them. You may qualify for Public Service Loan Forgiveness (PSLF); if so, it doesn't make sense to refinance your federal student loans. Many federal student loan forgiveness programs, like PSLF, aren't available for private loans, so refinancing would make you ineligible for them.
Refinancing federal loans limits your ability to participate in income-driven repayment plans. If you're struggling to make your federal loan payments, you might qualify for income-driven repayment, which reduces your monthly student loan payments to 10% to 20% of your discretionary income, depending on the plan.
If you're trying to lower your monthly payment, an income-driven plan can be an effective way to achieve that goal while maintaining access to federal benefits. However, be aware that you might pay more over the life of the plan with income-driven repayment. Even though your balance can be forgiven after 20 or 25 years of income-driven repayment, what you pay in interest could potentially be higher over time.
If you'd still prefer one payment, then it may be worth looking into a direct consolidation loan. This type of loan combines all your federal loans into one payment to make it more manageable. You can also choose a loan term of up to 30 years, allowing you to enjoy lower individual payments.
Refinance your federal student loans if you know you won't need access to the benefits. If you already make too much money to qualify for income-driven repayment or aren't working in a job that qualifies you for PSLF and know you won't use federal benefits, it can make sense to refinance your federal student debt, assuming your credit score is good enough to result in a lower interest rate.
Private Student Loans
It may make more sense for people to refinance any private student loans they have outstanding. If you don't have a fixed interest rate on your private student loans, that might lead to higher payments later. In many cases, you can lock in a fixed interest rate when you refinance your private loans, providing you with stability and saving you money over the long term.
The Federal Reserve began raising interest rates in March 2022 and if more rate hikes are coming, it might be wise to refinance before rates climb higher, which would ultimately result in paying more for your loan.
Some borrowers might decide to refinance their private student loans and consolidate their federal student loans separately. This still simplifies the situation, resulting in only two monthly payments and potentially lowering the overall costs while still allowing borrowers to remain eligible for federal programs and benefits on their federal loans.
Government, tribal government, or non-profit employees with federal student loans may qualify for the Public Student Loan Forgiveness program.
Student Loan Forbearance
The White House in 2020 enacted protections for federal student loan borrowers. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law in March 2020, paused student loan payments.
The Biden administration also has pledged to forgive up to $20,000 of federal student loan debt for each borrower. Although courts have blocked the debt relief plan due to ongoing litigation, the government has extended the pause in repayments until 60 days after June 30, or 60 days after the litigation is resolved, whichever is earlier.
This means borrowers don't need to make any payments, interest doesn't accrue, and late fees don't apply during this period. Even though you're not required to make payments, it's a good idea to continue, especially if your debt does not qualify or you owe more than $20,000.
Does Refinancing Student Loans Lower Payments?
Depending on the situation, refinancing might lower your interest rate, which can lead to lower monthly payments and help improve your cash flow.
Should I Refinance My Federal Student Loans?
Though refinancing federal student debt can lead to a potentially lower interest rate and monthly payment, it's not always the best choice. When you refinance federal student loans, you lose the ability to qualify for student loan forgiveness and access to programs like income-driven repayment. If you think you might need these programs, a direct consolidation loan might make more sense than refinancing.
How Can I Lower My Monthly Federal Student Loan Payments?
If you're hoping to lower your monthly student loan payments, there are a few options. You can get a direct consolidation loan to extend your term and combine your payments into one, take advantage of income-driven repayment, or sign up for an extended repayment plan.
You also can refinance your loans for a lower monthly payment, but that will replace your federal loans with a private loan, and you will lose access to federal programs.
The Bottom Line
Refinancing your student loans can potentially reduce your monthly payment and provide you with a way to better manage your budget. However, it's important to consider whether your loans are private or federal and which benefits you have access to. If you want to qualify for federal programs and benefits, you should consider consolidating your federal loans separately and only refinancing your private student debt.