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Should You Refinance Federal Student Loans?

ALERT: PSLF Time-Limited Waiver Opportunity

On Oct. 6, 2021, the U.S. Department of Education (ED) announced a time-limited waiver opportunity to its PSLF program rules. Under the time- limited waiver opportunity, borrowers could receive credit for past payments which would not have been previously classified as qualifying payments or instances in which payments were not made, specifically, servicemembers who were advised to put their loans in a deferment or forbearance status and did not make payments while on active duty.  The months the borrower spent on active duty can be counted toward the PSLF.

Borrowers will need to submit a PSLF form—the single application used for a review of employment certification, payment counts, and processing of forgiveness—on or before October 31, 2022 to have previously ineligible payments counted.

The time- limited waiver essentially waives all requirements except the employment requirement. If you have Federal Family Education Loans (FFEL) or Perkins loans, you will still be required to consolidate your loan with a Direct Consolidation Loan by Oct. 31, 2022. However, any payments made on your federal student loans, under any repayment plan (partial, full, or late), on any FFEL, Perkins, or Direct Loan, will count towards your 120 qualifying payments.

Under the new time-limited waiver, you need to have been employed or are currently employed by an eligible employer (government, 501(c)(3) not-for-profit, or other not-for-profit organization which qualifies), and working full-time. You can still qualify for the full-time requirement if you are working multiple part-time jobs (that totals at least 30 hours per week) with eligible employers. For more information on which employers meet PSLF Program requirements visit the PSLF Help Tool.

Nothing is more exciting than finding out you’ve been accepted to college. Almost immediately visions of achieving your dreams being to form.  Unfortunately, shortly after the excitement of getting into your dream school, the realities of paying for college begin to settle in.

For many students, paying for college means student loans. The largest provider of student loans is the U.S. Department of Education. After students complete the government form called a FAFSA® (Free Application for Financial Student Aid) to determine financial aid options, many accept the federal student loan offered.

The interest rates on federal student loans are non-negotiable, as they are set by Congress.  Students have no alternative but to accept whatever rate is approved for each school year they borrow (students repeat the borrowing process for each year they attend school). Upon graduation from college (plus a 6-month grace period period) the first monthly student loan payments become due.

If not paid attention to carefully, a federal student loan borrower can be caught off guard by just how much debt has accumulated while pursuing an education. If you find that this is you, don’t fret, there are options such as income-driven repayment, student loan forgiveness, loan consolidation or even refinancing.

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What is Student Loan Refinancing

Student loan refinancing is when you take your loan(s) and go to a private lender to change the terms of your loan and/or lower your interest rate. Effectively, you will borrow the same amount you owe (to be used to pay off your existing loans) with the new loan offering potentially more favorable terms, such a lower interest rate or lower monthly payments due to a longer repayment period.

You may opt for student loan refinancing for a variety of reasons.  You may simply want to save money.  With the given rates by the government at the time of your schooling, you may find that the market is offering more favorable rates now that will translate into quite a bit of savings over the life of your loan.

If you find your struggling to make your student loans payments and want to act while your credit is still good, a student loan refinance might be just the solution.  Changing the repayment terms by lengthening the life of the loan could lower your payments and make them more manageable preserving your credit score and the credit you’ve worked hard to build up to this point.

To be clear, the federal government is not a private lender and will not “refinance” your federal student loans. Going this route will move your loans from the protections and benefits offered by the Department of Education and move them to a private lender, making them now private student loans.

The federal government while not budging on interest rates, does offer you a number of options if you find yourself struggling with your loans. These include income-driven repayment plans, Public Service Loan Forgiveness  (PSLF) and Federal Direct Consolidation loans.

U.S. Department of Education Options for Federal Student Loans

Income-Driven Repayment Plans

The federal government offers 4 different Income-Driven Repayment Plans.  These plans adjust your monthly payment to be more manageable based upon your gross income, family size and expenses for eligible federal student loans. The amount you pay will be 10-15% of your  discretionary income. Each year you would recertify your information which could result in an even lower payment or a possible increase, if you’ve had changes to your financial situation, which could include a rise in income, the addition of a child, or marriage.

Public Service Loan Forgiveness

Public Service Loan Forgiveness is a government run program that will forgive the remainder of your Direct Loans after you’ve met certain requirements.  These requirements include working for an eligible employer (U.S. federal, state, local, or tribal government for non-for-profit organization) while you make 120 qualifying monthly payments in an eligible repayment plan.

The standard federal student loan will have a 10-year repayment term, so to take full advantage of this program, you must repay under an income-driven repayment plan, such that you can have a balance at the end of the 120 payments to be forgiven.

Federal Direct Consolidation Loan

The U.S. Department of Education has a solution called Federal Direct Consolidation Loan. They will take all your loans and consolidate them into one single loan with one single payment. The interest on this new single loan will be the weighted average of all the loans to be added and rounded up to the nearest 1/8th percent. This will simplify the repayment process and could (in rare cases) reduce your total monthly amount due if the sum of the individual minimum monthly payments is more than the new single payment (with minimum monthly payments being at least $50 in for standard loans)

You can consolidate your loans, depending on your total outstanding education debt, you may be able to take up to 30 years to repay them if necessary, also allowing for your payments to be reduced.  However, keep in the mind the longer you pay, the more you also pay in interest, making the total cost of your loan even more.

What it Means to Refinance a Federal Student Loan

As mentioned earlier, should you decide to “refinance” your federal student loan(s), you will be taking them out of the federal loan program and moving them to a private lender. This will cause you to lose any benefits you had under the federal loan program such as, multiple repayment options, loan forgiveness, deferment and other financial hardship solutions.

These benefits proved quite valuable recently when the federal government deferred all federally-held student loans during the COVID pandemic.  Students (regardless of financial need or hardship) with qualifying loans were able to skip payments for nearly 2 years (without accruing interest) while other federal borrowers and private student loan borrowers were required to make payments, and if they were approved to postpone payments interest was still accruing.

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When to Refinance a Federal Student Loan

This leaves the question, when should you refinance your federal student loan? The answer to this depends on your needs. If you think you are going to need the protections for financial hardship or you could qualify for PSLF, it’s probably not a good idea to take your loans out of the federal program.

However, if you feel financially stable, have good to excellent credit and the market is in a good place offering low interest rates, then it might just be time to refinance those loans and save some money.  Shop around and secure a new interest rate that will save you money over the life of your loan.

Additionally, if you are struggling to make payments and are looking to change your terms AND save money so you are not paying more in the long term, a student loan refinance also might be the right solution for you. While you can modify your monthly payments down with a Direct Consolidation Loan from the federal government you will eventually pay more over time. If you are a qualified candidate, a student loan refinance with a private lender can offer you that lower payment (due to a lower interest rate) without extending the repayment period by too much, effectively costing you less in the long run.


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