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Should I Refinance My Student Loans?

Should I Refinance My Student Loans?
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated August 29, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Student loan refinancing in some cases may improve your debt-to-income ratio, but refinancing can also potentially bring more harm than good upon you. Whether student loan refinancing is right for you depends upon your personal circumstances and the nature of your student loan debt burden.Qualifying for student loan refinancing doesn’t necessarily mean you’ll benefit from it. Refinancing may not be advisable for you if it raises your interest rate or causes you to lose exclusive benefits that you count on.You cannot get federal student loan forgiveness if you refinance your federal student loans with a private lender. What you can do, however, is submit a student loan refinance application after receiving partial forgiveness from the federal government. For example, if you’re holding $45,000 in federal student debt and receive $10K in forgiveness from President Joe Biden’s debt relief plan, if the plan moves forward, you may then refinance the remaining $35,000 balance.Refinancing might be suitable for you if it provides you with a lower interest rate and better financial outlook over the life of your loan. Some borrowers may find it worthwhile to refinance their remaining federal student loan balance after receiving up to $20K in debt relief from President Biden’s loan forgiveness plan, if it proceeds. The plan is currently on hold because of legal challenges.

How Much Does Refinancing Save You?

There’s no guarantee that refinancing will save you anything. Refinancing in some cases may lower your monthly payment and also expose you to more interest charges over the life of your loan.Refinancing your student loans with a more expensive loan product may not benefit you in the long run. In other cases, however, refinancing may work in your favor. Whether or not refinancing saves you money depends upon the terms and conditions of your refinanced loan agreement.Refinancing for a longer repayment term and lower monthly payment may cause you to pay more interest charges over the life of your loan. Refinancing for a shorter repayment term and lower interest rate, by contrast, can save you money over the life of your loan. Having a $30,000 student loan, 4.99% interest rate, and 10-year term, for example, would cost $318.05 per month. The monthly payment would be $317.17 under a nine-year $30,000 refinanced student loan charging 2.99% interest. This is an example where refinancing could save the borrower about $3,912 over the life of the loan thanks to a shorter term and lower interest rate. Refinancing $30,000 of student loan debt with a 4.75% interest rate and 12-year term would cost $273.72 per month. If the original $30,000 loan had a 4.99% interest rate and 10-year term, this is a refinancing example where the borrower could pay about $1,250 more toward total interest. That’s because the borrower refinanced the student loan for a longer term and went from a 10-year repayment plan to a 12-year repayment plan.

Student Loan Repayment Burden

Some borrowers may never finish repaying a student loan during their lifetime. What happens to student loans when you die is the debt might be discharged, although some private lenders may demand repayment from your estate.Some may ask, how long does it take to pay off student loans? It can take borrowers between 10 to 30 years to pay off federal student loans and five to 25 years to pay off private student loans.The average student loan debt across the United States is tens of thousands of dollars per borrower, according to the Education Data Initiative. Researchers from that group found the average federal student loan debt in 2021 stood at $36,510 per borrower, while private student loan debt averaged $54,921 per borrower.

Types of Student Loans to Refinance

Student loans can be federal or private, and borrowers may refinance both. The difference between private and federal student loans is that federal student loans are provided exclusively by the U.S. Department of Education. Banks, credit unions, online lenders, and select state-based or state-affiliated organizations may offer private student loans.How student loan refinancing works is that borrowers submit an application with a private lender requesting a new loan agreement for refinancing student loan debt.Refinancing federal student loans can allow borrowers to replace their existing federal loans with the terms and conditions of a private loan agreement. Private lenders can set their own underwriting standards, but some may require applicants to have steady income and good credit. For subprime borrowers, it might be difficult to refinance student loans with bad credit.Reviewing the pros and cons of refinancing student loans can help you decide whether refinancing is right for you. One of the advantages of refinancing student loans is it may provide you with a lower interest rate. One of the big disadvantages of refinancing student loans with a private lender, however, is you’ll be forfeiting federal benefits. Refinancing federal student loans will remove your access to income-driven repayment plans offered by the federal government.The federal government in March 2020 suspended student loan payments in response to the COVID-19 pandemic. After a number of extensions, the moratorium on student loan payments is scheduled to be lifted on Dec. 31, 2022. Borrowers can make more than the minimum payment when paying off student loans.

Federal Student Loans

Borrowers may refinance federal student loans with a private lender. This means federal student loan borrowers may switch from a federal repayment plan to a private student loan refinancing payment plan. Refinancing federal student loans, however, means you’ll also lose access to federal repayment plans and programs that can lead to loan forgiveness. Members of the U.S. armed forces with federal student loan debt, for example, may forfeit military student loan forgiveness if they refinance. The federal government has a variety of programs and repayment plans that can lead to federal student loan forgiveness, including President Biden’s student loan forgiveness plan. The forgiveness program announced by Biden would provide up to $10K in debt relief to federal student loan borrowers with annual incomes below $125,000 ($250,000 for married couples). Some borrowers may qualify for $20K in debt forgiveness under Biden’s plan if they’re Pell Grant recipients who meet the income threshold.

Private Student Loans

Refinancing private student loans is when borrowers replace their existing private loans with the terms and conditions of a new private loan agreement. Refinancing private student loans does not necessarily entitle you to any student loan forgiveness relief. You may ask your private lender for relief if you’ve refinanced your student loans and find yourself unable to repay the debt. Private lenders in some cases may reach a debt settlement agreement with delinquent borrowers. Debt settlement agreements may include debt forgiveness provisions, which may qualify as taxable income in some cases. This means forgiven student loans may carry income tax liabilities at the state or federal levels, but the Biden administration’s broad loan forgiveness plan will not be treated as taxable income for federal income tax purposes.

When to Refinance Student Loans

Below we highlight cases when student loan refinancing may work in your favor:

Lower Monthly Payment

Refinancing may work in your favor if you need a lower monthly payment to better manage your personal budget and finances. Refinancing your existing student loans into a single loan with a longer repayment period can give you a lower monthly payment.

Lower Interest Rate

Refinancing may work in your favor if you can lock in a lower interest rate that saves you money over the life of your loan. Locking in a lower interest rate with a private lender may lead to significant cost-savings over time, particularly if you’re refinancing tens of thousands of dollars in student loan debt.

Better Debt-to-Income Ratio

Refinancing may work in your favor if it can improve your debt-to-income ratio in a meaningful way. Your debt-to-income ratio, also known as DTI, measures your ability to afford new debt without defaulting on your existing obligations. Most lenders like to see a DTI below 36%. Refinancing a student loan for a lower monthly payment would improve your DTI if your gross monthly income remains equal.

Simplifying Debt Burden

Refinancing may work in your favor if it simplifies your debt burden in a way that works better for you. If you have federal and private student loans, you can refinance and replace all of those loans with one private repayment plan.

Qualifying for Better Terms

Refinancing may work in your favor if you can qualify for better terms than what you already have. You’ll lose access to federal repayment options and federal student loan forgiveness programs if you refinance federal student loans. Refinancing may still work in your favor, however, if you determine that refinancing would provide you with better terms.

Pros of Refinancing Student Loans

Here are some of the pros of refinancing student loans:
  • You may get a lower monthly payment
  • You may get a lower interest rate
  • You may emerge with a more simplified debt burden

Cons of Refinancing Student Loans

Here are some of the cons of refinancing student loans:
  • You may lose access to federal repayment and loan forgiveness programs
  • You may pay more interest charges over the life of the refinanced loan
  • Your private lender may be unwilling to forgive your refinanced debt

The Takeaway

Borrowing money to go to college can be expensive. A postsecondary education program can cost tens of thousands of dollars and may leave you burdened with student loan debt. Refinancing your student loans may provide you with some relief, particularly if you don’t qualify for a sufficient amount of loan forgiveness.Lantern by SoFi can help you compare student loan refinance rates. Refinancing might be right for you if you can lock in a lower interest rate. Explore your student loan refinancing options with Lantern.

Frequently Asked Questions

Is refinancing a student loan worth it?
What is not a good reason to refinance student loans?
Can refinanced student loans be forgiven?
Photo credit: iStock/urbazon

About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and currently serves as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
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