Federal student loan borrowers will have to resume payments after Aug. 30, following a three-year pause. That's sure to strain some budgets, especially given how much inflation has driven up the cost of basic living expenses in recent years.
It's only natural to wonder how you can minimize the blow to your finances that regular student loan payments may cause. Refinancing is probably one of the first things that comes to mind, but it's not the right move for everyone. Here's how to decide if it's a good choice for you.
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Refinancing federal student loans
Refinancing federal student loans typically isn't a good idea. You can't replace an existing loan with a new federal loan. The only way to refinance them is to take out a private student loan. And that usually means giving up some key benefits you'll only find with federal student loans.
Private student loans typically don't offer things like income-driven repayment plans, loan forgiveness options, or guaranteed loan cancellation if you die. They also usually have higher interest rates and more stringent credit requirements. And they're less lenient about late payments. So often, you have more to lose by refinancing federal student loans than you do by sticking to the terms you already have.
Refinancing private student loans
Since private student loans have less generous terms to start with, there's more to gain by refinancing them. But it's still not the right decision for everyone. It all depends on whether the move will actually save you money.
Interest rates on loans are pretty high right now, so this may not be the case. But it doesn't hurt to check. Those who have improved their credit significantly since they first took out their student loan should definitely explore the possibility of refinancing.
A higher credit score often qualifies you for a better rate. On the other hand, if you've experienced a lot of financial hardship and your credit score has taken a dip, you probably want to hold off on refinancing until you get on a better financial footing.
Many private student loan lenders have calculators on their website that can give you an idea of what kind of terms you'd get and what your monthly payments would be if you were to refinance through them. You can also reach out to the lender directly to ask.
Keep in mind that you could face origination fees or other charges when refinancing your private student loans. And the terms of your loan could change. This could affect the types of payment plans or forbearance options available to you. Make sure you're comfortable with the terms of the new loan before you agree to them.
If refinancing right now won't save you any money, you're probably better off tabling the idea for now. You can always try refinancing later once you've improved your credit or interest rates have fallen a little.
