Student loan refinancing can be a great decision. You cut your artificially high interest rate from the federal government by replacing your loans with new ones from private lenders. These lenders charge you for the risk you actually pose to creditors, and not the fixed price set for everyone by the government. What’s not to love? Actually a lot. Private refinancing can be a horrible decision. In fact, I’ve seen mistakes first hand that will likely cost individuals tens or even hundreds of thousands of dollars just because they jumped at an ad without considering the consequences. Please check PSLF before refinancing.
What is PSLF?
The PSLF acronym stands for the Public Service loan forgiveness program. Here’s a summary of everything you could ever want to know about it. Essentially, you work 10 years at a not for profit employer and make payments on an income driven repayment plan. Usually these payments are pretty low and cause the student loan balance to grow. At the end of the 10 year period, the government forgives the balance tax-free.
PSLF is the biggest back door scholarship program in history. While the new administration will probably take a lot of efforts to limit it for future borrowers, current borrowers with PSLF in the promissory note will most likely get the benefit.
So what actions could permanently eliminate someone from using PSLF as a loan repayment strategy?
Private Refinancing Eliminates PSLF as an Option
When you click on my Credible bonus for student loan refinancing and check your rate, you are seeking to leave the government loan program. Yes you might get a lower rate, but you also lose access to all of the programs and protections having a loan with the government gives you.
For a high income private practice surgeon, these protections are close to useless and private refinancing is the way to go. Same with a Big Law associate, CVS pharmacy manager, Physician’s Assistant at a doctor’s office, dental practice owner, and anybody else with a solid income in the private sector.
However, once you refinance your loans, you have a NEW LOAN. It’s with that private entity, not the government. That loan is irreversible in the sense that you cannot change your mind and put your loans back with the government if you decide you made a mistake.
Hypothetical PSLF Horror Story
I send many people to Sofi to refinance their loans. They give Student Loan Planner readers a $300 bonus along with a lower interest rate. Sofi is a great company, but they’re not going to know your future career plans and they won’t stop you from refinancing when you work at a not for profit company and should’ve used PSLF.
Here’s a hypothetical PSLF horror story that may make you pause for a moment before refinancing, which would be a good thing. I want people to refinance, I just want them to make sure they do it knowing the full implications of that decision and who should go down that path.
No Private Refinancing Deal will Give you a 0% Interest Rate or Less
So here’s the hypothetical. A new attending doctor has paid his student loans on IBR for 4 years. He gets a new job at a not for profit hospital system. He’s watching the 2017 NFL draft and sees a commercial for Sofi about how he pays too much in student loan interest.
While he has some down time in his office, he decides to go to Sofi to check what his rate could be. He finds an offer of 2.35% variable with a 5 year term. He’s stoked! That’s their best offer. He submits the application and signs the papers.
Then He Discovers He Lost PSLF
A couple years down the line, he hears in the physician lounge that some of his peers just got $200,000 in tax free student loan forgiveness on something called PSLF. Intrigued, he sends in the PSLF employment certification form because he’s worked at the not for profit hospital and wants to see how long he has to go until the remainder of his loans get forgiven.
Their answer stuns him. If he had stayed on the federal loan system, he could’ve received over $100,000 in loan forgiveness, effectively giving him a negative interest rate. The reason he can’t apply for PSLF? He refinanced his loans with a private lender.
This Story Happens More than You Might Think
There’s a lot of blogs out there, including this one, that tout the benefits of refinancing because we get affiliate commissions every time someone does it. If you look at the sidebar above, I’ve got deals with private lenders where I effectively split the bonus with you. Some companies keep the entire refinancing bonus for themselves. Regardless, we make money by showing you how to refinance.
Private lenders don’t rely on content creators alone to get our their message. They put out ads on Facebook and TV to convince you to refinance as well. Refinancing is a wonderful thing if done right.
I’m concerned that folks are refinancing just because everybody seems like they’re doing it. If you stand to get forgiveness on PSLF, DO NOT refinance until you’ve checked that private refinancing is in fact a better deal. If you’re uncertain about the future of the program, then save in a side account to pay down your loans in a lump sum and refinance once PSLF gets repealed. I think there’s a 80% to 90% chance PSLF will remain for folks who already have loans.
So When is it OK to Refinance Even if I’ve Been Tracking Progress Towards PSLF?
I think a lot of people fail to check PSLF before refinancing. I don’t want you to be one of them. If you’re at a not for profit employer but want to move to the private sector and are certain that you won’t be applying for PSLF, then refinancing is totally fine.
If you have loans on the FFEL loan program (most loans taken out before 2010) and have missed out on years of progress towards PSLF as only Direct loans qualify, refinancing could make a lot of sense. Some folks don’t want to be obligated to work at a not for profit employer for the next 10 years. In that case, refinancing could also be smart.
For our own situation, my fiancee made a lot of student loan mistakes because she didn’t have adequate help, which is why I started this business. We found out at her 7th year of medical training that she only had about 2.5 years of credit on PSLF. Since she would be making payments at the Standard 10 year rate and didn’t necessarily want to work at a not for profit hospital for the next 8 years, we decided to refinance the loans. We are about 30% through paying them back. It’s important to do the analysis though, which is why this business exists.
Want Help Comparing PSLF with Private Refinancing? I Can Help
I’ve helped clients save projected millions of dollars by optimizing their use of PSLF and private refinancing. I’d love to help you save money too.
I charge a low flat fee, and do my best to present you with all your options when making six figure student debt repayment decisions.