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While refinancing student loans can save you money on interest, it’s not for everyone. In fact, there are circumstances when refinancing your student loans could do more harm than good. Read on to learn five reasons not to refinance so you can avoid common student loan refinancing mistakes.
- You’re working toward federal loan forgiveness
- You’re on income-driven repayment
- You’re worried you can’t pay back your loans
- Your credit score isn’t high enough
- You can’t (or don’t want to) apply with a cosigner
1. You’re working toward federal loan forgiveness
If you’re working toward a federal student loan forgiveness program, such as Public Service Loan Forgiveness or Teacher Loan Forgiveness, don’t refinance your federal student loans.
Why? Because when you refinance federal loans with a private lender, they turn into a private loan. As a result, they become ineligible for federal loan forgiveness. Those programs only forgive federal student loans, such as Direct unsubsidized and subsidized loans.
Note that refinancing a private student loan is fine, since your private loan isn’t eligible for PSLF or similar programs anyway. But avoid refinancing your federal loans if you’re trying to qualify for federal forgiveness.
2. You’re on income-driven repayment
Refinancing federal student loans would also make them ineligible for federal repayment plans, such as income-driven plans. Income-driven plans can be a huge help if you need to lower your monthly payments.
The four income-driven plans are,
- Income-Based Repayment
- Pay As You Earn
- Revised Pay As You Earn
- Income-Contingent Repayment
All of these plans adjust your monthly payment to 10%, 15%, or 20% of your discretionary income. Plus, they could end in loan forgiveness after 20 or 25 years of on-time repayment.
But private loans aren’t eligible for income-driven repayment, so refinancing your federal loans means you sacrifice these plans.
Note that you can choose new terms when you refinance, typically between five and 20 years. Going with a long term of 15 or 20 years could result in lower monthly payments.
But most private lenders don’t offer income-driven plans, so it’s not a good idea to refinance federal loans with a private lender if you need income-driven repayment now or in the future.
3. You’re worried you can’t pay back your loans
Along with income-driven repayment, the Department of Education offers other protections on federal student loans that are helpful to borrowers who need to lower or pause their monthly payments.
If you lose your income or go back to school, for instance, you could pause payments temporarily through deferment or forbearance. But as mentioned, you lose federal perks when you refinance federal loans with a private bank or credit union.
And private lenders usually aren’t so flexible if you can’t make payments, though some do offer temporary forbearance if you run into financial hardship.
If you’re worried about your ability to pay back your loan on time, it might not be a good idea to refinance your student loans right now.
4. Your credit score isn’t high enough
Before refinancing your student loans, you’ll have to meet some fairly lofty credit requirements. Lenders want reassurance that you’ll pay the loan back, so they look at your credit score as an indicator of your past financial behavior.
Although refinancing lenders don’t advertise a specific cutoff, most look for a score of 650 or higher. Borrowers with scores in the 700s will qualify for the lowest rates.
If your score isn’t in the good or excellent range, you might not get the best rates — or might not qualify at all (at least, not without a cosigner).
Instead of trying to refinance now, take some time to increase your credit score and try again in the future.
5. You can’t (or don’t want to) apply with a cosigner
If you can’t qualify for refinancing on your own or want to get even better rates, you could try applying with a creditworthy cosigner.
A cosigner basically signs on to your loan application to reassure the lender that they can pay back the loan in the event that you can’t.
Having someone cosign a loan is a big ask, since they become just as responsible for the debt as you are.
If you don’t have someone who can cosign your loan — or don’t feel comfortable asking someone to take on debt with you — it might not be the right time to refinance.
As mentioned above, you can take steps to build your credit score and apply again in the future.
Learn the pros and cons before refinancing
As you can see, refinancing student loans isn’t right for everyone.
If you’ve got federal student loans, refinancing with a private lender means sacrificing federal protections and perks. And if you can’t meet a lender’s credit requirements, you might be better off waiting until you can.
At the same time, refinancing can save you a bunch of money on interest and help you pay off your student loans faster, if that’s your goal.
So make sure to learn all the pros and cons of student loan refinancing so you can decide if it’s for you.
Want better rates? Here are the best banks to refinance student loans:
| Variable rates start at... | Fixed rates start at... | Repayment terms | Welcome bonus | Check your rates | |
|---|---|---|---|---|---|
 | 4.54% | 4.49% | 5 - 20 years | $200 | Visit LendKey |
 | 4.99% | 4.47% | 5 - 20 years | $200 | Visit Earnest |
 | 4.22% | 3.97% | 5, 7, 10, 15, and 20 years | $120 | Visit Laurel Road |
 | 4.53% | 4.40% | 5 - 20 years | $100 or $200, depending on the amount you refinance | Visit Credible |
 | 5.09% | 4.74% | 5, 7, 10, 15, and 20 years | $100 | Visit SoFi |
 | 4.53% | 4.83% | 5, 7, 10, 15, and 20 years | $100 | Visit ELFI |