Federal student loan borrowers should think carefully before refinancing with a private lender
Private student loan companies really want you to refinance your loans with them and make a lot of money when you do. Perhaps that’s why we just watched the Super Bowl play out in a stadium named after one of the biggest loanees. Since low rates from private lenders are tempting, you might want to stop and think before you jump on what seems like a bargain.
Interest rates on all types of credit have been incredibly low for years, and the private student loan refinance market is no exception. Every week, great deals drop into mailboxes and inboxes across the country, offering student loan refinance at what looks like great interest rates, sometimes as low as 2%. For borrowers with federal student loans over the past two years, when interest rates have been relatively low, this may not be an attractive offer. For borrowers with older loans, however, this may seem tempting. Rates on federal direct loans have reached 6.8% over the past fifteen years. For PLUS loan borrowers, rates reached 8.5%. With the Federal Reserve looking set to start raising interest rates this year, there will likely be a publicity rush from private student lenders pushing borrowers to lock in a low rate now before interest rates are not noted. Student loan holders with good credit are particularly likely to be targeted and may be tempted to accept offers made to them.
These refinancing offers may seem very tempting at first glance. They brag about how much easier it is to consolidate multiple loans into one loan, how much money you’ll save, and how I can potentially pay off my loans sooner. Now, if you only have private student loans, refinancing could be a smart move if you crunch the numbers, check out what’s on offer carefully, and know that you’ll come out on top financially. If you refinance with another lender, private student loans offer very few additional benefits or protections that you can lose. For the most part, all you’re doing is swapping one lender for another with a lower interest rate. However, if you have federal student loans, you should take the time to evaluate all of your options before jumping on the enticing offers that land in your inbox and your mailbox. If all of your loans are federal student loans, you might want to take some time to think about what you would lose by refinancing.
Federal student loans come with protections that private loans don’t.
Federal student loans come with many protections and repayment options that private loans don’t. If you have federal student loans, you can suspend payment during times of financial hardship. Federal loans allow you to qualify for student loan forgiveness if you work in the civil service for ten years under the civil service loan forgiveness program, as well as the temporary loan forgiveness waiver of the civil service, which can give borrowers credit for past payments that did not previously count toward forgiveness. There are also several types of income-contingent repayment available to federal borrowers that are not available if you refinance with a private lender. Although far from perfect, income-driven repayment plans also offer the possibility of loan forgiveness if you make payments long enough and still have a balance owing.
Currently, there are four different income-based repayment plans for federal student loans with different eligibility criteria. These are:
Revised Pay As You Earn Reimbursement Plan (REPAYE Plan)
Pay As You Earn Reimbursement Plan (PAYE Plan)
Income Based Reimbursement Plan (IBR Plan)
Income Contingent Repayment Plan (ICR Plan)
Yes, income-based repayment options are too complex, with too many options, and need serious reform and improvement. It’s always better to have income-based repayment options than none at all, and that’s exactly what you get with private student loans. Work is also underway to try to improve income-contingent repayment, with student advocates pushing for lower payments and greater protection for borrowers. Yet the ability to have your payment matched to your income can make a big difference in managing what is often already a huge financial burden. This kind of flexibility is only available with federal student loans.
Before Refinancing Federal Student Loans, Ask Yourself a Few Questions
If you’re considering refinancing with a private lender, it’s worth asking yourself the following questions.
· Do I work in the civil service and plan to do so for at least ten years?
· Could I cancel some of my loans under an income-based payment plan?
· If I lost my job, would I still repay my loan?
· If my income decreased, would I still be able to make my payment?
· Will a lower interest rate reduce my payment enough to make up for the loss of federal student loan benefits?
· Can I be sure that I will not encounter financial difficulties while I repay loans and need means to reduce my payments?
These are important factors to consider before considering refinancing your federal student loans. Federal student loans offer many guarantees that private student loans do not. Federal loans are designed to take into account the worst times in life: job loss, loss of income, serious illness and any other life event that can change your financial situation. Private lenders are much less willing to make allowances for such things. Federal student loan refinancing only makes sense if the benefits far outweigh the costs. This is often not the case.
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