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7 Reasons Why You Shouldn’t Refinance Your Student Loan

Should I refinance my student loans? It depends on your financial situation and goals.

Refinancing might get you a reduced interest rate and save you money on your debt.

However, refinancing federal loans means losing government repayment schemes and safeguards that you may require in the future.

Here are 7 reasons why you might not want to refinance your student loans:

Should I Refinance My Student Loans? 7 Situations When You Shouldn’t Do It

1. You Have No Emergency Savings

While refinancing your student loans might save you money, it can also leave you in a bind if something goes wrong.

Having an emergency fund is one strategy to safeguard oneself from difficult financial situations.

If you don’t have an emergency fund, you may find yourself unable to make your student loan installments.

When you’re in serious debt, many private lenders provide little to no protection. When bad things happen, federal loan servicers tend to give more protection than private loan lenders, whether it’s a health issue, a financial difficulty, job loss, or something else.

If you have at least a portion of your emergency fund set aside, it may be worthwhile to refinance now if you can do so with a lender that offers forbearance choices, such as Commonbond* (24-month grace period).

Note: an “*” means we’ll get some of your purchase prices as commission – but only if you went through us first!

2. You’re Almost Finished Repaying Your Debts

If you’re concluding your repayment period, refinancing may not be particularly beneficial.

You’ll pick a new plan when you refinance, whether it’s for five, 10, 15, or 20 years. Switching to a new lender may not be worth the work if you’re practically debt-free.

You also want to avoid adding time to your repayment plan unintentionally. Adding years to your repayment plan will only make your debt more costly unless your interest rate falls substantially.

3. Your Income Is Insecure Enough that you Can’t Refinance Your Student Debts

You take out a new loan from a private lender when you refinance student debts. The lender repays all of your debts, federal and private, so you no longer have to deal with your previous loan servicers.

It replaces the previous debt with a new loan with — ideally — better terms.

Refinancing is typically done to cut interest rates or change monthly payments. Even if you receive better terms, you’ll still need money to repay your new loan.

If you face financial difficulties, the private lender may not be willing to work with you.

If you’re afraid of losing your income soon, you might want to hold off on refinancing.

Make sure you’re confident in your capacity to make monthly payments before refinancing all of your student loans into one private loan.

4. You Have Bad Credit or No Cosigner With Good Credit

Before qualifying you for a student loan, refinance lenders look at your credit (or your cosigner’s credit) in addition to your income. For example, Splash Financial* demands a minimum credit score of 640.

If you don’t have good credit, you can apply with a cosigner who has decent credit.

However, that cosigner will be held responsible for your debt in the same way as you are, which they may or may not accept.

You may also discover that your refinanced student loans offer terrible interest rates, which won’t save you much money in the long run.

5. You May Need an Income-Driven Repayment Plan In the Future

You won’t have any federal student loans because you can only refinance with a private lender right now.

As a result, you won’t be able to take advantage of beneficial government programs like income-driven repayment or emergency forbearance, which were available during the COVID-19 epidemic.

One of the primary disadvantages of refinancing student loans is that you lose your eligibility for federal schemes and safeguards.

Income-driven repayment plans change your monthly payments if you’re having trouble making them.

Income-based repayment (IBR), for example, sets your monthly payments at 10% to 15% of your monthly income.

Some of these programs even allow you to pay over 20 to 25 years and then have any leftover amount forgiven.

Most private lenders set a 15 to 20-year payback period and don’t provide income-based safeguards.

Before refinancing, consider whether you’ll need an income-driven repayment plan. If you’re going to do it, keep postponing your federal student loan refinancing.

More: Differences Between Refinancing and Consolidating Student Loans

6. The Average Weighted Interest Rate Is Already Low

If your interest rate is lower, refinancing can save you a huge amount of money over the term of the loan.

Assume you owe $40,000 in student loans with a 7% average weighted interest rate and 9 years to pay them off.

You may cut your interest rate to 5% and pick a 10-year repayment plan by refinancing. Even if you extend your loan for another year, you will save $3,114 in interest.

Interest on student loans grows daily or monthly. If you can considerably reduce the rate, you may save a lot of money.

However, if your current average interest rate is low, a refinancing lender may not be able to match it.

Look through the options and discover what interest rates lenders are willing to provide.

Variable APRs range from 1.80% to 5.28% on Lend-Grow*, while fixed APRs range from 2.15% to 5.85%. If these APRs aren’t significantly lower than your current rate, refinancing may not be worthwhile.

If you want to know how much you’ll save or spend, check out our student debt refinancing calculator.

You’ll see a detailed comparison of one student loan to another after inputting your student loan debt and interest rates.

7. You Are Eligible for Student Loan Forgiveness

Several loan forgiveness programs are available from the federal government, including Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness.

After a specified number of years of service, these programs will eliminate your remaining loan balance.

You will no longer be eligible for federal loan forgivenessif you refinance your federal loans with a private lender.

Some states or schools may still have debt relief programs and other forgiveness alternatives available, but you won’t be able to take part in a federal program like PSLF.

So Is It Worth Refinancing?

Refinancing is best for people who have a regular income and don’t seek federal income-driven repayment plans, forgiveness programs, or other federal safeguards

Before you refinance your student loans, make sure the rewards outweigh the downsides.

If you refinance your student loans, you should be able to lower your interest rates and monthly payments.

Even if you aren’t a good contender right now, you may be a stronger prospect in the future.

So, before switching loan servicers, think about the entire consequences of your decision.

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