When it comes to paying off a federal student loan, you have options. You have options within that loan (income based repayment and others), and you have options outside of that loan – refinancing through a private company, for example. Refinancing can seem like a great way to get rid of loan debt quickly, but there are both good and bad scenarios to consider when choosing a this option.
The Practical Points
If you have not defaulted on your federal loan or on anything else, never missed any credit card or other payments, and have generally excellent credit, you can probably qualify for a refinancing option. For the most part, refinancing is available to new graduates that have not yet defaulted on a loan.
Some newly established companies go even further to work only with recent graduates of certain programs (including law and medicine). Most of these companies are not a good fit for people that have a hard time paying back loans. This is something to keep in mind if you want refinancing through another company to be your main loan repayment option.
However, if you have bad credit you may find it really hard to refinance your federal loan. So, take that factor into consideration before you choose a refinancing option that may not actually be available to you. The other thing to consider is interest.
If refinancing your federal loan will, in fact, lower your interest rate significantly, this might be a very good idea. If it will not change your interest rate, you might not choose to refinance. You may also be able to benefit from a shorter repayment term. Either situation is a good one to be in if you want refinancing to work in your favor.
What You’ll Be Giving Up
The problem with refinancing a federal student loan in favor of a lower interest rate is that you will be giving up some rights that you have with these types of loans. One such right includes the right to income-based plans and loan forgiveness.
Once you refinance with another company, your interest rate might go down, but you will not have much of a safety net if you wind up in financial trouble. This is the most important thing to consider when it comes to looking for a way to lower federal student loan interest.
The Long and Short of It
If you have a significant amount of federal student loan debt with high interest rates, it might be worthwhile to opt for a refinancing plan through a private company. However, you should be aware that you are giving up some very important rights, and you should also be aware that you do usually have to have very good credit in order to be considered by most refinancing companies.