Student loan refinancing is a common strategy to save money and pay off debt faster.
But while it’s a great option for many people, it’s not always 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.
Here are nine times when refinancing your student loans is a bad idea.
- 9. You’re almost done paying off your student loans
- 8. Your rate won’t change that much
- 7. You qualify for Public Service Loan Forgiveness
- 6. You might need a income-driven repayment one day
- 5. You don’t have an emergency fund
- 4. You have credit card debt
- 3. You want to invest instead of pay down debt
- 2. You plan to live abroad
- 1. You think student loan forgiveness is the future
- Develop a plan for your future
9. You’re almost done paying off your student loans
People who’ve been paying off student loans for a while may be close to the end of repayment. If that’s you, refinancing probably isn’t going to be worth the trouble.
You won’t save that much money, and you lose access to valuable federal protections. In this case, it’s better to stay the course and finish out repayment 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 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 credit. If you have poor credit or no credit, you won’t 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 qualify for a low enough rate, it’s best to hold off on refinancing until you do qualify or come up with another repayment strategy.
7. You qualify for Public Service Loan Forgiveness
If you work in the public sector, there’s a good chance that your student loans qualify for Public Service Loan Forgiveness. 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 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.
6. You might need a 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.
If you lose your job or have to take a pay cut, making student loan payments becomes 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.
Most private lenders offer little to no protection when you’re facing hardship. Whether it’s a health issue, a financial struggle, job loss, or something else federal loan servicers offer more protection when bad things happen than private lenders.
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
As America gears up for the next presidential election, student loans have become a major point of interest among Amercans, especially younger voters. And some presidential candidates have released proposed student loan plans, which include major advances in the area of student loan forgiveness.
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 student loan forgiveness 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, and there’s no one-size-fits-all solution in refinancing.
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.
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.
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