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Editor’s Note: In response to the coronavirus pandemic, as of March 13, 2020, the Trump Administration has halted interest payments on federal student loans. Please note that this applies to federally held student loans only and may not apply to your private student loans. Also note that student loan payments are still required, however your entire payment will now be made toward the principal of the loan. Check with your student loan provider for more information.
Let’s face it, student loans are a huuuuge burden on students and parents alike. Student loans can make you feel trapped in debt, without any light at the end of the tunnel. Obviously, the idea is that you should be able to pay them off once you graduate and move into your career, but not everybody has the opportunity to move right into a high paying job. And let’s not forget about the parents who take out student loans for their kids. What happens to them?
In short, student loans blow! But hey, at least you’re not alone right? The good news is you have a variety of options when it comes to your student loans, including refinancing the loans themselves. Heck, even parents can refinance their PLUS loans. Here’s how!
Refinancing: Am I Making the Right Choice?
Before we get into specifics about whether or not you should refinance, let’s first talk about what refinancing actually is. When you refinance your student loans, you rework the details of the loan to provide you with a better interest rate or a better monthly payment. You may have also heard of the term “consolidation,” which is closely related to the refinancing process but not quite the same thing.
Some of the most important benefits to refinancing your student loans include the possibility of a lower monthly payment and interest rate. If your monthly payments are decreased, you will keep more of your money each month. Another perk is that you have the option of consolidating your loans, meaning that you can combine all of your federal student loans into one quick, easy to pay back loan.
When you refinance, the repayment plan can be lengthened which enables you to spread out your payments over a longer period of time. Keep in mind, however, that this will most likely increase the total amount you pay over the life of your loan. On the other hand, you can also pay your loans off much quicker if you shorten your loan term.
Lastly, if you choose a fixed-rate refinance, you can lock in an interest rate on your loan. This means that you don’t have to worry about fluctuations in the interest rate so your monthly payment will always stay the same. However, depending on whether interest rates are up or down, this can help or hurt you at any given time.
Cons to Refinancing
Of course, before making any major decision like this, you need to also consider the disadvantages. Here are a couple.
- Regardless of whether your loans are currently serviced by Fedloan or not, refinancing your federal loan into a private loan may disqualify you from any loan forgiveness programs or may reset your payment clock on your forgiveness plan. This can hurt, especially if you were counting on your loan being forgiven.
- You may lose some other federal benefits available, such as income-based repayment and financial hardship deferral options.
- If your credit has become damaged since obtaining your original loan, chances are that you will not qualify for an interest rate that would save you money through a private lender.
Refinancing PLUS Loans for Parents
If you’re a parent who took out a PLUS loan to help fund your child’s education, you may be wondering what your options are when it comes to payments. Did you know that you have the option to refinance your loan as well? Yep, that’s right. Refinancing is not just for the students anymore. Parents now have some options at their disposal, as well.
Just like refinancing other loans, refinancing your Parent PLUS loan might help you achieve lower monthly payments and a better interest rate. For example, if you are currently paying 7.8 percent on the loan, you may be able to refinance and get a rate of 3.25 percent. Big difference, right? Not only that, if you pay multiple interest rates on multiple loans, you can condense the interest rate into one single rate.
One of the most important things to remember about refinancing your PLUS loans is that you cannot transfer the debt to your child. Also, you may not combine your loan with your child’s loan. The debt is yours to keep. So, think carefully before ever assuming a PLUS loan in the first place!
Should You Refinance Your PLUS Loan?
If you’re trying to decide whether or not to refinance your PLUS loan, you need to carefully consider your options. Of course, interest rates are probably the most important part of the equation. If you already have a decent rate, refinancing may not be a good fit. You definitely don’t want to lose money on this deal. However, the average interest rate for a PLUS loan is roughly 7.5 percent. So, if your rate is above 7 percent, you should think carefully about refinancing.
The next thing to consider is how many loan payments you make each month. For example, if you have four separate PLUS loans, you may be making four different monthly payments. This is a total pain which can lead to confusion and accidentally skipped payments. Refinancing your PLUS loan will help eliminate these payments by condensing your multiple loans into one, single payment.
Before you decide to refinance your Parent PLUS loans, consider whether or not you planned on applying for a forgiveness plan. If you have, then refinancing may not be the best choice for you. As with other student loans, you may lose the opportunity for your loan to be forgiven.
You Are Not Stuck
Many parents think that, once they consolidate or refinance their loans, they are stuck with the new terms. It’s important to remember that your federal loan servicer is almost always willing to work with you.
Even if you do refinance your loan, you can apply for income-based repayment plans and deferments should you run into financial difficulty. Keep in mind that you should never stop making payments on your loans. This would put you into default, and you’ll lose the opportunity to gain a PLUS loan in the future.
Student loan refinancing is an option that is available to both students and parents. While refinancing your student loan offers a wide variety of benefits, it’s always important to consider all of your options (and the consequences) before you settle for a loan that sounds like it will work.