Friend: “ So what do you think about SoFi? Should I refinance my student loans? I’m considering refinancing my student loans from law school.”
Me: “I’m not refinancing but that’s up to you. Here’s what you need to know though – that most people don’t think about – your Federal loans will become private loans when you refinance.”
That’s it! That’s all you need to know. You take on much greater risk by refinancing because you lose the Federal protections (like income repayment and forgiveness) when you refinance into private loans. But if you want to know more, read on…
What is Student Loan Refinancing?
Think of loan refinancing like you would think of refinancing your house. In the same way, you will have a new lender, new loan, new loan terms, it will cost you some money, and your old loan goes away.
You cannot refinance directly through the Federal government if you have Federal loans. There are specific lenders that refinance student loans, including: SoFi, Darien Rowayton Bank, Citizens Bank, Earnest, CommonBond, and LendKey.
The reason for refinancing student loans is to lower your interest rate. You can convert your variable interest rate into a fixed interest rate (and vise versa) and go from a higher interest rate to a lower interest rate.
How Will the Terms of Your Loan Change?
The terms of your loan will change in many ways. The length of your new loan will vary based on the lender, but typically lenders offer terms of 5, 10, 15, and 20 years. The interest rates will also vary, ranging from as low as 1.90% to 8.90%, depending on your credit, your loans, and the lender. Most lenders offer refinancing for both undergraduate loans and graduate loans (but not all). And most offer refinancing for both private loans and Federal loans.
You need to read your new loan terms very carefully because the terms are completely new – everything could change!
What is the Consequence of Refinancing?
If you refinance your Federal student loans, you convert the loans into private student loans. This means that the protections that the Federal government has with your Federal loans go away – you only have the protections that are included in your new loan terms (and they will vary by lender, but typically they are not nearly as forgiving as Federal protections).
After you refinance, you will work directly with the bank that you refinanced with – you will no longer work with your previous lender. The new bank repays your old loan, and the new bank gives you a new loan. This means that your old loan is gone for good. This can be good if it’s what you want and bad if it’s not. Similarly, if you die before you repay the loans, you will owe the full amount upon your death, unless there is a forgiveness clause in the terms. If not, you would need to make sure that you have life insurance to cover your loan amount.
The key is to make sure you read all of the details. If you think you could benefit form an income repayment plan, you may give that up by refinancing because it may not be offered in your new loan. You also may have a prepayment penalty.
I like the protections offered by the Federal government, so I’m keeping my student loans right where they are – even with a 7.9% interest rate. You may be different and think that student loan refinancing is right for you. If you do go down this road, just be very careful to read all of the new loan terms before you go through with it. Once you refinance, there is no going back!