Private Student Loan Consolidation/Refinance (ReFi)
Refinancing your Federal student loan(s) into a private loan(s) can be a confusing and risky venture. Undoubtedly, you've received numerous emails, post mail, or other advertisements from companies like SoFi, Credible, Earnest, etc telling you how much money you can save on interest if you refinance your student loans. Know what you are giving up before converting your Federal student loans. Once it is done, you cannot convert your loans back into Federal student loans.
The summary listed below shows major considerations to be aware of prior to refinancing your Federal student loan(s). This is not meant to be a complete listing. There may be additional advantages/disadvantages specific to you or your situation which you should fully investigate.
• Once a Federal student loan(s) is consolidated/refinanced into a private loan, the process CANNOT be reversed in order to re-establish a Federal student loan(s) or to receive the benefits included with Federal student loans.
• Federal student loans provide access to income-driven repayment (IDR) plans. IDR determines your monthly payment amount using your taxable income and family size. These income-driven repayment plans currently include Income-Contingent Repayment (ICR), two versions of Income-Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE):
° Your monthly payment amount under an income-driven repayment plan is based on a percentage of your discretionary income, determined by your income and family size.
° You may qualify for a payment as low as 10-15 percent of your discretionary income and forgiveness after 20-25 years of payments.
° If you are making payments under an IDR plan and are working towards forgiveness under the Public Service Loan Forgiveness (PSLF) Program, you may qualify for tax-free forgiveness after 10 years of qualifying payments.
• Certain Federal student loans qualify for an interest subsidy. This subsidy is available during qualifying deferment, grace periods, the first three years of repayment, or during repayment under REPAYE during periods of negative amortization. This means you may not accumulate or pay interest on the loan during qualifying periods, or you may even be eligible for payments by the government on your behalf.
• Borrowers of Federal student loans experience NO prepayment penalty. You can pay as much as you want above the minimum amount due as long as it makes sense to do so.
• Federal student loan borrowers and their families may benefit from a death and disability discharge if needed. Family members who are not co-signers on your Federal student loans will not be responsible for continued repayment in the event of death or disability.
• Benefits for Federal student loans could be introduced by Congress or the Department of Education in the future, such as the recent release of PAYE and REPAYE. These benefits may not be available to you if you move your student loans outside the Federal system. A perfect example is the pandemic forbearance benefits in effect since March 13, 2020. Only federal student loans have been eligible for the long-term interest and payment freeze, as well as the credit towards forgiveness during this special forbearance. We've also seen additional benefits announced to help people reach income-driven repayment forgiveness as well as PSLF through programs like the limited waiver (now expired).
• If you've been using an income-driven repayment plan and decide to switch to a private consolidation/refinance loan, any unpaid interest you have will capitalize (get added to your principal). This capitalization of interest will add to your repayment costs. Depending on how much unpaid interest you have when you refinance, the interest capitalization could negate the effect of the lower private loan interest rate.
When a private refinance of student loans can make sense:
• You are refinancing less beneficial private student loan(s) with a more beneficial private student loan.
• Your debt-to-income ratio (DIR) is approaching one or less, you are not projected to reach student loan forgiveness, and you are reasonably certain your DIR will remain less than one for the duration of your student loan repayment.
• Your remaining costs for the private refinance will be less than your remaining costs for your federal student loan repayment options.
When considering a private refinance of Federal student loans, check your private refinance loan offer for the following:
• A lower stated and effective annual interest rate than your Federal student loans
• Paying more than the minimum or paying your loan in full before the term date set in the loan does not result in a penalty.
• Your ReFi does not require a cosigner that could be responsible for continuing repayment in the event of your death or disability, or non-payment for any reason.
• If your ReFi does require a cosigner, check to be certain that the loan does not immediately become due in full in the event of your or your cosigner's death or disability.
• Does not have an origination fee
• If your ReFi uses a variable interest rate, be sure there is a very clear definition of the basis and frequency of updates to the interest rates as well as a reasonable maximum interest rate ceiling, both in total and rate of increase per year.
• Offers a death or disability discharge with no tax liability to your family or estate
• Offers the most beneficial opportunity for forbearance/deferment that you can negotiate
Additional notes on student loan interest:
• You don't have to refinance your Federal student loan in order to decrease the amount of interest you pay. In most veterinary cases, the monthly payment amount due for a private refi will be an increase over what a borrower would be expected to pay under an income-driven repayment plan. As we highlighted above, you can make that same private refi payment amount towards your Federal student loans each month if it makes sense for you to do so. It may take you slightly longer to pay the loan back vs. the private refi, but you would retain all of the Federal student loan protections and benefits should you need them.
• Student loan repayment is not just about the stated interest rate per loan. With the evolution of income-driven repayment, recent graduate veterinarians with debt-to-income ratios greater than two will likely not pay the full interest amount based on their stated interest rate. Although the private loan refinancers keep you focused on the interest rate, use the VIN Foundation Student Loan Repayment Simulator to look at what we call the "effective interest rate." Depending on the specifics of your situation and future earnings, you can end up paying much less in interest using income-driven repayment than you would under traditional repayment plans, including private refinance loans with a lower stated interest rate.