With wage garnishment for defaulted student loans starting up this summer and SAVE borrowers gearing up for higher monthly payments, you might be considering a private student loan as a more affordable way to pay down your debt.
Private student loan companies have been advertising tempting offers for anyone struggling to afford monthly payments. SoFi, for example, unveiled SmartStart, a new refinancing program designed to help ease borrowers into the repayment process by only requiring them to pay interest for the first nine months. Another loan company, Earnest, offers benefits like the ability to skip a monthly payment, if needed. But student loan experts warn borrowers to be cautious before refinancing with any private lender.
“I get asked this question a lot,” said Elaine Rubin, a student loan policy expert at Edvisors. “Typically, it is not recommended to refinance with a private lender for a federal student loan.”
Rubin admits there is an exception, though. Here’s when it makes sense to refinance your student loans with a private lender, and alternatives you can explore if refinancing is too risky for you.
Read more: There’s Still Time to Stop Your Wages From Being Garnished for Defaulted Student Loans
When financing with a private student loan servicer makes sense
There’s one specific type of borrower who could benefit from refinancing federal student debt, said Rubin.
“An extremely financially stable individual who wants to repay a loan quickly and secure a lower interest rate might find this option appealing,” said Rubin. “This would typically apply to someone who cannot pay off the loan immediately but plans to do so within a few years.”
Some examples Rubin provided are a dentist or doctor who earns enough to more than comfortably afford their student loan payments, but can’t pay off the full balance just yet. Refinancing could help them lock in a lower interest rate and save on interest charges, in certain cases.
Even if you fall into this category, you should always compare rates and terms from different private lenders to make sure you’re getting the best offer. It may not make sense to refinance if you find you’ll pay less over time with your federal student loan repayment plan.
Why refinancing your student debt with a private lender is risky
For everyone else, Rubin recommends steering clear of private lender refinancing offers, especially if you’re enrolled in an income-driven repayment, pursuing public student loan forgiveness or living paycheck-to-paycheck. You’ll be giving up too many benefits and could land in a dangerous situation if you face financial hardship, like a job loss or medical issue.
Here are some other caveats to consider.
1. You’ll lose federal student loan protections
Refinancing to a private lender means you won’t have access to federal student loan benefits, such as access to income-driven repayment plans, administrative forbearances and any future federal student loan forgiveness opportunities.
“Some lenders in the Family Federal Education Loan program provide discounts for borrowers who make their loan payments on time without missing a payment,” Kantrowitz said.
Federal student loans also offer hardship benefits, such as loan deferment and forbearance, which can keep your loans in good standing for a period of time when you’re unable to make payments. Private student loans may offer some hardship assistance but don’t offer the same benefits.
2. You may pay more in interest and fees
If you’re able to get a lower monthly payment, you’ll likely be extending your loan’s repayment term — this means you’ll be paying off your debt for a longer time. Even if your interest rate is lower, you could end up paying more in interest and other fees. That means you’ll make debt payments for longer, which could hold you back from growing your savings, putting money away for a down payment on a house or car, or getting approved for a mortgage or other loan.
3. You might not qualify for the advertised interest rate
You might see a private lender advertising rates or rate discounts that are lower than your current federal student loan interest rate — but that doesn’t mean you’ll qualify for them. Most lenders require good to excellent credit to lock in the best rates. If your credit score isn’t in the mid-to-high 700s, your rate will likely be higher.
Before applying with a private servicer see if you can get pre-qualified so you have an idea of what your rate will be. Otherwise, you may need a cosigner to qualify for a lower rate.
4. Your credit score may be too low
When you refinance, you’re essentially moving your debt from one loan to a new one. Refinancing still means you’ll need to meet lender requirements, including credit requirements. Some lenders require a 665 or better to get approved for a loan.
If you’re already in default on your student loans, it will be challenging to refinance your loans with a private lender — you’ll likely need a cosigner, said Rubin.
Alternatives to refinancing your student loan debt
If you’re struggling to repay your student loans, you have a few options you can explore before you consider refinancing.
- Talk to your loan servicer. If you’re at risk of falling behind on your student loans, contact your student loan servicer as soon as possible for any alternative repayment or hardship options to avoid going into default.
- See if you qualify for lower monthly payments. Check out all of the repayment options available to you, including income-driven repayment plans, using the Department of Education’s Loan Simulator.
- Consider consolidating your loans. If you have multiple loans with different interest rates, you may qualify to consolidate them into one direct loan with one interest rate. This could also help lower your interest rate or overall monthly payment.
- Look into loan rehabilitation. If your loans are in default, you can avoid having your wages garnished. The Office of Federal Student Aid offers loan rehabilitation, which can get your loans out of bad standing if you make nine consecutive payments on time under the agreement.
