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September 15th, 2020

Should I Refinance my Student Loans?

What does it mean to refinance your student loans? 

Refinancing involves you taking out a new loan to replace your old loan or group of loans. The old loans are paid off and you then make payments towards this new one instead. The goal being that the new loan is at better interest rates and terms. The sooner you can do this, the better. In the best case, it can help you save money and pay loans off faster, especially if you are able to get a lower interest rate than before. 

You should refinance your student loans if the following describes your situation: you have high interest, private student loans, you will be able to lower interest rates thus lowering your monthly payments and the total payback amount. If you are not eligible for federal loan programs, you have nothing to lose! 

You should not refinance your student loans if the following describes your situation: you only have federal student loans that are on an income-based repayment plan paying towards loan forgiveness programs. Particularly, the Public Service Loan Forgiveness (PSLF) program which is available to those working in government or nonprofit fields and provides loan forgiveness after ten years of qualifying payments. 

Additionally, the following needs to be considered:

Do you only have federal student loans? If so, having access to income-based repayment is very valuable.  Think how helpful this option is if you are facing a decrease in income or have loan balances that would not be feasible to repay due to your income level if you were on a standard repayment plan. Then during times of economic instability, like COVID-19, there can be generous deferment and forbearance periods that give more time to make payments and still remain in good standing. If you qualify for federal loans but choose to refinance your students loans, which is done privately, you will lose access to all of these options. 

Like all things credit related, if you have poor credit, it may be hard to qualify for any new loans if unexpected issues arise in the future. If you are behind on payments, this is something lenders will notice. This strongly impacts your credit score and lenders will hesitate to give you a new loan if you have shown you are having trouble paying back your current loan. Even if you do qualify, you may need a cosigner, which is a person who agrees to sign and vouch for your credit, tying their (usually good) credit score to yours now. This may be difficult to find knowing the many risks associated with doing so. 

Working with a Financial Planner who specializes in student loan planning can help you sort through the nuisances of creating the best repayment plan for your situation.

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