Grace Period Over? Refinance These Student Loans Now

Recent update: The CARES Act payment pause and interest freeze on federal student loans has been extended to 5/1/2022. This means you can continue taking advantage of 0% interest until that date, including while you’re in your grace period.

You did it — you’ve walked across that graduation stage and accepted your diploma or maybe you were on Zoom in your PJs (thanks COVID) — and it’s time to start your career. It’s also time to think about repaying those student loans, too.

Federal student loans will have an automatic six-month grace period, post-graduation as the standard. Private loans might have a similar six-month grace period, but it just depends on your lender’s terms.

The only way you can enter a repayment plan prior to that six-month student loan grace period is through consolidation or a student refinance loan. These terms get used interchangeably, so to clarify, there IS a difference between consolidation and refinancing.

Student loan consolidation

Consolidation is a process done within the federal system to combine your existing federal loans into one Direct Consolidation Loan.

Benefits of consolidation:

• Simplifying your loan management
• Entering repayment sooner than six-months, post-graduation
• Accessing income-driven repayment plans (IDR) and other payment options
• Opening up eligibility for Public Service Loan Forgiveness (PSLF) if you have loans other than Direct Loans (FFEL or Perkins)
• Converting variable-interest loans into a fixed loan
• Restarting your deferment availability

Disadvantages of consolidation:

• It erases payment history toward IDR or PSLF qualified payments
• Interest is capitalized on any accrued interest
• You’ll lose the ability to discharge Perkins Loans
• You can’t go back after consolidating your loans

Refinancing student loans

Refinancing is when you take your private or federal student loans to another private loan company in hopes of reducing your interest rate and changing your terms.

Private refinancing companies can’t consolidate your loans within the federal system, they can only refinance them out of it.

Pros of refinancing:

• You can lower your loan repayment by reducing your interest rate or term.
• Simplifies your loan repayment — you’ll have one loan, with one interest rate and one monthly payment.
• You can adjust the terms on a private loan so that your payment is more affordable
• You can change a variable-rate loan into a fixed-rate loan

Cons of refinancing:

• Less flexible payment plans, limited forbearance (if any), and no forgiveness opportunities
• Refinancing is a permanent decision

Should you refinance during the grace period?

When you already have private student loans, refinancing can be a great way to reduce your overall debt over time. If you can obtain a lower interest rate, and don’t need the grace period, consider a student loan refinance during your grace period. Just make sure you have at least three months of living expenses covered in your emergency fund.

If you have federal student loans and are wondering whether refinancing into a private loan makes sense for you, there are a lot of important factors to consider.

Refinancing rule-of-thumbs

• If your federal student loan debt balance is lower than your annual income: Prioritize your loan repayment sooner than later to minimize your cost over time. Refinancing can be a great way to achieve this.
• If your balance is close to your annual income with no major pay-raises in the foreseeable future: I’d strongly suggest against refinancing so that you can leverage your flexibility within the federal system until you get your student debt balance lower.
• If your balance is 1.25x or greater than your annual income: Refinancing your federal debt to a private loan might not be the best move for you. You might want to consider taking a passive approach with your student loan debt instead.

All of this said, before you refinance your federal student loans, you should be able to answer YES to each of these questions:

1. Do you have at least three months’ expenses in the bank (emergency fund)?
2. Is your debt-to-income ratio is below 1.5 to 1? For example, if you make $100,000, but owe less than $150,000 in student debt.
3. Are you confident that you won’t need federal loan programs, like the Public Service Loan Forgiveness (PSLF) program?

Student loan refinancing is worth it if you’re in a financially stable situation. You should also be willing (and able) to give up the benefits and protections of federal loans.

Is refinancing right for you?

In the right situation, refinancing your loans during a grace period can save you lots of money on your student loan debt repayment. If refinancing seems like the right move, check out our refinancing calculator to see how much it could save you.

If you’re not sure about whether refinancing is the right step, or you want a customized student loan plan, schedule a consultation with a consultant today.

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