People often consider refinancing. You get lower rates right?  Maybe.  There are things to consider.  Be careful with refinancing.  You lose federal government protections as well as access to loan forgiveness programs or payments based on your income. Furthermore, you leave your co-signers and potentially your family responsible for your debt if you die, unlike if you stay in a public plan.  You may also lose access to the permanent loan forgiveness Congress may pass at any time. We write this in an election year, where a few proposals have been put forth. You never know.  

If you are unsure which action to take, consider refinancing at a later time because you can never go back once you refinance. 

Here is a summary of options to consider based on your payoff goals. If you are unsure which payoff goal is right for you. Consider viewing the article on Pay off quickly or Pay less?

 

Lower your monthly payment

 

IDR- allows you to lower your payment temporarily or permanently. It’s based on your income. Refinancing can help you lower your payment slightly, but it’s permanent and you can’t reverse your decision

 

Pay your debt gradually

 

IDR allows you to lower your payments and strength out your payments over a longer time period. If you manage your paperwork correctly, you qualify for loan forgiveness. If you don’t, you’ll pay higher accruing interest.

 

Pay your loans ASAP

Refinancing - If you earn significant income and/or want to pay your loans off in 5 years or less and do not care about your federal protections, refinancing may be right for you. You can lower your interest rate, make extra payments, or double and triple your payments to pay down your debt. Your credit score impacts your ability to qualify. 

If you don’t have a “good” score of ~ 650 or higher, consider staying on the standard plan and increasing your payments. LoanSense tools help you figure out your savings. 

 

We always hear about the benefits of refinancing or the benefits of lowering our monthly payments through a different federal plan, but what are the cons?

 

What are some cons of refinancing?

  • IDR gives your access to many protections, including a choice of payment plans, loan forgiveness, and even cancellation if you are disabled, die or your school closes. Refinance companies may grant economic hardship deferment, but that’s it.
  • Your co-signer may also be stuck with your debt if something happens to you.  Some people even buy life insurance once they refinance large sums of student loan debt, in the event something happens and they do not want their co-signer to be stuck making their student loan payments.
  • Federal student loans never get passed onto your family, if you die. 

What are some cons of the income-driven plan?

  • You have to file paperwork annually. If you file late, then your interest will accrue on top of your principal, which means your loan payments will increase.
  • Also, you may owe taxes on the loans that were forgiven, if you did not receive forgiveness as part of PSLF. If you receive any type of loan forgiveness and did not receive the loan forgiveness as part of the Public Service Loan Forgiveness program, then you technically owe income taxes on the forgiven amount. 

Apparently, congress appropriations have not budgeted to receive this money, so it's not 100% that the government plans to actually tax borrowers, but it's something to consider. You can save a small sum each month for this "tax bomb". Calculate 25% of the forgiveness amount as taxes and divide by the number of payments you have left to pay to receive forgiveness. Save that amount for the tax bomb. 

LoanSense application will clearly indicate the taxable amount and can help you understand how much you should be saving.