Student Loan Refinancing: Assessing if this Money-Saving Strategy is Suitable for You

Below is a post by Travis Hornsby. He founded Student Loan Planner. You can read more about him at this post’s end.

Are you anxious about repaying your student loans? I’ve seen so many people struggling with the same issue.

Refinancing student loans is something we often recommend to our clients. Refinancing can help borrowers save a lot of money. Is this money-saving method right for you or not?

It’s not the best option for everyone, even though it can save thousands of dollars. Take a look at the truths about student loan refinancing.

Student Loan Refinancing: The Truth of the Matter
Over the years, I have had the opportunity to consult with Student Loan Planner on more than $500 million in student loan debt. Our clients have saved a lot of money by using customized repayment plans for student loans.

Refinancing student loans is a complex process. I’ve been through it all, and can tell you 3 things:

Refinancing may not be the best option for everyone
The program won’t be able to help all students with their debt
Some borrowers could be hurt financially by refinancing.
We get paid commissions when our clients refinance using our affiliate links. But I would rather not make that money if pushing people to make a bad financial decision.

For some borrowers refinancing is a good option, but it is not the only one.

Credible will give you some free options if you’re interested in refinancing student loans, curious about ReFi or unsure if it is right for you. Credible does not obligate you to refinance. It only provides a list with the best options and rates. Start here.

Refinancing your student loans won’t get rid of your debt
Refinancing your student loans is one of the most effective ways to reduce your debt. Refinancing student loans can save you three, four or even low five figures, but not more.

Refinancing won’t wipe out your student loan debt if you have $250,000. You could save a lot of money on interest depending on how good your credit is. You will still be required to repay the majority of your loan.

Refinancing student loan debt is generally a good idea for private sector borrowers who owe no more than 1.5 times the amount of their annual salary.

The options of loan forgiveness or income-driven repayment plans (IDRs) become more appealing if you owe an amount higher than this. It depends on what type of loan you have. However, it makes sense if the majority of your debt is federal.

You lose valuable federal programs when you refinance your student loans
Refinancing federal student loan is not without its pros and cons. You will lose several federal protections that are available to borrowers.

What protections will you lose?

Public Service Loan Forgiveness: After 10 years of making payments, you can forgive your debt tax-free.
IDR Loan forgiveness: Income-driven loans forgiven allows you to pay back your loan for up to 25 years based on your income. The government will forgive the balance at the end of the period. However, you are still required to pay income taxes on the forgiven amount.
Forbearance protections: You can pause your loan payments up to three times a year. Most private lenders who offer unemployment benefits will only allow you to pause your payments for a maximum of three months.
When you refinance student loans, these income-driven repayment plans are no longer an option. These plans cap your payments at 10% to 15 percent of your income (20% for parent PLUS).
It’s not worth it to give them up, especially when you might need them someday. Refinancing student loans is not recommended if you are considering loan forgiveness.

Loan forgiveness is not an option when refinancing federal loans.

Refinancing student loans is only a good strategy for financially fit borrowers
Refinancing is often used to avoid massive student debt. Refinancing can be a good way to save money if you’re already in good shape financially. If you’re struggling to pay your bills or have poor credit, refinancing is not the best option.

You could put yourself at risk of financial ruin if you do not have an emergency fund.

What happens if you lose your job or suffer a medical crisis and are unable to make payments? Your payments will not be paused until you recover.

You may default on your loan if you are unable to make payments.

It is only advisable to refinance if your financial situation is good and you won’t require the federal protections. It’s generally a good idea for you to have at least six-months worth of expenses in an emergency fund.

Refinancing is often done to reduce interest rates and get better terms.

You must have a good credit score to refinance. Refinancing is best done with a credit score of 700 or higher. You shouldn’t refinance student loans if you have bad credit.

Refinancing Your student loans is just the beginning of repaying them
Refinancing is a popular way for borrowers to lower their monthly payments. This is done by extending the term.

You’re not going to be forced by anyone else to repay your debts. You are the only one who can make that decision. The work is not done just because you have refinanced. The work is just beginning.

It’s time to pay off your student loan. Here’s how to take advantage of refinancing your student loans.

You could have gotten lower payments by using the federal repayment plan. Make extra payments to reduce your student debt.

Next Steps
Take the time to consider all of your options if you’re unsure whether or not to refinance. Use a student loan comparison calculator to help you decide if refinancing is right for you.

If you’re not sure what to choose, ask for help. Your decision about student loan debt is one of the most important financial decisions that you will make. Before refinancing your student loans, take the time to determine your best financial options.

Credible will give you some free options in just two minutes if you’re interested in refinancing student loans, or curious about ReFi. Credible does not obligate you to refinance. It simply gives you a list with the best options. Start here.

About the Author
Travis Hornsby, a physician himself, founded Student Loan Planner in order to help his wife make the most complex decisions regarding student loan repayment. He has personally consulted for over $400 million of student debt, which is more than any other person in the nation. He is a Chartered Financial Analyst, and his background includes trading bond worth billions of dollars.

He applies the same level of intensity when analyzing the best repayment options for professionals with graduate degrees who have six-figure student debt. He has helped 1,700 clients to save more than $80 million on their student loan debt. His work has been featured by U.S. News and Business Insider as well as Rolling Stone and Huffington Post.