Student loans are a growing problem in the US. According to the New York Fed, student loan debt stood at $1.46 trillion in Q4 2018. All this debt will definitely have people wanting to refinance student loans.
But what are you options when you want to refinance student loans? Before answering this question, there is an important one we must answer first.
Federal or Private Student Loans?
Indeed, the first question we have to ask is whether you have federal or private student loans. Why is this so important? Well, there are several federal student loan protections. If your student loans are through FedLoan, refinancing could mean giving up those protections.
FedLoan is a federal student loan servicer. However, note that FedLoan is not the only servicer for federal student loans. Other servicers include Navient, AES, and Great Lakes.
To further complicate the matter, these companies may service both federal and private student loans. If you are unsure whether your student loans are federal or private, you can always contact them and ask.
Here are the contact numbers for common servicers:
Federal Student Loan Forgiveness
One of the main advantages of federal student loans is its forgiveness options. While not perfect, the Public Student Loan Forgiveness (PSLF) program is something you won’t see with private student loans.
To sum it up, the way PSLF works is you must work in public service for ten years while making monthly payments. After those ten years (120 payments), you are eligible for forgiveness. There are certain caveats to this; for example, your job must qualify for PSLF.
Regardless, student loan forgiveness is one of the main advantages of federal student loans.
Another benefit of federal student loans is the option for a Direct Consolidation Loan.
Note that refinancing often has much the same effect. When refinancing, you can often consolidate as well. However, doing so means you will give up any benefits of federal student loans, such as PSLF.
Refinance Student Loans: the Benefits
As with most things, there are benefits as well as drawbacks to refinancing. Whether refinancing is right for you will depend on your situation. It will also depend on your priorities.
As such, the best thing we can do is explain the benefits. From there, you’ll have to apply them to your own situation and decide if it’s the right fit.
Student Loan Interest Rates
One of the biggest potential benefits of refinancing student loans is reducing your interest rates. Doing so could be beneficial because it may reduce your monthly payments. In addition, less of your money will go toward interest with a lower interest rate.
However, the interest rates available to you might vary greatly. That is one of the reasons you will have to consult with each lender before making a decision.
According to Debt.org, federal student loans have interest rates ranging from 4.45% to 7%. These interest rates are also fixed, meaning they won’t change over the life of the loan.
The same article says that fixed interest rates for private loans range from 4.75% to 15.14%. Meanwhile, variable interest rates range from 3.40% to 13.09%.
It’s important to pay attention to the specific interest rates a lender offers. It’s even more important to pay attention to variable interest rates, though.
If you are currently paying 7% fixed interest and are offered 3.40% variable interest, that might seem attractive. However, if that rate then goes up to 13%, you may be worse off than you were before.
This is why you really have to pay attention to the particulars of your situation. You’ll need to read the fine print on this one.
Refinance Student Loans: Consolidate All Kinds Of Loans
Most federal student loans can be consolidated. However, there is one exception: Direct PLUS Loans for parents. Because these loans are in the parent’s name, they can’t be consolidated together with other types of student loans.
For example, let’s say you have a Stafford Loan and some Perkins Loans, but they don’t cover all of the cost. To help out, you parent also decided to take on a Direct PLUS Loan.
In this scenario, it won’t be possible to consolidate all of your student loans with a Direct Consolidation Loan. However, you may be able to do so if you refinance through a private lender.
“Shopping” Interest Rates
Without a doubt, the interest rate of your student loans is one of the most important aspects. When you refinance student loans, you want the lowest interest rate possible.
When you have federal student loans, you have little control over the interest rate. You will likely have the rate set by Congress and it will never change.
Conversely, one of the potential benefits of refinancing is the ability to shop around for different rates.
Lower Monthly Payments
There are a number of factors here, but you might be able to reduce your monthly payments when refinancing. Taking over a Parent PLUS Loan is one scenario.
It’s probably not the only one, though. Each lender has its own criteria. However, if you are on the lower end of the income spectrum, that may be considered. Having a strong credit history always helps as well.
This is yet another reason to shop around. You never know what rates they will quote for you, so the best way to find out is to ask.
Should You Refinance Student Loans?
If you refinance, you will be giving up the chance to have student loans forgiven through PSLF. Also, a private lender may not have the same income-based repayment options as federal student loans.
However, with a private lender, you may be able to land a lower interest rate with lower monthly payments. You may also be able to consolidate all of your student loans, which isn’t possible with Direct PLUS Loans.
Thus, a lot of the decision comes down to the interest rates private lenders offer. Plus whether you want to consolidate a Direct PLUS loan.
However, keep in mind that you will have to pay close attention to private lenders’ interest rates. If they offer you a variable interest rate, it’s possible it could increase to more than the Fed’s fixed rate.
At the end of the day, the best answer to this question of whether you should refinance student loans? It just depends.