Should You Refinance Your Student Loan With a Private Lender?

Student loan debt is no joke— just ask any college graduate.

The cost of higher education creeps up from year-to-year, with each graduating class owing slightly more than the class before.

This type of debt haunts graduates for decades and significantly impacts their financial choices.

An American Student Assistance survey explored the impact of student debt on everyday life.

According to the survey, about 27 percent of respondents found it difficult to buy daily necessities because of their student loans; 73 percent said they had put off saving for retirement; and 75 percent indicated that student loan debt affected their decision or ability to purchase a home.  

A third of respondents in an MyBankTracker poll reported they'd be willing to give up a body part to become free of debt.

Student loan debt doesn't just impact their daily life, but can impact graduates' futures as well. Monica Harvin, Contributing Editor of GoodCall talks about how these loans can impact retirement:

“Graduates with high interest loans won’t only be paying more for student loans. A recent GoodCall study reveals that having just $12,000 in student loans at a high interest rate can mean more than $75,000 in lost retirement savings over time.

What’s more, graduates with higher than average student debt loads may be tempted to extend repayment terms rather than cope with student loan debt in the short run; however, extending repayment to 20 or 25 years can mean hundreds of thousands of dollars in lost retirement savings for a graduate with $50,000 in student loans, the study finds.”

Because of the long-term implications of student loan debt, it goes without saying that many graduates look for ways to make their payments more manageable.

Getting a lower payment typically starts with a lower interest rate.

Since federal loans—which are funded by the government— all have the same rate, some graduates consider refinancing their loans with a private lender (bank, credit union, other type of lender) to take advantage of a lower interest rate.

What is student loan refinancing?

Refinancing with a private lender involves taking on a new loan with new terms, and then using these funds to pay off an existing loan. It’s important to note that refinancing is not the same as a consolidation.

Consolidation and refinancing can both simplify student loan repayment, but consolidation only works with federal student loans.

You can apply for a Direct Consolidation Loan and combine multiple federal loans into a single loan with one interest rate and payment.

Unfortunately, this doesn’t work with private loans.

If you have a combination of federal and private student loans, refinancing is the only way to merge these loans into a single loan.

Refinancing is an attractive option if you don’t want the hassle of managing multiple loans and different due dates every month. But refinancing with a private lender has its risks.

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What do you need to know about refinancing?

There are significant differences between a federal and a private student loan, primarily with regard to repayment options.

Refinancing federal student loans with a private lender can be a smart move for some borrowers, particularly those seeking a lower rate.

“There simply isn't a federal student loan repayment option that lowers interest rates and can lead to savings like refinancing student loans can,” says Andrew Josuweit, CEO of StudentLoanHero.com. But while the monthly savings is financially rewarding and adds up over the years, Josuweit explains that refinancing with a private lender means giving up federal student loan protection.

“There simply isn't a federal student loan repayment option that lowers interest rates and can lead to savings like refinancing student loans can,” says Andrew Josuweit, CEO of StudentLoanHero.com

“Borrowers will lose access to income-driven repayment options like Pay As You Earn and Income-Based Repayment, as well as federal student loan deferment and forbearance. These repayment options (with the exception of being able to pause payments in some cases) simply don't exist with virtually all private lenders.”

Borrowers should keep this in mind before refinancing with a private lender.

Federal loans come with hardship provisions not offered by most private lenders.

If you lose your job or can’t work due to an illness or injury, a federal lender will work with you and offer assistance—some private lenders aren’t as forgiving.

“Based on my experience, private lenders are much more aggressive with student loan collections and more litigious — meaning they are more likely to sue the borrowers,” says Leslie Tayne, a financial attorney, debt expert and author of Life & Debt.

The upside, however, is that refinancing with a private lender means that your student debt may be eligible for bankruptcy discharge, unlike federal student loans which are not dischargeable in bankruptcy.

It’s also important to note that while refinancing with a private lender can result in a lower interest rate and a lower payment, this is subject to credit approval.

“Before refinancing with a private lender, you should make sure you do not have any blemishes on your credit reports (i.e. missed loan payment in the past) so that you can be sure to get the best rates and terms for repayment,” says Tayne. “The new interest rate typically depends on one’s credit score, income and overall debt, among other factors.”

Should you refinance your student loans?

Just because private loans don’t offer the same level of protection as federal loans doesn’t mean you shouldn’t consider this option.

It’s all a matter of what you consider more important, whether it’s a lower interest rate and payment, or income-driven repayment options.

Before you make a decision, get a quote from a private lender and compare the new loan terms with your existing loan terms to see if the savings is worth losing your federal protection.

“If borrowers feel comfortable that they will be able to make their student loan payments on time and don't plan to use federal student loan repayment options," says Josuweit, "refinancing can be a smart financial choice that can save thousands of dollars over the lifetime of their loans.”