How do Federal Student Loan Protections Compare to Private Refinancing?

By
Kat Tretina
,
October 17, 2018

These days, it’s all too common to leave school with student loan debt. According to Mark Kantrowitz, researcher and vice president with SavingForCollege.com, college students graduate with $39,400 in student loans, on average.


With so much debt, many borrowers look for ways to make managing their repayment easier. Refinancing is a popular option, but some borrowers worry about losing federal loan benefits.


But just what are those protections worth? Learn about the pros and cons of refinancing federal student loans and how to figure out if refinancing is right for you.

Refinancing federal loans

Refinancing your federal loans can be a smart choice for some borrowers. With refinancing, you work with a private lender to take out a loan for the amount of your old ones. It can be a great way to lower your interest rate or reduce your monthly payment.


However, by doing so, you’ll risk losing out on three major federal benefits.

Income-driven repayment plans

If you have federal Direct student loans—rather than Perkins loans or FFEL loans, which are no longer available—you may be eligible for one of the four income-driven repayment (IDR) plans. Under these plans, your loan servicer extends your repayment term to 20 to 25 years and caps your monthly payments at a percentage of your discretionary income.


According to Federal Student Aid, most borrowers qualify for at least one of the four IDR plans. Some people will even qualify for a payment as low as $0 due to their income and family size.  

Public Service Loan Forgiveness

Some borrowers with federal Direct Loans can qualify for Public Service Loan Forgiveness (PSLF). Under this program, the government will forgive your loan balance if you work for a qualifying non-profit organization or government agency for 10 years while making payments on your student loans.


Forbearance and deferment

If you have trouble affording your monthly payments or are experiencing a financial hardship, such as a job loss, you can enter your federal student loans into deferment or forbearance. With these options, you can temporarily postpone making payments on your loans without entering into default.

3 questions to ask yourself

The idea of losing federal protections like the ability to enter your loan into deferment or access to IDR plans can be scary. But in some cases, the tradeoff of giving up those benefits to refinance your loans can be worth it.


To figure out which is the right path forward for you, ask yourself the following three questions.

1. Am I going to use an IDR plan?

If you can’t afford your payments, IDR plans can give you much-needed relief. However, it’s important to know that IDR plans can cost you a lot of money over time.


Because your loan servicer extends your repayment term, you’ll end up paying much more in interest than you would under a 10-year Standard Repayment Plan. And your payments can grow over time, making it difficult to make ends meet.


For example, pretend you have $39,400 in student loans at 5.05 percent. You have an income of $30,000 and are single. Under a Standard Repayment Plan, your monthly payment would be $420. By the time you repaid your loan, you will have paid back a total of $50,379.


If you signed up for the Revised Pay As You Earn plan, one of the four IDR plans, your monthly payment would start out at just $98. However, it rises over the course of 25 years.


Toward the end of your repayment term, your monthly payment would skyrocket to $539. Worse, you’ll repay a total of $77,761. You’ll pay over $27,000 more in interest due to the longer repayment term.



Also keep in mind that not all borrowers are eligible for IDR plans. If you make over a certain amount of money, you won’t qualify for an alternative payment plan.


If an IDR plan isn’t right for you, refinancing can be a smart alternative. You can choose a longer repayment term to get a lower monthly payment. Unlike REPAYE, where payments will grow over time, refinancing gives you one, fixed payment. And, if you qualify for a lower interest rate, you could actually save money over the length of your loan.

2. Will I qualify for PSLF?

PSLF sounds like a dream come true for many borrowers, but it’s incredibly hard to actually qualify for forgiveness. You must spend a full 10 years working for a qualifying employer while making 120 payments on your loans.


As of June 2018, thousands of borrowers applied for PSLF. According to Inside Higher Ed, 99 percent of applicants were rejected, highlighting just how difficult it is and how PSLF may not be a realistic option for most borrowers.


If PSLF isn’t an option for you, refinancing your loans can help you pay off your loans ahead of schedule.

3. Will I use deferment or forbearance?

The ability to place your loans into deferment or forbearance is an important benefit, especially if you’re in a volatile or very competitive industry. When life throws you a curveball, having the option to postpone making payments can be a huge help.


However, refinancing your loans doesn’t necessarily mean losing out on this benefit entirely. Some refinancing companies, such as CommonBond, offer forbearance options of their own.

When refinancing makes sense

Refinancing your debt may make sense for you in the following three situations.

1. You want to save more money in the long run

When you refinance, you may be able to qualify for a lower interest rate. With a lower rate, more of your monthly payment goes toward the principal rather than interest, helping you save money over the length of your loan.


For example, let’s say you refinanced your $39,400 in student loans from above and qualified for a 10-year loan with a 3.2 percent rate. You’d repay a total of just $46,091 instead of $50,379. By taking just a few minutes to apply for a refinancing loan, you’d save over $4,000.

2. You want to pay off your debt faster

If you want to become debt-free as quickly as possible, refinancing your loans can help you achieve your goal. With refinancing, you can elect for a shorter repayment term, helping you get rid of your loans ahead of schedule while saving significant amounts of money.


If you refinanced your $39,400 in student loans and qualified for seven-year loan with a 3.2 percent rate, you’d repay just $44,029. By taking just a few minutes to apply for a refinancing loan, you’d save over $6,000 as compared to a Standard Repayment Plan.

3. You want one easy payment

During your college career, it’s common to take out several different student loans. You may even have a mix of both federal and private loans. Juggling multiple loans, with different monthly payments and due dates, can be overwhelming.


Refinancing also allows you to consolidate your debt. When you refinance, you’ll have just one student loan and one easy payment to manage, plus you’ll have the benefits of a lower rate or different repayment term.

Refinancing your student loans

By refinancing your student loans, you do give up certain federal benefits and protections. However, you may not be eligible for some or all of those protections. In many cases, the benefits of refinancing outweigh the drawbacks.


If you want to save money on your loans or pay off your debt ahead of schedule, refinancing might be a smart choice. If you decide that refinancing is right for you, you can get a quote online.


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