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Figuring out how to manage your federal student loans now that the U.S. Department of Education has lifted the student loan payment pause can be challenging. Although refinancing your federal loans can save you money if you qualify for a lower rate with a private lender, it also has potential drawbacks, like giving up access to student loan forgiveness programs and income-driven repayment (IDR) plans. As a result, it’s best to explore all of your federal loan repayment options before applying for a refinance loan.
What to keep in mind when refinancing federal student loans
Refinancing can save money if you qualify for a lower rate with a private lender. You can use a student loan refinance calculator to estimate potential savings. However, before you convert a federal student loan into a private one, it’s important to consider potential downsides.
Refinancing federal student loans takes away benefits
By replacing your federal student loans with a private student loan, you would be giving up certain benefits, including:
- Income-driven repayment.
- Access to student loan forgiveness programs.
- Federal student loan consolidation.
It can be challenging to refinance student loans with bad credit
When you apply to refinance your student loans, the lender will check your credit report and score as part of the process. If your credit is in poor shape, you could have difficulty qualifying. And even if a lender approves your loan application with credit problems, you might not receive the most attractive interest rate or terms.
If you can spend some time improving your credit before you apply for refinancing, you may save a lot of money on interest in the long run. You may also want to take advantage of the prequalification process. Prequalification lets you see if a lender will likely approve you for a loan (and at what interest rate) without negatively impacting your credit score.
What other steps can you take if you’re having trouble making payments?
Refinancing your student loans can potentially lower your monthly payment by securing you a lower interest rate, extending your repayment terms or both. However, refinancing may not be beneficial in all situations, and it likely won’t solve your main problems with making payments. Consider these alternatives:
- Apply for forbearance: If you have private student loans and can’t keep up with your monthly payment, contact your lender to see if you could temporarily suspend your payments through forbearance. Although interest will continue to accrue during this time, pausing your payments while things improve can save you from damaging your credit.
- Ask for an adjusted repayment plan: Even if a lender doesn’t have an established forbearance program, it may be willing to temporarily adjust your payments. Often, a lender would rather work with you on creating a plan than let you default, so it’s always worth asking.
- Apply for income-driven repayment if you have federal student loans: If you can’t afford to pay federal student loan debt, consider applying for an income-driven repayment plan. With an income-driven repayment plan, your monthly payment is limited to between 10 and 20 percent of your discretionary income and can be as low as $0, depending on how much you earn.
The bottom line
Refinancing a federal loan could save you thousands of dollars on interest if you can qualify for a lower rate with a private student loan. However, think twice before refinancing because it means you’ll lose access to valuable federal loan benefits.
If you decide refinancing is the right option, shop around to find the best student loan refinance rates available.