Most students realize that college is an essential part of obtaining a worthwhile and lucrative career. However, the excessive and growing costs of college cause many to wonder if it's’ actually worth it. There are a number of viable options that don’t include racking up tens of thousands of dollars in student loan debt, such as community college, trade school, and apprenticeships.
Many students head to college without really understanding what they’re getting into or how they’re going to pay the large debt they’re accumulating. They end up having to choose from one of the federal student loan repayment plans, making decisions that will affect their finances for the next ten to thirty years.
Often, borrowers will end up refinancing their student loans so that they have more manageable payments. In order to understand the student loan refinancing rules and if this option will be a good one for you, you’ll want to consider a number of aspects of refinancing.
Some government programs may be better than refinancing with a private lender
While refinancing your federal student loan will make sense in certain situations, it’s not necessarily the best option. In some cases, it will be more beneficial to use other government repayment plans for paying your student loans. By refinancing with a private lender, you are actually missing out on some of the better student loan repayment plans.
If you refinance with a private lender, you won’t be able to use an income-driven repayment plan that ends up forgiving your remaining balance after 20-25 years. You will also be ineligible for the PSLF, which provides loan forgiveness for public service workers after 10 years.
The government offers assistance for times of hardship, such as deferment and forbearance. By refinancing with a private lender, you are removing your ability to utilize these helps if necessary. There are a number of benefits that the government provides to those with a federal student loan. Keep in mind that when you refinance, you are giving those benefits up.
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You can change your repayment plan without refinancing
If you don’t want to give your benefits up, you can change your repayment plan instead of refinancing by simply switching from a 10-year repayment plan to a different one. You can change to an extended repayment plan that allows you to pay off your loans for up to 25 years, or you could use an income-driven repayment plan that bases your payments off of your income and forgives the loan after 20-25 years.
While you may end up paying more in the long run for these plans, if you are in need of monthly payment relief, then switching to one of these extended plans may be the best option.
You don’t have to lose federal benefits when you consolidate
Another option for reducing your monthly payments without refinancing and losing your federal benefits, is the Direct Consolidation Loan. With this loan, your federal student loans are consolidated into one loan with one interest rate that is dependent upon the weighted average of your old loan rates.
With one interest rate and one monthly payment, you’ll be better able to manage your student loan payment. They are also still considered federal loans, ensuring that you will be able to keep your federal student loan benefits
Private student loans can be refinanced at any time
While you can’t change your private student loan into a federal student loan, you can refinance your private student loan as often as you need, as long as you qualify. Once you’ve refinanced from a federal loan to a private one, you will have the option of continuing to refinance if the need arises.
Keep an eye on student loan interest rates. If they drop more than 1%, it may be time to refinance again, especially if you’re looking to lower your monthly payment.
However, don’t forget that continually refinancing your student loan will extend the length of repayment, and cause more money to be paid towards interest.
The Final Word
Refinancing your federal student loan may be a great idea for you if you have a strategy and goal for repayment. Ideally, borrowers who refinance will have a great income and credit, as well as a plan for repayment within three to five years. Those who are just looking for a lower monthly payment will probably want to avoid refinancing and just switch their payment plan.