If you are finding that you are currently suffering from a high-interest rate or feel like your monthly payments are making each month tighter, then refinancing could be a good strategy. By refinancing your loan, you could reduce your interest rate, lower your monthly payment, or renegotiate the terms of your debt according to Student Loan Hero. This can help make the burden of your debt weigh less on your wallet.
Furthermore, according to “8 Valuable Rights You Might Lose When You Refinance Student Loans,” Fannie Mae is offering a sweeter deal for those looking to refinance their mortgage to pay off their student debt. This new offer will “make it more affordable for graduates — or parents — to use home equity to pay off student loans by waiving the usual extra charge for taking out cash when you refinance a home.” If you have a private loan, then the consequences of consolidating or converting it into a mortgage are probably more alluring. However, if you have a federal student loan, here are some of the things that you will be giving up.
Federal Protections and Options You Will Give Up
If you decide to refinance your federal loan, you will lose two big safety net options—deferment and forbearance. If you end up losing your job or are still struggling to find stable work after graduating, then you could attempt to defer your loan payments. Depending on the type of loan you have, the federal government may even cover the interest while you are looking for a job. Forbearance is similar to deferment except that the interest is not covered and it continues to add to your balance.
Another option that you will forfeit include the income-driven repayment plans that are offered by the government. These include Income-Based Repayment (IBR), Income-Contingent Repayment (ICR), Pay As You Earn (PAYE), and the Revised Pay As Your Earn (REPAYE). These plans were designed to help those who are eligible and in need of a more manageable payment option. However, it doesn’t stop there. If you do decide to refinance your loan, then you are also giving up the benefits of any loan forgiveness programs through the government.
Is It Worth It to Refinance?
As you can expect, keeping these options open to you is the safer route even if you are paying more in interest. It really boils down to your own current financial situation and where you expect to be in the near future. If you are still unemployed or are not making a significant amount of money out of college, then keeping these federal repayment options open to you would probably be the best route.
However, this might not be the case for everybody. If you have a stable form of income and have good credit then you can probably dispense with the federal benefits. A person in this situation may want to just pay off their debt as quickly as possible, which would make refinancing more appealing, and diminish the risk of losing these federal options. Reflect on your own situation and make the best decision in light of your current financial standing.