When Is Student Loan Refinancing A Bad Idea?

October 20, 2015

I was recently at an event at my church talking to a group of wonderful women in their 20s. After getting over the horror that most of them were born after I graduated from high school and I was the same age as one of their mothers, we starting talking about what we did for a living and I mentioned I was a financial planner. The conversation stopped immediately. They all looked at me and started asking financial questions, many related to student loans.

One woman was in the process of refinancing her federal loans. Student loan refinancing is when you get a new loan and the new loan pays off the other loan. When you refinance a federal loan you are shifting from a federal to private loan.

In a lot of cases it makes sense but in some cases, you may want to reconsider. She and the others asked why and I realized there is so much information on when to refinance student loans that no one ever thinks about when it is not a good idea. I told her that before she refinances her student loans, she should weigh the benefits of student loan refinancing with the loss of federal loan benefits, particularly if:

• You are a teacher that works in a lower income community for five years. If you do, you may qualify for the Teacher Loan Forgiveness Program or Teacher Cancellation Program for Federal Perkins Loans. Refinancing may lower your rates, but it may also disqualify you from these programs.

• You work for a government organization, a non-profit tax-exempt organization under 501(c)(3) or a private, not-for-profit organization that provides services such as public safety, military service or any of the other employers listed as a qualified employer. If you work for one of these “qualified employers,” you may qualify for a Public Service Loan Forgiveness Program.

• If you experience a financial hardship or have low income, federal loan programs have a number of Income-Driven Repayment Plans or forbearance or deferment programs for borrowers. These programs would also be a consideration for someone with fluctuating income or someone in an unstable profession or concerned about a layoff.

As you look at refinancing options, it’s important to weigh the benefits such as lower interest rates against the benefits of federal student loans to make sure that you choose the best option for you. For example, I would hate someone to refinance and find out that they could have eliminated the loan entirely through a forgiveness program. As with all financial decisions, make sure you understand the pros and cons before you decide.