Interest rates are incredibly low right now. This makes refinancing student loans tempting for someone like me who is aggressively paying them off. After a little bit of research, I decided this was the worst decision.
Why I’m not refinancing my student loans
I currently have $36,000 of student loan debt. All of my student loans are federal and housed with FedLoan Servicing. Federal student loans come with flexibility and borrower protections that I would give up if I chose to refinance. These include:
- Income-based repayment plans
- Eligibility for loan forgiveness
- Forbearance options in the case of economic hardships
You can read more about the benefits of federal student loans vs. private student loans on the US Department of Education Federal Student Aid website.
Refinancing my student loans does not allow for targeted student loan pay off
In addition to giving up federal student loan flexibility, I would be giving up my ability to target specific loans for pay off. I am currently paying off my student loans using the avalanche method. This simply means I make extra payments on the loans with the highest interest rate first on top of my normal payment. This keeps more money in my pocket during the course of student loan pay-off by reducing the amount of interest I pay.
What if I could get a lower interest rate?
If I could get a lower interest rate by refinancing, would this negate everything I said above? Maybe, but it would need to be a pretty low rate. My current average interest rate is 4.6%. This will soon drop as I eliminate my last two loans with a 5% interest rate.
I checked Credible to see what I could qualify for. (Note that I have excellent credit-above 800) My lowest offer was from PenFed with a 3.65% fixed interest rate for a 5-year term. Variable-rate offers were of course lower, at 3.2%, but I am not willing to have a variable interest rate loan. For a 10-year loan term, PenFed still had the lowest offer with a 3.9% interest rate.
The interest rates are lower and I would save about $5,386 over the course of 5 years compared to my current interest rate. In the first year, I would save about $300.
Is the savings worth it? No.
This decision was based on more than just the numbers. Would an extra $5k over 5 years be nice to keep? Yes. But there were other factors that made me say no to student loan refinancing.
1. I am not currently paying interest
If you didn’t know the interest on federal student loans is currently suspended during the COVID outbreak. This is a good thing for many people. It’s especially helpful as I work to pay off student loans. If I am not currently paying interest, I am not going to refinance my student loans.
2. I want payment flexibility if the worst were to happen
The minimum payment increased with the offers I received on Credible. This is to be expected since I was looking primarily at 5 -year loan terms and currently have a 10-year term with FedLoan. We could afford this payment since we are making additional student loan debt payments right now. However, with the current economic downturn, I want the flexibility to lower my payment to income-based should we suffer a job loss.
3. We need to hold on to some cash right now
As I type this, we made some major financial changes recently. We canceled a portion of our remodel, stopped my IRA contributions for 3 months, and lowered our extra student loan debt payment. This is because we wanted to build a bigger cash buffer in light of an upcoming recession. We can only make this choice because I have federal student loans with a low minimum payment.
In the future, I do not see us refinancing, but I am not writing it off for good. I think refinancing private student loans is always something you should consider if you can lower your rate. Refinancing federal student loans might be worth considering if you’re aggressively paying them off, but you need to weigh what you’re giving up. For me, it wasn’t worth it.