Refinancing your student loans can seem like an attractive option. After all, who wouldn’t want to save money on their debt? But for most students, refinancing federal loans is more complex than it seems. Here’s why:
In a word: no
Can I refinance federal student loans? “Perhaps you can — but for that, first, you have to qualify,” as said by Lantern by SoFi professionals. Refinancing federal student loans is not something you should be doing unless you have excellent reasons for doing so.
If you can pay off your federal loans sooner than the standard 10 years of repayment, then do so. But if that’s not an option for you, consider switching to another repayment plan instead. That way, instead of paying more interest on top of the principal amount, you’ll have more time to pay back your debt, save money in interest over time, and get out of this burden sooner than otherwise.
You’re giving up important benefits by refinancing federal student loans
You lose essential benefits by refinancing federal student loans. These include:
- The ability to defer payments if you lose your job, get sick or injured or go back to school.
- The option of consolidating multiple loans into one loan with a lower interest rate.
- The ability to select a graduated repayment plan that will fit your income level and financial situation best.
- Cancellation in case you die or become permanently disabled (if the government cancels the loan).
The money you save won’t be worth it
If you’re like most people, you don’t have much money to spare. If your student loans cost more than they should, refinancing them is a good idea. However, the benefits of federal student loans outweigh any savings that could be had by refinancing them. Refinancing your student loans means losing the following:
- The ability to defer payments on all or part of your loan balance for up-to-three years in certain situations (e.g., unemployment).
- A chance at having your debt forgiven after 25 years of making qualifying payments (this benefit is currently suspended through 2026).
You could end up paying more in the long run
When you refinance your federal student loans, you’re borrowing a new loan in order to pay off an old one. The result is that you’ll pay more interest over time—and the longer your old loan gets paid off, the more expensive it will be.
One potential downside of refinancing is that some borrowers may lose their income-driven repayment plan or their Public Service Loan Forgiveness benefits by switching lenders. If this happens, it’s because there’s no guarantee that future payments will be made on those plans with a different lender—and those plans are designed specifically for people who need help with their monthly payments due to financial hardship like unemployment or medical expenses.
There are much better ways to reduce your student debt
You can also think about a career change. If you’re in a field with high unemployment, consider changing careers to something that’s more in demand. For example, the Bureau of Labor Statistics (BLS) has a tool that allows users to search for occupations by type of work or industry, pay, and employment outlook.
Well, that’s it for today. You’ve gone over the pros and cons of refinancing your federal student loans. But, in most cases, it’s a good idea to take advantage of this option if you can afford it. Just remember that interest rates are still rising from here on out, so make sure you’re not buying into too much debt!
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