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For Your Life Matthew Frankel, CFP® September 18, 2023

Thinking of Refinancing Your Student Loans? 3 Important Questions to Ask Yourself First

If you haven't already, you're probably going to start receiving offers from private companies offering to refinance your student loans. With payments set to resume soon, many borrowers are worried about fitting their student-loan payments into their budget.

While keeping your student-loan payments affordable is certainly a valid concern, refinancing your student loans might not be the best way to do it. To help determine if refinancing is right for you, here are three important questions to ask yourself.

Can you lower your monthly payment by refinancing?

This is the most obvious reason you might be interested in refinancing, but as we go on, you'll see it's not the most important consideration for many borrowers.

It's rather easy to answer this question. There are a handful of major companies that offer private student-loan refinancing, and most will allow you to check your personalized interest rate and loan-term offers without a hard credit pull and with an easy pre-approval form.

This can be the most important factor if you have private student loans you're looking to refinance. But if a chunk of the $1.6 trillion in federal student-loan debt is yours, you should ask yourself the other two questions first.

Do you (or will you) benefit from income-driven repayment?

It's been about three and a half years since most federal student-loan borrowers have had to worry about what repayment plan they're enrolled in. And even if you didn't qualify for a lower payment through one of the income-driven plans, that may have changed. After all, the new SAVE plan is expected to reduce student-loan payments by more than $1,000 per year for most federal student-loan borrowers.

Private student loans do not qualify for income-driven repayment plans, even if the loans you're refinancing are federal loans. You don't get to bring any of the benefits of federal student loans with you, and that includes the ability to get a payment based on your income.

Are you a candidate for loan forgiveness?

Another big benefit of federal student loans is the ability to participate in loan-forgiveness programs. Most notably, the public service loan forgiveness (PSLF) program forgives any remaining balance after making 120 payments while working in qualifying employment -- and the three-and-a-half-year payment pause counts as if you had made payments on time.

There is also the teacher loan-forgiveness program that provides up to $17,500 in loan forgiveness after five years of service for certain public school teachers. And don't forget about the forgiveness provisions in income-driven repayment plans. Most forgive any remaining balance after 20 or 25 years in repayment -- even if your required monthly payments are $0 because of your income.

Of course, many people are not going to benefit from loan forgiveness. If you don't have employment that qualifies for one of the programs, and you earn too much to benefit from income-based forgiveness, the answer to this question is probably no.

Consider the big picture

It's important to answer all three of these questions before you consider refinancing your student loans. And to be perfectly clear, for the vast majority of federal student-loan borrowers, it doesn't make good financial sense to refinance, especially with interest rates having risen significantly over the past couple of years.

In a nutshell, there are two main groups of people who should consider refinancing:

  • Borrowers with private student loans who for one reason or another have high interest rates, even compared with what they can get today. For example, if you have private student loans with a 10% APR and you have good credit, you could probably lower your payment.
  • Borrowers with federal student loans whose income is too high to benefit from income-driven repayment (IDR) plans and who aren't going to be eligible for public service loan forgiveness. But even in this case, it only makes sense if you can get a lower interest rate by refinancing.

If you're in one of these groups, refinancing could be a good option for you. But be sure you understand the reasons for and against refinancing, especially if you're a federal student-loan borrower.

 

This article was written by Matthew Frankel, CFP® from The Motley Fool and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.

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