Rising interest rates encourage refinancing student loans. But refinancing is not always the right answer. Why refinance student loans?
When to refinance student loans
Not everyone can qualify for refinancing student loans. Usually you need a university degree, good credit and income that will allow you to conveniently afford expenses and pay off debts. If you meet these requirements, consider refinancing in the following circumstances:
- Savings will matter. You don’t have to wait until you get the perfect refinancing loan as long as you can get a better rate than today. Check to see if the lender is offering a student loan refinancing premium to further increase your savings.
- You have private student loans. By refinancing private student loans, you have almost nothing to lose because these loans do not qualify for federal loan programs such as income-based repayment and forgiveness of public loans.
- You have student loans with high variable rates. Forecasting payments with a floating rate loan can be difficult, and even loans with a low interest rate can be more expensive to pay back. Before increasing, consider refinancing to get a fixed interest rate.
- The rate environment is strong. Both fixed and variable refinancing rates for private loans may change depending on economic factors, such as interest rate increases or interest rate cuts in the Federal Reserve. When rates are reduced, you can take advantage of this situation by refinancing.
- Your finances have improved. If refinancing makes no sense after graduation, think about it when you’re on a more solid financial foundation. And if you have refinanced before but simply repaid your credit card debt or got a raise, you can now get a better rate – you can refinance as often as you like.
Why is that a bad idea?
- You will lose access to federal repayment options
By refinancing federal student loans, you will say goodbye to any federal student debt. This is because all refinancing lenders are private enterprises and therefore only deal with private loans. When you refinance one or more federal loans through a private lender, you get one new private loan.
- You will not be entitled to forgive a federal loan
If you refinance student loans, you will also lose access to federal loan cancellation programs.
For example, public loan forgiveness (PSLF) forgives the remainder of federal student loans after working for 10 years in a qualifying public service organization. Similarly, the Teacher Loans Forgiveness program allows you to repay debt of up to USD 17,500 after five years of eligible service.
- You will not lower the interest rate significantly
One of the biggest reasons borrowers decide to refinance student loans is to get a lower interest rate (although this is not the only reason). The student loan interest rate is usually increased on a daily basis; by lowering the rate, you can get significant savings throughout the loan period.