Private lenders are increasingly open to the idea of refinancing student loans, which can be a big benefit for the right borrower. While it’s a very dangerous option for the majority of borrowers, there can be advantages to refinancing so long as you know exactly what you’re getting yourself into.

What you stand to gain

Depending on your financial stability, credit score, career prospects, and level of tolerance for risk, refinancing your student loans may help you save money over the life of your loan. Although that’s the only real advantage, saving is a pretty big advantage when you’re discussing loan repayment. Specifically, by refinancing some people may be able to:

  • Lower Interest Rates: Let’s face it, not many people would be interested in refinancing if it meant a higher interest rate. If you have a particularly high credit score, this could even result in a fair amount of savings by the time you’re finished paying back the loan.
  • Lower Total Repayment: Another possibility is that refinancing will lower your total repayment. This isn’t a given, since bank fees can more than offset interest savings, but for the right person with an outstanding credit score and the right bank it can be significant.
  • Convenience: Since private loans cannot be consolidated with federal loans into a Direct Consolidation Loan, the only way for somebody with both types of loans to get down to a single payment is through private refinancing. While that might seem like you’re giving up a lot for minimal benefits, it’s a factor to weigh.

Pitfalls to be aware of

The benefits of refinancing are pretty much what you would expect, but it’s often less obvious to see what you’re trading away in the process. Particularly when you refinance federal student loans into private loans, there’s a lot that needs to be considered:

  • Higher Monthly Payments: Private refinancing options are appealing because they save you money in the long term, but that may not translate to the short term. Federal student loans can be tweaked to match your finances as they change. You may even already be on an extended or income-driven repayment plan to reduce your monthly payments. Almost all private student loans will have shorter terms and little flexibility, which means higher monthly payments are likely.
  • Lost Deferment or Forgiveness Options: All federal student loan borrowers are entitled to a number of benefits, including access to deferment and forgiveness (depending on repayment plan). If a federal student loan borrower loses their job, their servicer is required to provide a specific amount of deferment time. If that borrower becomes totally and permanently disabled, they can have their remaining loan balance forgiven. Some private lenders are more accommodating than others in these circumstances, but none of them are required to offer similar accommodations.
  • No Safety Net: Missed student loan payments? Federal student loan borrowers can call their servicer and work something out. In fact, a federal student loan borrower has to be behind on their loan payments for nearly a year before they are sent to collections. Even then, there are affordable, income-driven rehabilitation options to bring defaulted loans current again. After you refinance into a private loan, those missed payments could send you into collections in a matter of months with no hope for an affordable way out.

Basically, refinancing can be a great benefit if you are absolutely stable and have extremely good credit. Between lower interest rates and presumably higher monthly payments, you’ll be out of debt faster than was otherwise likely.

If, however, you think there is a chance that you could lose a job, have a health issue, or find yourself in financial trouble at any point in the next 10 years then it might be better to hold off on refinancing. Explore other options like accelerating your repayment to reduce the long-term cost of your loans without giving up your rights. Refinancing is not a choice to make lightly and there is no going back if you regret the decision later.

About Employer-Assisted Student Loan Refinancing

Many businesses are exploring ways to add student loan assistance to their benefits package. This may include sponsored refinancing offers where the company negotiates lower-interest student loan refinancing options for their employees. This is a great way to secure a lower interest rate than you might otherwise be eligible for! It does not insulate you from any of the negative effects, unfortunately, but if you were a good candidate for refinancing to begin with then this can make a good option even better.

The Best Way Your Company Can Help

The latest trend in student loan assistance is employer payment contribution, often run in a way that is similar to the matching used in familiar 401(k) programs. Employer payment contribution programs allow your company to add funds to your student loan payments as a way to reduce your balance and get you closer to debt-free.

Even small contributions can make a big difference in the long term, and it’s not unusual to see this form of student loan assistance outpace the savings from refinancing very quickly without any of the risk. We expect this to become the preferred option for most employers as they get a chance to do the math and weigh the impact on their employees.