Student loan debt seems to be on everyone's mind – and for good reason. The Federal Reserve points out that there is more than $1.3 trillion in outstanding student loan debt in the United States. This indebtedness is having a big impact on individuals, with 13 percent of borrowers defaulting on their federal student loans within the first two years of repayment, according to the National Center for Education Statistics.
If you are feeling the pinch with your student loans, refinancing might help. Here are some facts about refinancing student loans:
1. Student Loan Refinancing is Different from Loan Consolidation
First of all, understand that student loan refinancing is not the same thing as loan consolidation. When you consolidate your student loans, all the loans are essentially put into the same place. Your interest rate is an average of the rates on all your loans, and you make one payment. Refinancing replaces your existing student loans with one new, bigger loan with its own interest rate (usually lower).
2. It's Possible to Refinance Federal Loans
Many grads are surprised to discover that one of the facts about refinancing student loans is that federal student loans are eligible. Even if you have consolidated your federal loans, you can still refinance with a private lender. You should consult with a knowledgeable professional first, though, since there are sometimes consequences with refinancing your federal loans into a private loan.
3. You Might See a Lower Interest Rate
As of this writing, federal student loans come with interest rates between 4.29 percent and 6.84 percent. Some lenders are offering interest rates below 2.5 percent when you refinance. This can save you money on your monthly payment and ease your cash flow.
4. You Win When Lenders Compete to Refinance Your Student Loans
One of the great facts about refinancing student loans is that you can win when you comparison shop. It's possible to get quotes from multiple lenders and choose the deal that's best for you, improving your chances of a more affordable payment.
5. Some of Your Interest Might Be Tax-Deductible
Depending on your income and other factors, the interest you pay as a result of your student loan refinance might be tax-deductible. Check with a tax professional to determine whether your interest payments qualify for a tax break.
6. Forgiven Student Loans Can Result in a Hefty Tax Bill
One of the facts about refinancing student loans is that you could be on the hook for increased taxes if you end up in a situation where your private lender forgives some of your debt. Most forgiven debt, including student loans, is considered income by the IRS – and that means that you are expected to pay taxes on the amount you no longer have to pay.
7. After Refinancing Privately, There is No Reversion to Federal Loans
While you can refinance your federal student loans, it's important to understand that once you do so, the loan is considered private. That means it can't revert back to a federal loan, or be consolidated along with future federal student loans you receive. Understanding this is crucial to making a decision that works for you.
8. You Might Have More Repayment Options When Refinancing
When you compare private lenders, you might have more flexibility in your repayment options. Lenders offer different incentives, ranging from lower rates if you make a certain number of payments on time, to different term lengths. It might be easier to create a situation that fits your needs when you refinance your student loans.
If you decide that refinancing is right for you, consider your options and make the choice that is best for your finances.