This summer, we wrote a bit about the different types of student loans that are available through the U.S. Department of Education. One aspect of student loan planning that we touched on, but not in great detail, was the ability to refinance federally issued student loans with a private company.

What is Student Loan Refinancing?

Student loan refinancing is like refinancing other loans, most commonly, a mortgage. With refinancing your student loan, the borrower is receiving a new loan at a new interest rate and/or term through a private company. Your old loan is paid off by this new issuer. The terms of that loan are based on a number of factors, including your credit profile and household income.

My current rate is pretty high – if I can meaningfully lower my interest rate, should I refinance?

Reducing your interest rate, and correspondingly the amount of interest you’d pay over the life of the loan, are the primary reasons to refinance. Additionally, because private student loan refinances don’t typically have origination fees, you need not consider the cost to refinance (whereas in a mortgage, you’d consider closing costs).

However, there can be a number of different goals in wanting to refinance one’s student loans, including those separate from the reduction of the interest rate. As you’ll recall from our summer blog, federally issued student loans come with a 10-year term, meaning that unless you’ve enrolled in a repayment program, that loan will fully amortize over 10 years. If that term is too short, and you’d rather pay it over a different period, a private refinance can offer you that leniency (e.g., 15-year term). This will be a balancing act though, and requires further examination, as extending that term will result in paying more interest over the life of the loan.

Are there any drawbacks to refinancing my federally issued student loans with a private issuer?

Yes, there can be. The federal government has created several income-based repayment plans, with the goal of these being to make repayment more manageable. These repayment plans each are based upon the borrower’s discretionary income, and after a certain number of years, the remaining balance is forgiven. That forgiveness is typically taxable income to the borrower; however, if during the payment term you work at a “qualifying employer”, you may be able to qualify for that forgiveness to be non-taxable.

The primary point here is that, by opting for a private loan refinance, you no longer are eligible to qualify for an income-based repayment plan, which could prove to be valuable. This most impacts those who are underemployed, have less reliable income, or have a large outstanding balance relative to their income.

How does the CARES Act impact my analysis of whether I should refinance?

Through the passage of the CARES Act, the following relief measures for Department of Education-held federal student loans were approved:

  • Suspend loan payments
    • The following Department of Education Federal loans have been placed into administrative forbearance through January 31st, 2021:
      • Defaulted and non-defaulted Direct Loans
      • Defaulted and non-defaulted FFEL Program loans
      • Defaulted and non-defaulted Federal Perkins Loans
      • Defaulted HEAL loans
    • Set interest rates for 0%
      • This is set to continue through January 31st, 2021. During that period, no new interest will accrue on federally issued student loans.
      • An appealing aspect here is that, by opting to make payments during this period, those payments will be allocated 100% to principal, whereas normally a portion would go towards interest (assuming you have no other outstanding interest or fees). That results in a sooner ultimate payoff of your loans
    • Stop collections on defaulted loans

By keeping your loans with the Department of Education you can continue to take advantage of the measures detailed above (although some private issuers have instituted certain accommodating measures)

Lowering your interest rate and/or your monthly payment is appealing. However, there is more nuance to understand when undergoing a student loan refinance than just those terms. The bottom line is, while managing meaningful student loan debt, you and your advisor should have a conversation on the best way to plan for repayment.



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Yoni Berhane, CFP®

Yoni is an advisor in our New York headquarters.