Think twice before you refinance
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Stuck with a pile of student loans you can’t afford to service? You’re not alone. If you’re struggling with school debt, you might be desperately looking for solutions. That’s understandable, but think twice about refinancing your student loans. Lenders advertise aggressively and push the benefits of lower interest rates and monthly payments, but there is a flip side to the allure. When you refinance federal loans into a private re-fi, there are some downsides to seriously contemplate before you sign a deal. Consider these aspects:
1 - Interest rates may fluctuate
Interest rates for federal student loans are set by the government and are typically quite reasonable. Current interest rates are lower than 8.5% and some are much lower. They vary based on when you took out the loan and the type of loan. The government doesn’t drastically raise interest rates out of nowhere. On the other hand, private student loan interest rates fluctuate and can exceed 18% plus the finance contract might allow the lender to raise them much higher and with little notice.
2 – You lose federal protection
Federal student loans come with lots of protections written into the laws of school finance. There are payment options and forgiveness programs you won’t be able to access if you refi. See the details below, but the bottom line is that private finance companies don’t offer these benefits and likely never will offer them. Once you ink a refi deal, all these protections are permanently off the table, so think carefully.
3 – No forbearance or deferment
Compared to the 10-year standard repayment plan, a private loan might have lower payments. That’s all well and good if you’re earning enough to pay off the debt and you’re sure you won’t hit a financial roadblock that will prevent you from fulfilling the loan terms. But what if you lose your job? With federal loans, you can apply for forbearance or deferment to temporarily halt payments if you can’t make them for any reason (such as job loss, illness, etc.). This option evaporates when you move from federal to private debt under refinancing terms.
4 – No income sensitive payments
With federal student loans, there are many Income-Driven Repayment (IDR) options. You can pay no more than 10-15% of your disposable income with payments as low as $0 a month depending on your earnings. After 20-25 years of low payments, the rest of the balances are forgiven. No private lender will offer this incredible parachute to protect you from possible financial problems. Private lenders expect you to meet their terms or face the consequences.
5 - Loan forgiveness
In addition to the IDR forgiveness options, federal loans may be eligible for Public Service Loan Forgiveness (PSLF). For those in careers in law enforcement, government, the military, education, and philanthropy, 10 years of low payments under IDR while working in a qualified job can lead to balances being forgiven tax-free. Once you convert these loans to private debt, you can never participate in PSLF.
When refinancing may be worth it
If your student loans are almost paid off, and your income is stable, you might consider a refi to get lower payments if the lender offers better terms than your federal loans. If your employer will pay your student loans as a job perk but wants you to refinance, it could make sense to privatize your loans.
Plus, there is one perk to converting your student loans from federal to private. Like any other consumer debt, private student loans have a statute of limitations. In North Carolina, it’s three years from the date you first went delinquent on the debt (so long as you never make another payment).
Debts beyond the statute of limitations are not legally enforceable. Also, private student loans are easier to discharge in North Carolina bankruptcy than federal student loans. There are a couple of upsides (but more downsides) to changing from federal to private student loans. Think carefully before you sign!
To find out more about discharging student loans in bankruptcy, contact the Law Offices of John T. Orcutt. Call +1-919-646-2654 for a free student loan debt consultation today. Read reviews from satisfied clients, then see us at one of our convenient locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.