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When NOT to Refinance Your Student Loans

Whether or not you should refinance your student loans depends entirely on your financial situation and on the type of loans you have — there are both pros and cons to refinancing.

Student loan refinancing could get you a lower interest rate and save you money on your debt. But refinancing federal loans also means sacrificing federal repayment plans and protections that you might need later.

Here are some questions to ask yourself when thinking about refinancing:

What is refinancing?

Refinancing means taking out a new loan at a new interest rate and terms to pay your existing loans. You can usually refinance both federal or private student loans. When you refinance, you are applying for a private loan. If you have private loans, this usually isn’t a big deal, but if you have federal loans you will lose your federal protections.

Is your monthly income secure enough for refinancing?

When you refinance your student loans, the private lender repays all of your debt, and you won’t have to deal with your old loan servicers. However, you will still need the means to pay back your new loan. If you run into financial hardship, the private lender might not be flexible about your options (federal loans on the other hand allow you to apply for income-driven repayment plans or deferment).

If you’re worried about losing your income in the near future, you might not want to refinance just yet. Make sure you feel confident about your ability to make monthly payments and you have money saved up in case of an emergency.

Is your interest rate already low?

Refinancing can save you money over the life of your loan — if it lowers your interest rate.
Student loan interest accumulates on a daily or monthly basis. If you can lower the rate significantly, you could save a lot of money. But if your average interest rate is already low, a refinancing lender may not be able to beat it.

Browse what’s available, and see what interest rates lenders will offer. And if you’re not sure how much you’d save or spend, check out Snowball Wealth’s student loan planning tool here.

Do you qualify for federal loan forgiveness?

If you refinance your federal loans with a private lender, they will no longer qualify for federal loan forgiveness, such as Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness. You might still be eligible for loan repayment assistance programs and other forgiveness options from individual states or universities, but you won’t be able to participate in a federal program such as PSLF.

Are you almost done paying your loans?

If you’re almost out of debt, switching to a new lender may not be worth the trouble and might add more years to your loan.

Do you have weak credit (or no creditworthy cosigner)?

Refinancing lenders take a look at your credit (or your cosigner’s credit) before approving you for a student loan. If you don’t have strong credit, you can try applying with a cosigner who does. But that cosigner will become just as responsible for your debt as you are. And if neither you nor your cosigner have strong credit, you could have trouble getting approved. Or you might get mediocre rates on your refinanced student loans, which wouldn’t save you much money in the end.

Fortunately, lenders like Earnest and SoFi offer an instant online rate quote so you can see if your credit is passable before submitting a full application. If it’s not, then you might be better off spending some time building your credit before applying to refinance student loans.

Do you have credit card debt?

If you’ve racked up significant credit card debt, your top priority should be paying it off since it has much higher interest. According to the Federal Reserve, the average APR across all credit card accounts in 2021 hovered between 15% and 16%. Credit cards typically have much higher interest rates than student loans. If you have credit card debt, pay it off before looking at available options for your student loans.

At Snowball, we make the refinancing process more transparent and ensure you have evaluated the best lenders to get the best rate and terms for you. We also give you the best course of action to tackle your student debt and compare refinancing, optimizing payments, and federal decisions. You can learn more and sign up here.

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