Student loan refinancing has been a hot topic during the past several years. Trendy new companies – like SoFi, Earnest, LendKey, and CommonBond – have been offering slick refinancing products to entice borrowers. Major banks and credit unions have also jumped in, sometimes offering tantalizingly low interest rates. The best loan products are generally marketed to doctors, lawyers, and other high-income professionals who tend to have large amounts of federal student loan debt, but great earning potential and excellent credit.
A lower interest rate is often the central reason to explore refinancing; after all, a lower interest rate will save you money in the long run, and could lower your monthly payments, as well. But that’s not the only thing borrowers should be considering. Turning federal student loans into private student loans through refinancing can have major, irreversible consequences, and it’s important to know what you might be giving up in exchange for that lower rate.
Federal Student Loans Have Stronger Consumer Protections
Some federal loans – especially some Graduate PLUS loans – have painfully high interest rates. But federal loans also have unusually strong consumer protections, including generous deferment and forbearance options if you encounter an unexpected financial hardship; tax-free, statutorily-guaranteed discharges due to death or disability; and the right to cure default if something unexpected happens and you fall behind on payments.
No private student loan has consumer protections as strong as those found in the federal student loan system. Even if some private loans offer some similar protections in their contracts, the provisions are generally “discretionary,” meaning the lender gets to decide whether or not to allow it. And it’s easy to think that you’ll never need these protections at all when things are going well – but unexpected events happen all the time, and if you’re not protected, the consequences can be severe.
No More Loan Forgiveness or Income-Driven Repayment
Income-driven repayment plans like IBR and PAYE, teacher loan forgiveness, Perkins loan cancellation, and Public Service Loan Forgiveness are all unique federal student loan programs that can provide substantial relief to borrowers who qualify. If you refinance, you will forever lose access to these programs. I’ve met with many student loan borrowers – particularly highly-paid attorneys in private practice – who don’t believe they will ever need to access these programs. That very well might be true. But just think of all the attorneys and other white-collar workers who lost their jobs unexpectedly during the Great Recession; many had to change professions or settle for a lower paying job. Without being able to access programs like income-driven repayment and loan forgiveness, staying current and in good standing on high-balance student loans would be exceptionally difficult.
Variable Interest Rates
Most federal student loans disbursed within the past decade have fixed interest rates – meaning the rates don’t change during the lifetime of the loan. Many private student loans, on the other hand, have variable interest rates, which can increase over time. Some student loan refinancing companies entice borrowers with deceptively low initial interest rates; but if those rates are variable, they could actually exceed the fixed interest rates on your federal loans. You might wipe out any savings you hoped to get by refinancing, and you could potentially pay even more in interest than you otherwise would have.
Origination Fees
Some private student loan refinancing companies will charge you money to refinance. This is called an “origination fee,” and it gets tacked on to your new loan balance once it is disbursed. You then have to repay that fee – with interest – along with the rest of your refinanced loan balance. This can cut into whatever savings you were hoping to get with a lower rate.
You Might Need a Cosigner
The best student loan refinancing products with the lowest interest rates and the best terms typically are geared towards borrowers who have very high income and excellent credit. And even if both criteria are solid for you, you might still need a cosigner, especially if you’re looking to refinance a particularly large balance of loans. Federal student loans are generally not cosigned, meaning they are only in the student borrower’s name. By bringing a cosigner into the mix, you’re now making someone else fully legally responsible for your entire student loan balance, just as much as you are. This can have major, long-term implications that go beyond simple financial considerations.
Bottom Line
Does this mean that you absolutely should not consider refinancing your federal student loans? No! Refinancing can truly save borrowers a lot of money over time, and it’s the right decision for some people. But too often, I see student loan borrowers focusing only on the interest rate. As a consumer rights attorney, it’s my job to focus on the entire loan product, and I see too many people signing on to problematic new loans or giving up substantial consumer protections in exchange for that lower rate. In some cases, I just don’t think it’s worth it. Bottom line? If you’re thinking about refinancing, look at the whole picture, and get some objective professional advice first.
