On the surface, refinancing your student loans might sound like a good idea. Generally, refinancing can score you a better interest rate, which results in a lower monthly bill. But that is not always the case. Below are a few situations when you won't want to refinance student loans.
7 Situations to Avoid a Student Loan Refinance
1. Your credit score is not good
Life happens, and sometimes that means circumstances come up that cause your credit score to take a dip, whether you paid a few bills late or had your home foreclosed upon. If your credit score is in bad shape, you will not be able to refinance your student loans for a better rate or improved terms.
2. You have a high debt-to-income ratio
If you have a large amount of debt relative to your current income, lenders will assess you as a high-risk borrower. As such, it is unlikely they will extend more favorable terms on your student loans. This is a common situation for people attending graduate school or pursuing an advanced degree like an M.B.A. or Ph.D., since they have loans to pay from their undergraduate days, but no source of significant income yet.
3. You are persuing a career in public service or teaching
The government has loan forgiveness programs for people in these specific fields. These programs generally forgive the balance of a qualifying individual's student loans after they make 120 on-time payments on the loan. If you refinance student loans and you qualify for this program, you will lose this generous benefit.
4. The interest rates are high
This is a no-brainer. If the interest rate is higher than the current interest rate on your loan, it's probably not a good time to refinance. However, if you have a variable rate loan and you think the rates are going to continue to climb, it might be best to refinance to a fixed rate loan before they rise any higher.
5. You don't want to extend the term of your loan
Refinancing generally means you'll have a lower monthly payment, but you'll be paying for longer. For example, if you had a 10-year term on a student loan, which you've been paying for three years, and then you refinance to a new loan with a 10-year term, you'll be paying your student loan off for 13 years total. That means you'll be adding three years' worth of interest payments to your total debt. If you are close to paying off your loan, the added interest might squash the lower monthly payments.
6. You need government assistance
If you have a federal student loan, you may be eligible for certain government assistance programs like deferments and income-based repayment options. It is not possible to refinance federal loans unless you are moving to a private lender. Doing so will make you ineligible for any government assistance for which you might have qualified.
7. Your current loan has special perks
Some private lenders offer loans with unique benefits, such as a reduced interest rate for on-time payments. Other loans have flexible repayment options, like a graduated plan that assumes your income will grow over time, so the amount you pay monthly increases as the loan matures. If you enjoy taking advantage of these perks, stick with your current loan, because these options are hard to come by.
If you think refinancing your student loans might be for you, check out the reasons to refinance your student loans here.