Should You Refinance Your Student Loans?

Ordinarily… maybe? But for right now, an expert says it’s best left alone, especially if it’s a federal loan.

It can feel like you’ll spend a lifetime paying back multiple student loans — along with the 43 million other Americans who have them. Wouldn’t it be nice to pay a little less in interest each month? Fuck yeah it would! But should you? All those refinance offers seem kinda eager. What’s the catch? Are there any reasons you shouldn’t refinance your student loans? Alongside Robert Farrington, a student loan debt expert and founder of The College Investor who once paid off his own $43,000 debt in three and a half years, we’re studying hard to get some answers.

How simple is it to refinance student loans?

It’s not complicated — there’s oftentimes not even a fee of any kind! Typically, there’s no origination fees, loan fees, etc., you’re basically just taking out a private student loan that replaces your existing, usually federal loans (though many people also have private student loans). Eighty percent of all student loans are federal, Farrington says — and therein lays the rub.

The thing is, federal loans have amazing benefits even in normal times, like income-driven repayment plans and other hardship options. And in the midst of coronavirus, they have even more robust benefits: six months’ deferment, no interest until September 30th, even forgiveness plans.

And so when you refinance them…

Right, so when you refinance federal student loans, you’re doing it through a private institution, and from that point on, you can blow an air kiss and wave all those amazing benefits of federal loans bon voyage forever-ever. Now you’re on the hook to pay it back pretty much like you would a mortgage or car payment. There may be some deferment options right now through whatever lending institution you’re refinancing with, but the bill is still due sometime soonish! And it won’t be tailored to your income, and interest will probably accrue.

Sounds like a lot to give up.

It might be, depending on your situation. Farrington says this is the biggest mistake people make when refinancing student loans. A lot of people simply fail to realize all that they’re giving up when they opt for a lower interest rate. “In general it’s really important for federal student loan borrowers to think about it before they refinance,” Farrington says. “It can make sense! But my personal opinion is that, for 95 percent of federal student loan holders, it doesn’t make sense to refinance.”

How easy is it to qualify for refinancing?

Qualifying is one thing, but getting the advertised rate is pretty goddamn difficult. Also be aware that the advertised rate is usually a variable rate, as the interest rates on student loan refinancing can be either fixed or variable.

So what’s it take? 

Right now, Farrington says getting the best, advertised rate means having an 800-plus credit score, a great income and at least two years of income history.

What if I have approximately none of those things?

If you’re a recent grad or you don’t have much credit — or whatever else you’re dealing with — you might want to consider getting a cosigner. Having a family member or spouse with better credit or income sign onto the loan could help get you a better rate. But it can also be risky for the cosigner, as they’re now on the hook for these loans if you can’t make payments. If you do decide to go that cosigning route, Farrington recommends a workaround in case the worst happens: Having the cosigner take out a life-insurance policy that would cover the cost of the outstanding loan balance if anything were to happen to them. It might sound morbid, but once you look past that, it’s a financially smart way to make sure your albatross of a student loan is covered in a worst-case scenario.

How much can you save by refinancing?

In many cases, more than a hundred bucks a month, and tens of thousands over the term of the loan.

Is there anything shady about student loan refinancing?

They definitely target federal student loan holders, and they don’t usually go out of their way to warn you about all the benefits you’ll lose when you convert federal loans into private loans. One exception is CommonBond, whose CEO recently said his company is encouraging federal loan holders to take advantage of all federal-loan relief during this extraordinary time, rather than refinance with his company.

Also, some companies have an optional fee similar to a mortgage points system, whereby you can actually buy yourself a lower interest rate. Nothing wrong with that, except, as Farrington points out, it might prevent you from any subsequent refinancing, since you’re now literally invested in the loan you bought points for. It’s a soft, subtle way for the lender to keep you as its customer.

Is refinancing the same thing as consolidation?

Yes and no. This is a confusing term: When people refinance their student loans, they’re often combining several loans into one all-new loan, a dictionary definition of “consolidation.” But the federal government also offers a Direct Consolidation Loan to roll all your federal student loans into one, for free. We’re talking about an actual government program — a totally separate thing from private banks offering to refinance. Some people either get confused, Farrington says, or even mean to do one but end up doing the other by accident. 

Do certain professions get any special refinancing perks?

Yes — certain industries are sought after by lenders, and also trade groups and even companies negotiate with certain lenders and offer discounts. This is especially common with doctors, which makes sense: They have a lot of debt and high incomes. Lenders will sometimes offer doctors low payments while they go through their residency to lock them in, knowing that they’ll eventually earn a lot more down the road. With other trades and professions, it usually entails offering a lower interest rate.

So how do I know if refinancing is for me?

It depends on how good your credit is, how much you earn and how secure you feel your job is (though, is anyone’s right now?). Go ahead, shop around for quotes if you like. If you already have private loans, hell, go wild and refinance them as often as it makes sense to do so. But federal loan benefits are hard to beat, and seem tailor made for times like this. It’s up to you whether they’re worth giving up in exchange for paying less money every month.

Farrington, though, is pretty wary of it at the moment. “The real message here,” he says by way of signing off, “is if you have federal student loans, refinancing is probably not a good idea.”