The Limitations of Refinancing Student Loans

Interest rates are down, and the desire to refinance existing debt is up. Especially student loans. The past few years have seen a swarm of companies come on the scene with the purpose of helping facilitate the refinancing of student debt. A swarm of new companies means an avalanche of advertising. Like all good advertising, they make it seem like you're missing out by not using their services.

The general rule of thumb with debt is to minimize interest costs and pay off the debt as quickly as possible while balancing your other financial commitments. This strategy works well with credit card debt or car loans. Treating student loans with this model is a trap, one that even many financial advisors fall into. Like the coral snake and the king snake, they look almost identical, but one demands more of your attention.

While refinancing can help, in some situations, the effectiveness for student loans is more limited than these companies make it seem. This is exceedingly so for SLPs and other healthcare professionals with federal loans.


The potential to lower your interest rate

There are two ways to lower the cost of your debt. The first is by lowering your interest rate; a lower rate equals less interest charged to you, allowing you to pay off the debt for less. Going from a 6 percent interest rate to 5 percent can make a big difference. The ability to do this is the biggest selling point of refinancing.

Changing the term of the loan

The second way to lowering your interest cost is by shortening the length of the loan, so that you can pay it off faster. You can do this with or without refinancing by making higher payments than required. Combining this with a lower interest rate can be a powerful strategy.


New Loan Fee

Sometimes refinancing debt requires you to pay an “origination fee” that gets added to your new loan. Not all student loan refinancing companies charge an origination fee, however, you need to watch out for it and ensure your savings calculation accounts for this. 

Higher Monthly Payments

The best interest rates are given on the shortest length loans. If you shorten the term of your loan to get a good interest rate the required monthly payment may rise - sometimes substantially. Overall, this would save you money in the total loan pay off, but if the monthly payment is an anchor dragging you down, it may not be worth it. 

Loss of Flexibility

These last two points are the unique issues with refinancing student loans. The federal loan program provides options in repayment that no other private loan company can match. Deferrals, forbearance, and income-driven repayment plans are all built into the federal loan program. If you refinance federal loans to a private lender, you lose access to all these options, including one of the most powerful loan repayment strategies for SLPs: loan forgiveness.

No Forgiveness

Refinancing federal loans with a private lender means no more Public Service Loan Forgiveness and Perkins Loan Cancellation. Two programs many clinicians can qualify for and use to great effect. Once your loans leave the federal program these are permanently lost. You can't go back.

In Practice

The biggest opportunity for refinancing student loans is in any existing private student loans you have. These loans often have the higher interest rates and therefore have room for improvement. Plus, you don’t lose any of the flexibility you would by refinancing federal loans.

There are few big wins achieved by refinancing federal loans. To recover the loss of the federally provided repayment options, you need significant savings on your interest rate. 

Say hi at ASHA19! I’ll be presenting on how to repay your student loans