Is Refinancing Student Loans Worth It?
Student loan debt continues to weigh down a generation of Americans. Even though education usually translates into higher lifetime income, many people are struggling to pay their bills. Even worse, student loans are harder to discharge in bankruptcy than other types of unsecured debt, so the odds are high you are stuck paying them for the indefinite future.
One option is to refinance your student loans. But is this really a good option? Most people know about refinancing a mortgage, but few understand what it takes to make refinancing student loans a sensible step.
What Is Student Loan Refinancing?
You refinance student loans when you take out a loan and pay off an already existing one. So if Michael has $15,000 in student loans, he might get another loan for that amount and pay it off. Many people also roll multiple student loans into one. So Michael might have 3 student loans for $5,000, $4,000, and $6,000. He can take out one loan for $15,000 and pay them all off.
What Are the Advantages of Refinancing Student Loans?
The principal advantage is to get a new loan with a lower interest rate to pay off loans with higher-rates. With the lower rate, the borrower’s monthly payments should be lower, and the amount paid over the life of the loan should also be lower. If you can’t get a loan with a lower interest rate, then it rarely makes sense to refinance.
What Factors Go into Getting Approval?
According to Forbes, lenders will look at the following factors before approving you for a loan:
- Credit score—the higher the score, the better.
- Income—a lender wants to see that you can pay back the loan comfortably.
- Current debt—your debt-to-income ratio should not be too high, otherwise you are at risk of going into default.
- Total student loan debt—some lenders have a ceiling on how much student loan debt they will refinance.
Other factors include your educational degree and whether you have someone willing to co-sing on your loan.
When Does Refinancing Not Make Sense?
Refinancing might sound like a sure win, but there are two situations where you should probably avoid it.
First, you should avoid refinancing if you cannot get a loan with a lower interest rate. This defeats the purpose of trying to refinance. The primary goal of refinancing is to lower the amount you pay.
Second, you need to think carefully before refinancing federal loans, which have many repayment options that private loans do not. For example, you might qualify for public service loan forgiveness or an income-driven repayment plan. These options are generally not available with private loans. Federal loans also have deferment and forbearance options, which few private loans offer.
When you refinance federal loans, you lose out on all of the above options, so many experts discourage refinancing federal loans. However, this is an individualized decision. You might be so financially stable that you are confident you won’t need to ask for a deferment or forbearance, in which case the savings on interest might make refinancing federal loans attractive. You should talk to a student loan officer about this option.
Is Bankruptcy in the Cards?
Even if you cannot wipe out student loans in bankruptcy, you might eliminate other debts, like credit card charges. With more money in your pocket, student loan debts might be easier to pay.
Contact Nowack & Olson, PLLC today if you would like to learn more about whether bankruptcy is right for you. Our Plantation bankruptcy attorneys offer a free consultation.