*The following is an article that I wrote in partnership with Digital Federal Credit Union, DCU*
If you’re currently trying to manage your student loan debt, you’re not alone. It’s estimated that 42.9 million Americans have student loans, and the total outstanding student loan debt is $1.59 trillion, according to 2021 second quarter data from the federal government. With the negative impact that the pandemic has had on the economy, people are more financially strained than ever before when it comes to repaying their student loans. It may be time to consider refinancing your student loan, but first, you’ll need to understand all your options, so that you can make the best decision for you and your wallet.
The Best Plan of Action Depends on the Type of Loan You Have:
Before you can decide the best course of action in dealing with your student loans, it’s important to know what kind of loans you have. Are your student loans federal or private? Federal student loans and Federal Parent PLUS loans are funded by the federal government. Private student loans are made by a lender such as a bank, credit union, state agency, or a school. The type of loan you have greatly impacts if it’s a good time to refinance. When you refinance your student loans, a private lender pays off your existing loans and gives you a new loan with new terms which can result in a lower monthly payment.
Federal Student Loans vs Private Student Loans:
Federal student loans have terms and conditions that are set by law, and include some benefits that private loans don’t offer such as standard fixed interest rates and income-driven repayment plans, which allows you to have a monthly payment proportionate to your income and family size. In contrast, private student loan terms and conditions are determined by the private lender and are not regulated by the government.
While you can refinance both federal loans and private loans, you want to make sure that you’re not giving up important payment options & favorable terms when it comes to refinancing your federal loans. Since you can’t refinance federal loans through the government, you’ll need to refinance your federal student loans through a private lender, which will result in you losing any of the government protections that you once had. For example, if you refinanced a federal loan to a private loan right before the pandemic, then you would have not qualified for the pause on federal student loan payments that started in March 2020 (this pause on payments is set to expire in January 2022). While some private lenders offered their borrowers relief during this time including paused or reduced payments, unlike federal loans, there is no rule that says they are required to do it.
Should you Refinance Your Student Loan?
Interest rates are at a record low, so if you have private loans with higher interest rates or have multiple private loans that you want to consolidate, then it makes sense to explore your refinancing options. In some cases, refinancing your student loan could save you significant money over the lifetime of your loan, or lower your monthly payment. DCU offers student loan refinancing options with competitive rates. If you have a federal loan, it may be best to keep it and explore income-driven payment options if you need relief.
In general, it’s important to know that you do have options when it comes to your student loans. Refinancing may or may not be the right choice for you. Make sure you understand the terms of your current loan and the options available to you before making an informed decision.