Posted on Jun 10, 2019

If you’re struggling to pay down your student loans, you’re not alone. About 44.7 million Americans carry student loan debt, with an average monthly payment of $393.00. 

It’s a hefty sum, especially if you’re fresh out of school and not making a high salary. With an average debt balance at just under $30k, recent graduates face years of payments and as a result, may postpone marrying, buying a home or other large purchases, saving for retirement, or starting a business. And unlike other forms of debt that can be discharged through a bankruptcy filing, it’s often very difficult for borrowers to meet the standard of “undue hardship” required for cancellation of a student loan.

Should you refinance if your interest rate is high, if you’re having trouble making your monthly payment, or the amount is seriously impacting your quality of life? Each person’s case is different and it’s important to know what your options are, along with the pros and cons. For example, under the standard repayment plan, payments are calculated at a fixed amount for ten years until the loan is paid off, or within 10 – 30 years with a consolidation loan. All consolidation loans, PLUS loans, direct subsidized and unsubsidized loans, and federal Stafford loans are eligible for the standard repayment plan. If monthly payments under the standard plan are unaffordable, borrowers can request to change their loan terms to one of several other plans such as:

  • Graduated Repayment Plan, which starts with low payments that increase every 2 years.
  • Extended Repayment Plan, which allows a repayment period of 25 years if borrowers meet certain eligibility criteria, such as having more than $30K in direct loans.
  • Pay as You Earn (PAYE) and Revised Pay as You Earn (REPAYE) Repayment Plans: These plans have different eligibility criteria and require a monthly payment that is a percentage of discretionary income.
  • Income Based Repayment (IBR), Income Contingent Repayment (ICR) and Income Sensitive Repayment Plans each have different terms and eligibility criteria, but offer repayment plans based on annual income or discretionary income. The ICR and IBR plans are recalculated annually and repayments are determined by income and family size, capped at 10 to 20% of discretionary income.

Other possibilities if you’re having trouble making payments are deferment or forbearance, which allow you to temporarily stop making payments or temporarily reduce the payment amount.

Given these choices, does it make sense for you to refinance a student loan? It’s important to be aware that refinancing is always done through private lenders, so the variety of federal loan repayment plans will no longer be available to you. And if you have a low credit score, you’re unlikely to get a favorable interest rate to make refinancing worthwhile.  In addition, if you work in a nonprofit or public service job, you might be eligible for loan forgiveness through the Public Service Loan Forgiveness Program, but this is not an option once a federal loan is refinanced.

Generally, refinancing may be a great choice if you have a steady paycheck, aren’t working toward loan forgiveness, and have a decent credit score that enables you to get a lower interest rate than what you currently have. As with any major financial decision, do your homework and make sure you understand the potential drawbacks. Most importantly, if you are struggling with repayments, talk with your lender and investigate plans that might be more affordable. Defaulting on a federal student loan is a bad idea and can result in serious consequences, including wage garnishment and a long-lasting hit to your credit score. 

This material is provided for informational purposes only, and is not intended as authoritative guidance, legal advice, or assurance of compliance with state and federal regulations.

[1] https://studentloanhero.com/student-loan-debt-statistics/

[2] https://studentaid.ed.gov/sa/repay-loans/understand/plans

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