Don’t refinance your student loans until you get all the facts.

We have all seen them – the ads telling us to refinance our student loans. They are on social media, television and in the mail.  Lower your monthly payments? Potentially lower your monthly interest rate? Sounds great, right? However, here is the problem and what you are not told by these private refinance programs unless you read the very fine print: if you refinance federal student loans, you lose any protections that the federal repayment or forgiveness programs afford for future unforeseeable events. What does that mean? If you do not know, you should NOT refinance your student loans until you do.

The U.S. Department of Education provides many income driven repayment programs (IBR, ICR, PAYE, REPAYE, etc.) that forgive student loan debt after a certain period of time depending on the program. Moreover, if you work for a nonprofit entity (the government, military or a 501(c)(3) organization) for a period of 10 years, your student loans can be forgiven but only if you are on an income-based repayment program throughout that 10 year period. If you refinance your student loans into a private loan, you lose these benefits.

Keep in mind the federal student loan repayment programs are INCOME-based. No one likes to think that potentially he or she may not be able to work or that his or her income would be dramatically reduced, but what if these things happen? On an income driven repayment program, you can potentially drop your payment to as low as $0/month and continue to show a current status for your student loan on your credit report. These programs have helped many student loan borrowers stop the garnishment of social security benefits and tax refunds and others who find themselves either permanently or temporarily unemployed.  With a private student loan, you have no built-in ability to change your payment if your circumstances change for the worse.  Also, if you become totally or permanently disabled, federal student loan programs allow for permanent forgiveness of some student loan debt. You can also forbear or defer your federal student loan payments if necessary, although these are not generally good options. These forms of relief are not available if you have refinanced your federal student loans into a private student loan. A private student loan is just like any other loan or credit card debt, however it is not dischargeable in bankruptcy. Have you ever tried negotiating with your credit card company to lower interest or reduce payments when times are tough? It will be the same thing with private student loans.

Refinancing student loan debt is not always a bad idea, but it only makes sense in certain situations. It is critical that before you refinance you are educated as to your particular circumstance. You must know if you currently have private or federal student loans. The distinction is crucial. If you only have private student loans, then refinancing to lower the interest rate and monthly payments makes sense. You are not harming yourself if your circumstances change as you currently do not have the benefits of federal programs and a lower interest rate and/or monthly payment would be a benefit, much like refinancing your home. If you have a combination of federal and private student loans, it could make sense to refinance only your private student loans, but keep your federal loans as they are so you are still afforded their benefits. If you are worried about having multiple monthly student loan payments, you can always consolidate your federal student loans into one payment and then have a separate private student loan payment.

The point is this – you need to get educated as to your personal circumstances before refinancing your student loans, and you need to get educated on your own and not by a refinance company that has a vested financial interest in refinancing your student loan debt. Also, you should never forbear, defer or enter into any income driven repayment plan until you understand every option available to you. Once you know the facts, make an educated decision as to what is right for you. It may be refinancing or it may not, but you need to be sure that you understand whether it’s right for you.

Please share this important information with your friends and family.

The Law Office of Kathryn L. Johnson PLLC has added student loan law to the practice.  If you have questions about your student loans, email Kathy@kathyjohnsonlaw.com or call (520)743-2257.