Student loan debt is one of the most prevalent issues affecting younger generations in the US. Increasingly, Millennial and Gen Z borrowers are demanding practical and strategic solutions to tackle the student loan debt they’ve accumulated as a result of the skyrocketing costs of higher education.
Refinancing student loans could be part of borrowers’ overall strategy, but it’s not always the right path. Factors such as what type of loans you have, debt-to-income ratio, career trajectory, and more will play a role in determining if refinancing some or all of your student loans is the right choice for you.
Read on to learn more about student loan refinancing and how this repayment strategy affects eligibility federal forgiveness programs. Let’s start by reviewing how refinancing works.
How student loan refinancing works
When you refinance a student loan, a new lender pays off your existing loan and gives you a new loan with more favorable repayment terms. Lower monthly payments, having a single loan instead of several, a lower interest rate, or a shorter different loan term could all be reasons why a borrower might seek out refinancing. Typically, the process goes like this:
You apply to a private lender that offers student loan refinancing, typically by submitting an online application.
Understand new loan terms
After applying, you find out if you’ve been approved or not, and what the interest rate is.
If you decide to move forward with refinancing, the lender then pays off your existing loans and you begin making monthly payments to your new lender.
Note that applying may require a hard credit inquiry and may cause your credit score to dip a few points temporarily. Use our calculator below to understand how much money you could potentially save by refinancing your student loans.
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How student loan forgiveness works
Before you decided to refinance your student loans, it’s important to assess your financial situation – especially if you have federal student loans. If you refinance federal student loans with a private lender, you lose access to federal repayment & forgiveness programs such as Income-Driven Repayment (IDR) and Public Service Loan Forgiveness (PSLF).1 Read on to learn more about federal student loan forgiveness programs and compare your options.
Income-Driven Repayment (IDR)
The IDR program has undergone significant transformations in recent years, with legislative changes expanding its reach and making it accessible to even more borrowers. When you enroll in an IDR plan, your monthly payments are calculated based on your adjusted gross income and family size and will be a percentage of your discretionary income. Depending on which plan you’re enrolled in and how much you owe, IDR also offers a path to forgiveness after a certain period of repayment.
For more context and history of the federal IDR program, and to understand how to qualify and apply, visit our content collections:
Public Service Loan Forgiveness (PSLF)
PSLF is a program available only to full-time employees of the government or qualifying nonprofit organizations that offers forgiveness after 120 months of qualifying payments. For a deeper understanding of the program, including how to qualify and apply, visit our resources:
Are refinanced student loans eligible for forgiveness?
Whether you’re considering pursuing forgiveness through IDR or PSLF, be aware that only federal student loans qualify for forgiveness through these programs. That means if you refinance federal loans through a private lender, you will no longer be eligible for these federal student loan forgiveness programs. So, be sure to weigh the pros and cons of each option, get clear on your short– and long–term financial goals, and consider speaking toan expert before you make the decision to refinance.
Consider speaking to a student loan specialist before refinancing
Given the rules around federal student loan forgiveness programs, federal student loan borrowers could benefit from speaking with a student loan specialist to check their forgiveness eligibility and make sure refinancing is aligned with their goals. A student loan specialist can help you stay informed about the latest developments in student loan forgiveness programs and regulations, provide a personalized analysis of your unique financial situation, and help you make the right plan for your student loans.
For help understanding the pros and cons of refinancing vs. federal forgiveness programs, and one-on-one help with all your student loan management questions, book a free 30-minute consultation with one of our student loan specialists.