Student loans: When should you refinance?

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Student loans can be a terrible burden when you’re just starting out in life. The average 2016 graduate is now wrestling with $28,773 in student loan debt, according to a U.S. News estimate.

Consolidating multiple loans into one and refinancing the interest rate is one possible solution to limit the hurt that the cost of education puts on your wallet.

But it’s not the right move for everybody.

RELATED: Should you buy tuition refund insurance?

Should you refinance your student loans? 

The question of who should consolidate and refinance really depends on what types of student loans you have.

If you have federal student loans

Federal student loans come with a lot of built-in protections and even, dare we say it, perks.

For example, on the protection side, federal student loans offer deferment and forbearance options.

The former allows you to delay paying your loan for a period of time without accruing additional interest. By contrast, the latter lets you postpone or temporarily reduce your payments if necessary when economic times are tough — though interest still continues to accrue as agreed while you’re in forbearance.

Meanwhile, when it comes to perks, Clark has long sung the praises of various income-based repayment options that cap your payment at a percentage of your income — not to mention the carrot of federal student-loan forgiveness programs.

Among the most popular of the forgiveness options is the Public Service Loan Forgiveness Program, which stipulates that if you work in a qualifying job (government, charity, etc.) and make 10 years of on-time payment, the remainder of your loan balance gets wiped out.


To Clark’s mind, all of these reasons make a strong a case for keeping your federal student loans and paying as agreed — rather than refinancing.

“It’s a rare situation where it makes sense to refinance because you lose so much, like the forbearance rights if you become unemployed,” the consumer champ says. “With federal student loans, you’ve got to be very thoughtful and careful before agreeing to a refinance. It’s got to be worth it for you to do it.”

Clark has two criteria that must be met if you’re going to refinance your federal student loans:

1. Only consider refinancing if you’re not in a public service job where you’ll get student loan forgiveness after 10 years

2. You must be able to save a full two points on your new interest rate (Example: Going from a 6.25% interest rate to 4.25%)

Other than under those strict conditions, it’s best to steer clear of refinancing federal student loans.

If you have private student loans

Private student loans are a different animal altogether. For years, Clark has warned people away from private student loans at all costs. Turns out, there’s a reason for that!

With private student loans, there are no programs to help with capping your monthly payment based on your income, there’s no wiggle room on scheduled payments with forbearance or deferment, and private student loans typically cannot even be dismissed in bankruptcy.

Clark has long said that if the cost of a degree exceeds what you can borrow under the federal student loan program, you should either pick a cheaper school or work your way through school.

That’s how strident he is about you never borrowing any private student loan money!


But what if you’re already in a private student loan and have the chance to refinance into a lower interest rate? Clark’s advice is clear: “If you can do it, do it!” is one of the largest providers of student loan refinancing that will offer you a competitive rate to refinance your private student loans.

A special note for parents and grandparents

For parents or even grandparents, private student loans could represent one case where you might consider using a home equity loan to refinance student loans you took out for your child or grandchild.

Home equity loans typically have either five-year or 10-year terms with a low fixed interest rate. Meanwhile, student loans made to parents (or grandparents) typically carry a higher interest rate than loans made directly to students.

“So this advice trumps my normal thing about not taking debt against your house, because private student loan debt can be so onerous,” Clark says.

Just be sure you understand the full ramifications of what you’re doing if you try to secure a home equity loan to refinance a student loan for your child or grandchild — your home will serve as collateral for the loan if you can’t repay it as agreed.

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