Should you refinance your student loans?

Almost every page answering this question is published by somebody who earns money when the answer is yes. That does not make them wrong, but it does explain why the answer is so consistently yes, and why the reasoning so often stops at the interest rate.

Here is a framework instead. Work through it in order, because the first question can end the exercise on its own.

Question 1: Are your loans federal or private?

Only private loans? Then this is an ordinary rate decision with no hidden cost. Nothing on this page about forgiveness or deferment applies to you. What is left is shopping: quotes from several lenders, compared on APR rather than headline rate, against the loan you already hold.

Any federal loans? Keep reading, because the rest of the questions are about what you would be giving up.

A mix? Then note the option most calculators never show you: refinance the private loans and leave the federal ones alone. You get the better rate where there is nothing to lose and keep every protection where there is.

Question 2: Are you on, or near, a forgiveness track?

If you work for a government body or a qualifying nonprofit, Public Service Loan Forgiveness is almost certainly worth more than any interest saving available to you, and refinancing ends it permanently along with every payment you have already made.

Check something specific before anything else: are you actually earning credit right now? Payments only count under a qualifying plan, and the Tiered Standard plan does not qualify above a $25,000 balance. It is also the plan a borrower is placed on by default. It is entirely possible to work for a qualifying employer for years and accrue nothing, and that is fixable while your loans are federal.

Income-driven forgiveness matters too, though less, because it takes twenty to thirty years and is now federally taxable. If your balance is large relative to your income, an income-driven plan may forgive a substantial sum eventually.

Question 3: How stable is your income, really?

A federal payment can follow your income down. A private payment cannot. The question is not whether you expect your income to fall, because nobody refinances while expecting that. The question is what happens if it does.

Work out the actual number. If you refinance to a $1,400 monthly payment, then:

• Could you cover $1,400 a month through six months of unemployment?
• Could you cover it through a serious illness?
• Could you cover it if you needed to leave a job quickly?

On an income-driven federal plan, some of those scenarios produce a payment near zero, and under RAP those months still count toward forgiveness. On a private loan the payment stays exactly where it is.

Question 4: How large is the balance relative to your income?

This ratio drives more of the answer than anything except forgiveness.

• Balance well below annual income: you will repay it either way, forgiveness is unlikely to reach you, and the federal protections are mostly ones you will never use. A lower rate is real money.
• Balance well above annual income: an income-driven plan is likely to forgive a meaningful amount, the interest waiver under RAP prevents the balance growing, and refinancing converts a payment tied to your income into one tied to your debt. In this shape the numbers usually favour staying federal.

Question 5: How big is the rate gap actually?

There is a real difference between a borrower at 9 percent moving to 5.5, and a borrower at 6.5 moving to 6.2. The second is doing a great deal of paperwork and giving up every federal protection for a saving that a single month of unemployment would erase.

Also check the term. A lower monthly payment achieved by stretching a loan from eight remaining years to ten is not a saving, and calculators we audited are pre-filled in exactly that way. Compare total cost, not the monthly figure.

Question 6: Is a variable rate being quoted?

Variable rates start lower and are the ones shown in advertising. They can rise, sometimes substantially, and you carry that risk for the whole term. If a variable rate is the only thing making the comparison work, the comparison does not work.

The clear cases

The numbers usually favour refinancing when

• All your loans are already private
• Your income is high and stable, your balance is modest, and no forgiveness path applies
• The rate gap is large, and the term is the same or shorter
• You have savings that could carry the fixed payment through a job loss

The numbers usually favour staying federal when

• You work in public service, or might within the next decade
• Your balance is large relative to your income
• Your income is variable, commission-based or early-career
• You have no emergency fund
• The saving is thin, which is most of the time at current rate levels

Run your numbers, and readthe full list of what is at stakefirst.