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With wage garnishment for defaulted student loans resuming this summer and borrowers in the Saving on a Valuable Education (SAVE) plan facing potentially higher monthly payments, many are exploring options such as private student loan refinancing as a potentially more manageable avenue to handle their educational debt.
Private student loan companies are actively advertising attractive offers, particularly targeting those struggling with current monthly payments. For example, SoFi introduced SmartStart, a new program aimed at easing borrowers into repayment by requiring interest-only payments for the initial nine months. Similarly, Earnest offers features like the option to postpone a monthly payment when necessary. However, student loan specialists advise borrowers to proceed cautiously before refinancing with any private lender.
“I receive this inquiry frequently,” noted Elaine Rubin, a student loan policy expert at Edvisors. “Generally, refinancing a federal student loan with a private lender is not advisable.”
Rubin acknowledges there are exceptions. Here’s when refinancing your student loans with a private lender might be a viable choice, along with alternative options if refinancing presents too much risk.
Read more: There’s Still Time to Stop Your Wages From Being Garnished for Defaulted Student Loans
When Refinancing with a Private Student Loan Provider Is Advisable
Rubin indicates that there’s one particular type of borrower who might find refinancing federal student debt advantageous.
“A very financially secure individual who wishes to repay a loan rapidly and secure a more favorable interest rate might find this option beneficial,” Rubin explained. “This typically applies to someone who can comfortably afford their student loan payments but cannot immediately clear the full balance.”
Rubin cited examples such as dentists or physicians who earn substantially more than needed to cover their student loan payments but are not yet able to pay off the entire amount. Refinancing could help them secure a lower interest rate and reduce interest charges in certain instances.
Even if you meet these criteria, always compare rates and terms from various private lenders to ensure you’re receiving the most competitive offer. Refinancing might not be the best decision if you find that you’ll pay less over time with your existing federal student loan repayment plan.
Risks of Refinancing your Student Debt with a Private Lender
For most, Rubin suggests avoiding private lender refinancing offers, particularly if you’re enrolled in an income-driven repayment plan, seeking public student loan forgiveness, or living paycheck to paycheck. You risk losing significant benefits and potentially facing financial strain if you encounter hardships such as job loss or medical emergencies.
Here are additional considerations:
1. Loss of Federal Student Loan Protections
Refinancing with a private lender means forfeiting access to federal student loan benefits. These include income-driven repayment plans, administrative forbearances, and potential future federal student loan forgiveness programs.
“Some lenders in the Family Federal Education Loan program offer discounts for borrowers who consistently make timely payments,” Kantrowitz noted.
Federal student loans also provide hardship benefits like deferment and forbearance, which can maintain your loan status during periods when you’re unable to make payments. While private student loans may offer some hardship assistance, they typically lack the comprehensive benefits available with federal loans.
2. Potential for Increased Interest and Fees
While you might secure a lower monthly payment, you’re likely extending the repayment term of your loan, meaning you’ll be paying off your debt over a longer duration. Even with a reduced interest rate, you could ultimately pay more in interest and other charges. This prolonged repayment period can hinder your ability to increase your savings, set aside funds for a down payment on a home or car, or secure approval for a mortgage or other financing.
3. Qualification for Advertised Interest Rates Not Guaranteed
Private lenders may advertise interest rates or rate reductions that appear lower than your current federal student loan rate. However, qualifying for these rates is not assured. Most lenders require a strong credit history to secure their most favorable rates. If your credit score isn’t in the mid-to-high 700s, you’ll likely receive a higher rate.
Before applying with a private provider, explore pre-qualification options to get an estimate of your likely interest rate. Otherwise, you might need a cosigner to qualify for a more competitive rate.
4. Credit Score Requirements
Refinancing essentially replaces your existing loan with a new one. Therefore, you’ll need to satisfy the lender’s requirements, including creditworthiness. Some lenders stipulate a minimum credit score of 665 or higher for loan approval.
If you’re already in default on your student loans, refinancing with a private lender will be more challenging, and you’ll likely require a cosigner, according to Rubin.
Alternatives to Refinancing Your Student Loan Debt
If you’re struggling with student loan repayments, consider these alternatives before pursuing refinancing.
- Contact your loan servicer. If you’re at risk of falling behind on your student loans, immediately reach out to your servicer to discuss alternative repayment plans or hardship options to prevent default.
- Explore eligibility for lower monthly payments. Investigate available repayment options, including income-driven repayment plans, using the Department of Education’s Loan Simulator.
- Consider loan consolidation. If you have multiple loans with varying interest rates, you may be able to consolidate them into a single direct loan with a unified interest rate. This could potentially reduce your interest rate or your overall monthly payment.
- Investigate loan rehabilitation. If your loans are in default, you can avoid wage garnishment. The Office of Federal Student Aid offers loan rehabilitation, allowing you to restore your loans to good standing by making nine consecutive on-time payments under the agreed terms.