If you are robbed of student loan debt, it may get to the point where it feels difficult to move forward. You pay, but a good part of it doesn’t even touch the director.
Culprit? Your interest rates. Federal student loans have fixed interest rates that don’t change over time, so you’re stuck with your rate – and if you have GFIC loans, that can be close to 7%.
One possible solution is to refinance students.
But while it can help student loan lenders save money on interest, it is especially risky for federal college student loan students.
What is Student Loan Refinancing?
You have probably heard that you can save money by refinancing a car loan or mortgage. Well, you can refinance and consolidate your student loans, too, allowing you to save money on interest and make payments.
And by shaving a few percentage points, you can save thousands of dollars and get out of debt faster. Sounds attractive, doesn’t it?
While there are cost savings involved, it can be a risky move for federal student borrowers in particular.
Consequences of Refinancing Federal Student Loans
Your federal student loan is administered by the US Department of Education. Chair of Education, students in charge of students have certain rights.
For example, lenders in a federal studio loan have access to a variety of repayment plans – including an income-based plan that bases your monthly payments on your discretionary income.
Federal student loans for an income-based plan that make consistent payments of 20 to 25 years may be eligible for student forgiveness. Borrowers in federal study credit also have access to deferral and deferral options. These options may pause your student loan if you are unable to make monthly payments.
“Federation student loans have many consumer protections in places, such as death and disability relief, extensive deferral and burden options, and the right to cure the default,” says student loan lawyer Adam S. Cole. “These programs are not just contracted – they are federal law, which makes them incredibly powerful.” And these opportunities can help you if you work in a low-paying field or if you are hit by difficult times.
However, federal student loan borrowers waive these benefits if they refinance.
When refinancing student loans, you work with a private company. As such, you are in your field, dealing with their rules. While refinancing a student loan can save you money, it may not help if you end up losing your job and unable to make payments. You will not have rich federal student loan fees offered through the U.S. Department of Education.
And when you refinance, there is no going back. “Refinancing federal loans to a private loan is a one-way street from the federal loan system. There is no way to turn a private loan into a federal loan again,” Cole explains.
As a student lender for students, you will lose the following benefits through refinancing:
- Eligibility for a revenue-based plan
- Potential student loan forgiveness
- Repayment assistance programs (such as public service loan forwarding and other programs)
- Death and disability
- Normal rehabilitation
Although lenders in student loan refinancing loans may offer some benefits such as deferrals, the benefits are still short compared to what the U.S. Department of Education offers. Not only that, but private lenders can change their offers at any time.
“Consumer protection for a private student lender is contractual and often discretionary – meaning the lender or repairer decides whether or not to enforce it,” notes Cole.
There are also many unknowns about the student and credit consolidation industry, which is still in its infancy.
“Because many players in the field of refinancing in private student loans are relatively new, we just don’t know how they will handle troubled lenders or borrowers who have had debt,” Cole says. “We don’t know how gentle and flexible they will be, how liberally they will apply programs to help with their contracts, or how aggressively they will accompany people.”
Is refinancing a good idea?
If you are considering refinancing your federal student loans, it is important to carefully weigh the pros and cons. Cost savings may be valuable for certain borrowers, but for most federal studio borrowers this may not be a good idea. There is too much to lose compared to the benefits and protection.
However, refinancing your federal student loans may be a good idea under certain circumstances. For example, if you have a steady job, large cash reserves, and plan to pay off your debt in no time, refinancing may make sense as a way to reduce interest rates and pay off debt faster. But there are no hard and fast rules about who should refinance their federal student loans and who shouldn’t.
“I think borrowers need to fully understand what they are getting and what they are giving up, and they need to assess their risk tolerance,” Cole says. For some borrowers, that risk might be too much – while for others it might be a short-term risk that helps them pay off debt faster.
So if you have a federal student loan and want to save money on interest through refinancing, first evaluate your current financial situation. Understand the benefits and safeguards they protect, and make sure you value them.