When to Avoid Refinancing Student Loans

If you’re one of the more than 40 million individuals in the United States who’s paying off student loan debt, you probably want to find a way to become debt-free faster. Refinancing student loans is one option for accomplishing this. There are, however, certain situations when this doesn’t make sense. It’s essential you understand when to avoid refinancing student loans.

What Does It Mean to Refinance Student Loans?

Refinancing student loans can be a great way to achieve a more reasonable loan repayment schedule. The objective of a student loan refinance is to get better terms on your debt without having to pay anything in the process. If this sounds too good to be true, it’s not—but there are some deeper considerations you need to make that can determine if refinancing actually makes sense for you.

But what is refinancing student loans, and how can this affect a consumer’s ability to repay their debt? The act of refinancing is quite simple. You’re just taking out a new loan that totally replaces your old debt. The idea is that this new loan will come with better interest rates, which are one of the main factors to determine how much you’ll pay back over the full course of a loan. In most situations, it’s extremely beneficial to lower your interest rates.

However, there are some specific details to student loans that forces borrowers to make some additional considerations about refinancing.

When to Avoid Refinancing Student Loans

Even though refinancing student loans can be a great choice for some people, it’s not right for everyone. These are a few of the main situations when it makes sense for consumers to avoid refinancing their student loans:

• You have good federal loans – The federal government is behind the vast majority of student loans. There are many different types of federal loans—some more beneficial to borrowers than others. If you have highly desirable student loans, such as Direct Subsidized Loans, it likely won’t make sense for you to refinance. Not only do these typically have pretty low interest rates, you’ll also lose some key federal loan benefits. For instance, those who have enjoyed the moratorium on student loan collection and interest accumulation have received that benefit due to having federal loans. Since refinancing can only be done through a private lender, you’ll lose perks like forbearance and income-driven repayment plans. People who plan to utilize these aspects should likely avoid refinancing.
• Interest rates are high – The primary reason to refinance a loan is if you think you can lower your interest rates. If rates are high at the moment, it might not be an opportune time to refinance.
• You’d be stuck with a variable rate – Student loan refinancing typically comes with two interest rate options: fixed or variable. Those who have only borrowed from the federal government might not know the difference between these. A fixed rate doesn’t change over time, while a variable rate will go up and down with market conditions. This can be super risky if you take out a variable rate loan when rates are low, as it can lead to a massive increase in your payments down the line.
• It still won’t be affordable – If refinancing your debt isn’t going to make it any more affordable for you, it probably makes sense to pursue another option. While this might provide some temporary relief, simply prolonging your pending inability to meet your obligations doesn’t help you much longer term.

These are all examples of times when it doesn’t make sense to refinance. But there must be people who will benefit from a student loan refinance as well, right? This is certainly true for those who already have private loans. Since there’s no cost for refinancing, it always makes sense to do so if you can get a better fixed interest rate. Furthermore, some people will certain federal loans, such as Direct PLUS Loans, might actually find some benefit from a student loan refinance even if they lose some federal benefits.

Ultimately, refinancing student loans isn’t the right choice for everyone. It’s important to understand what kinds of implications refinancing your student loans can have on your life before going ahead with it.