By Taylor Schulte | Finance News
Are your monthly student loan payments eating up a lot of money that prevents you from doing other things you need to save for, like getting married, starting a business, buying a house or having a family?
If yes, refinancing your student loans can look like an attractive option. Refinancing does make sense for some people and it can save money or make debt more manageable, but it’s not a cure-all for everyone with student debt.
Understand what happens when you refinance student loans and know the potential consequences before you start the process.
Restart the clock
Here’s what happens when you refinance student loans:
- You apply for a new loan with a new lender, asking to borrow the sum of all your existing student loan balances.
- The lender approves your loan application and underwrites a loan which includes new terms and interest rate.
- The money from the new loan is used to pay off all your existing student loan debt.
- You repay the new loan.
Say your existing student loans had 10-year terms and you were four years into paying them off. Your refinance loan could come with a 10-year term. You’ll be paying on that debt for 10 more years, rather than just the six you’d pay on your existing loans.
Extending the time it takes to repay debt could negate savings from a lower interest rate. Before you refinance student loans, do the math. Is the interest rate you can get from a lender low enough to make paying off loans over more months worthwhile?
No loan forgiveness
If you have federal loans now, you can currently enroll in one of the Department of Education’s many repayment plans or programs. But if you refinance?
Your new loan isn’t a federal loan. It’s private — which means you won’t be eligible for programs to help you repay student debt. That includes the Public Service Loan Forgiveness program.
That might be OK, especially if you don’t qualify for federal programs, use a repayment plan, or refinancing offers a way to save more on repayment than a federal plan does.
Need help running through the various scenarios? Consider working with a fee-only financial planner who can help design a comprehensive financial plan that considers all aspects of your life — including student loans — so you can maximize the money available to you. Just make sure that any financial professional you work with is a fiduciary. You can find a list of other important questions to ask before hiring a planner here bit.ly/2twwyZf.
Losing benefits, protections
Federal student loans offer certain protections to borrowers. Those include options for forbearance and deferment. It also includes the ability to discharge the debt if you were to pass away or become disabled.
Along with losing access to repayment plans and programs, you lose these benefits when you refinance. If something happened to you, your debt would not be discharged after your death. The lack of protections could leave you (or your family) in a bad spot in the future.
And if you had a cosigner on your original student loans, you need to ask your new lender for a cosigner release form before you refinance. Without that form, your cosigner gets stuck with the remaining balance of your refinanced loan — which they’ll owe immediately — if you were to die.
Refinancing does seem appealing. But it’s not the only way to make your student debt easier to manage and pay off. If you’re struggling to make your payments and want to get them under control, look at other aspects of your financial situation first.
Are you overspending? Could saving more money in your everyday expenses help you come up with the money you need to comfortably make your student loan payment?
If you’re doing your best to save but still can’t manage your student loan payments, it might be time to learn how to make more money. From side hustles to a switch in your full-time job, you have more options — and more control over your income — than you might think.
To see the original version of this article, visit bit.ly/2ubUGy3.
—Taylor Schulte, CFP, is the CEO of Define Financial and the founder of StayWealthySanDiego.com and is passionate about helping people make smart decisions with their money. He can be reached at 619-577-4002 or firstname.lastname@example.org.