9 Reasons Not to Refinance Your Student Loans

Student loan refinancing is a common strategy to save borrowers money and help them pay off debt faster. While can be a great option for many people, it’s not the best solution for everyone. There are certain times when it makes more sense to leave your student loans alone or sign up for specific federal programs instead.

Arguably, this might make the most sense for every Direct federal student loan borrower right now as these loans are still under the emergency coronavirus forbearance period. That means if you have federal student loans, you're currently making no payments and your loans aren't accruing any interest.

You're not going to be able to beat 0% interest with a private lender no matter how great your credit is. However, the emergency forbearance is currently set to expire August 30, 2023, unless the courts rule on lawsuits sooner than that. So, should you immediately start looking to refinance your loans in February 2022? Not so fast.

You might still want to avoid refinancing even after the federal payment pause has been lifted. Here are nine reasons not to refinance your student loans.

9. You’re almost done paying off your student loans

If you’ve been paying off student loans for a while, you may be close to the end of your repayment term. If you're less than five years away from having your loans paid off, the refinancing process probably isn’t going to be worth the trouble.

You won’t save that much money, and you lose access to valuable protections from the federal government. In this case, it’s better to stay the course and finish out your repayment schedule through your federal student loan servicer.

8. Your rate won’t change that much

Refinancing student loans has the potential to cut thousands or tens of thousands of dollars off your student loan debt — if you lower your interest rate significantly. But if your student loan already has a decent rate or you don’t qualify for the lowest rates, the savings with your new loan may not be significant enough to bother with refinancing.

Several factors go into qualifying for refinancing and the kind of rate you receive. The most important factor is your credit score. If you don't have a good credit score, you may not get one of the low interest rates you see advertised. You could use a cosigner to qualify, but in doing so you put someone else on the line for your debt if you can’t pay.

If you don’t meet the eligibility requirements to earn a lower interest rate, it’s best to hold off on refinancing until you do qualify. Or you may need to come up with another repayment strategy.

7. You qualify for Public Service Loan Forgiveness

This is perhaps the most important reason to not refinance student loans. If you work in the public sector, there’s a good chance that your student loans qualify for Public Service Loan Forgiveness (PSLF). The PSLF program can erase your remaining student loan debt in as little as 10 years.

You’ll need to work for any of the following to be eligible:

• Government organizations at any level (federal, state, local or tribal)
• Nonprofit organizations that are tax-exempt under Section 501(c)(3)
• Other nonprofit organizations that provide qualifying public services
• Americorps or Peace Corps

Not only will your remaining debt be forgiven after 10 years of monthly payments, but it’s also completely tax-free. By refinancing your student loans, you could be giving up access to one of the most valuable repayment programs available — you'll lose eligibility for PSLF if you refinance your federal loan into a private student loan.

6. You might need income-driven repayment one day

Income-driven repayment plans (IDR) can lower your monthly loan payment. Payments are based on your adjusted gross income. Maybe you don’t need access to an IDR plan now, but you might in the future. Many borrowers don't feel comfortable losing this protection and this is one of the most common reasons not to refinance student loans.

If you lose your job or have to take a pay cut, making student loan payments can become more difficult, especially because private lenders don’t offer much support in times of need.

Maybe you don’t plan to work forever or you want to work part-time. Having access to a repayment plan that adjusts to your lifestyle might make more sense. Plus, after 20 to 25 years of IDR payments, your remaining student loan balance is forgiven, although there could be a tax bill on the forgiven amount.

5. You don’t have an emergency fund

Although refinancing your student loans might save you money, it can put you in a tight spot if something bad happens. The way to protect yourself against tough financial situations is to have an emergency fund.

If you don’t have an emergency fund, you might find yourself in a position where you can’t make student loan payments.

Many private lenders offer little to no protection when you’re facing financial hardship. Whether it's a health issue, a financial struggle, job loss, or something else, federal loan servicers tend to offer more protection when bad things happen than private loan lenders.

If you at least have a portion of your emergency fund built up, it may be worth your while to refinance now provided that you're able to do so with a lender that offers forbearance options such as Earnest or SoFi. Compare refinance lenders here.

4. You have credit card debt

If you’ve racked up significant credit card debt, your top priority should be paying it off.

According to the Federal Reserve, the average APR across all credit card accounts in 2019 hovered between 14% and 15%. 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.

Yes, you could look into a balance transfer credit card that offers introductory 0% APR for an extended time, but that only helps if you’re able to pay off the balance before the introductory period ends.

3. You want to invest instead of pay down debt

There’s a school of thought that you should pay off debt before investing. It’s a smart plan in theory. But focusing on loan repayment could also delay investment returns that outweigh the benefit of paying off student loans early.

There’s no perfect answer for which financial move is more important. Your specific situation plays a big part in determining what’s right for you.

It’s hard to commit 100% to both paths, though. If you are interested in saving for retirement now, you might be better off paying the minimum on your loans and pursuing loan forgiveness.

2. You plan to live abroad

Perhaps your student loan debt has you thinking of running away to another country. It might seem like an extreme way to deal with your debt, but several Student Loan Planner® clients in other countries are paying nothing on their student loans right now.

One of the biggest student loan hacks available is probably one you’ve never heard of before. It’s called the foreign earned income tax exclusion. It allows you to exclude over $100,000 of income earned abroad from your U.S. tax return.

If you have plans to live outside the U.S., skip refinancing and take advantage of this unique repayment strategy.

1. You think student loan forgiveness is the future

Since the election, student loans have become a major point of interest. Many organizations and politicians have been calling on President Biden to provide a large amount of student debt cancellation. Many are asking the president to cancel up to $50,000 in student loans per U.S. borrower.

We don’t recommend banking your whole student loan repayment plan on what might happen in the future. There’s no way to predict who will be in office or whether their proposed plans will become a reality. But if you think federal loan forgiveness programs or cancellation will be more prominent in the years to come, you’ll miss out by refinancing your student loans now.

Develop a plan for your future

As with anything else in life, it’s good to have a plan for your student loan debt. You need to know where you stand and determine the right course of action for you. Remember, everyone’s situation is different. You may have several great reasons not to refinance student loans while your best friend may be better off refinancing. There’s no one-size-fits-all solution.

Take time to look at your debt, finances, plans and other factors relevant to your decision. If you’re married or in a relationship, get your partner’s thoughts on what you should do. And if you decide to refinance your student loans, make sure that the lender you choose doesn't charge any origination fee.

Use Student Loan Planner®’s helpful student loan refinancing calculator to get an idea of how much you could save by refinancing. If you still need help, you can contact our consultants who have assisted hundreds of people in creating customized repayment plans that work.