Refinancing Federal Student Loans: What You Need to Know
If you have good credit and a consistent salary, restructuring your federal student loans may be a prudent move. Even though you could save a lot of money, there are a number of risks involved in lowering your interest rate. Take the following into consideration before deciding to restructure your federal student loans.
What Exactly Is Student Loan Refinancing?
Refinancing your debt occurs when you submit an application for a new loan to pay off your current student loans. Usually, this is done to reduce your interest rate or increase the amount of time it would take you to pay back the debt.
If you possess a federal student loan, you must restructure with a private creditor. If you possess private student loans, it is important to shop around before restructuring because you can do it either with the current creditor or an alternative one.
How Does Student Loan Refinancing Work?
If you possess federal student loans, you must take restructuring into account because doing so would result in you losing federal safeguards including customized reimbursement plans and possible loan forgiveness. Refinancing is only possible through private creditors.
Prequalification is a service that many creditors offer. You can request a rate quote by providing some basic details about yourself and your current loans. The greatest approach to evaluate the rates offered to you by several creditors is through prequalification because, unlike a formal application, it does not harm your credit score.
The Pros and Cons of Refinancing Federal Student Loan
|A lower interest rate is possible.||You are no longer qualified for reimbursement based on your income.|
|You can settle your loan more quickly.||You are ineligible for loan forgiveness programs.|
|You can roll over several loans into one.||You are no longer qualified for federal forbearance or deferment.|
|A child may receive parent loans.||Everyone is not eligible for restructuring.|
1. A lower interest rate is possible.
You may have a relatively high-interest rate on your federal loans, depending on when you took them out and the sort of loans you have. Your chances of getting a lower rate and saving money over the course of your loans increase if you restructure them.
When you restructure your debt, you often have the choice of a variable or fixed-rate loan. For customers with excellent credit and a steady source of income, creditors that specialize in restructuring currently offer rates that start at roughly 2%.
2. You can settle your loan more quickly.
More of your settlements will go toward principal rather than interest if you restructure your loans and are approved for a lower rate. If you’d like, you may also take advantage of this to cut the length of your payback period.
For example, if you reduce your payback duration from seven to five years, your monthly settlements might go more, but you’ll save money overall by settling off your debt sooner. You can settle your loans months or even years ahead of schedule if you’re committed to getting out from under your debt as soon as possible.
3. You can roll over several loans into one.
By the time they leave college, the average college graduate will have eight to twelve various student loans. Keeping track of so many debts, settlements, and due dates can be disastrous. It’s simple to mix up dates and loan servicers, which can lead to missed settlements and bad credit.
Your loans are consolidated into one when you restructure them. You can even combine your federal and private student loans so that you only have to remember one monthly settlement.
4. A child may receive parent loans.
There is a significant benefit to restructuring your loans if you are a parent who obtained parent PLUS loans to settle for your child’s undergraduate studies: You can transfer the loans to your child. Your child may be able to restructure the loans and assume responsibility for the debt with some creditors. If your child is accepted, your debt will be settled and you won’t be held accountable for settling it back.
1. You are no longer qualified for reimbursement based on your income.
Income-driven reimbursement (IDR) programs are available to you if you’re a debtor of federal loans. Your loan servicer will determine your settlement based on a longer term and a portion of your discretionary income if you qualify. Additionally, if your situation warrants it, any outstanding debt may be canceled after 20 or 25 years.
If you restructure your debt, you may be eligible for a monthly settlement that is significantly lower, but IDR plans are no longer an option for you.
2. You are ineligible for loan forgiveness programs.
Loan forgiveness programs like the Public Service Loan Forgiveness and Teacher Loan Forgiveness are available to debtors of federal loans. However, you lose your eligibility for federal forgiveness programs whenever you restructure your federal loans.
3. You are no longer qualified for federal forbearance or deferment.
If you have federal student loans, you can benefit from generous deferment or forbearance if you face financial difficulty, fall gravely ill, or decide to go back to school. You may be able to delay your settlements for up to three years, depending on the type of forbearance or deferral you are eligible for.
These programs are only open to federal debtors. After restructuring, you cannot use them. Even though many creditors for restructuring have their own financial hardship programs, most of them aren’t as flexible as the ones offered by the government.
4. Everyone is not eligible for restructuring.
You normally need high to exceptional credit and steady income to be eligible for student loan restructuring—and to get the best rates. If you don’t fulfill those conditions, you probably won’t be approved for a loan unless you apply for one with a co-signer.
Should You Refinance Your Federal Student Loans?
Debtors are currently receiving unprecedented assistance from the federal government. Therefore, it would probably not be a good idea to restructure government student loans in the following circumstances:
- Over the next few months, your job may be in jeopardy.
- If your employer did change, you wouldn’t be able to meet all of your financial responsibilities.
- The present settlement suspension is necessary for you to settle other bills.
- You are eligible for currently offered federal loan forgiveness programs.
Some lawmakers still advocate for more forgiveness initiatives. If you restructure federal loans through a private creditor, you might not be eligible.
You would probably save more money by canceling the $10,000 offer than by restructuring. However, there is no assurance that forgiveness will take place, and it is impossible to predict whether you will benefit without understanding the specifics of a program.
Refinance government debt only if you’re willing to take the associated risks. Refinancing student loans could result in long-term savings on federal loans with high-interest rates if you’re okay with giving up loan advantages.
Let’s take an example where your debt was $30,000 with a 10-year reimbursement period and a 7% interest rate. You may save close to $7,000 by restructuring at a 3 percent interest rate, which is about the best you could hope for.
You normally need good credit (a FICO score in the upper 600s or higher) and a debt-to-income ratio lower than 50% to be eligible. If you decide to postpone restructuring, strive to surpass those standards so that you may receive the best terms when you do.