The average student who graduates with $30,000 in student debt is more than $1200 behind their peers who graduated with a high school diploma or less – and that’s if they keep up with their payments. Refinancing student loans is a great way to pay them off faster, but the decision is a tough one. Here are the top reasons not to refinance student loans.
Refinancing student loans is a popular option among borrowers who are looking to pay down their debt faster. Unfortunately, not all refinancings are the same, and paying more for your student loan debt may not be worth it. We’ll cover costs, benefits, and other things to keep in mind before you refinance.
Refinancing student loans is a common strategy to save borrowers money and help them pay off their debt faster. But while this is an attractive option for many, it is not always the best solution for everyone. In some cases, it makes sense to leave your student loans or apply for special federal programs. This probably makes sense for any borrower of Federal Direct Student Loans, as these loans are still subject to a payment ban due to the Corona virus.
This means that if you have federal student loans, you are not currently making payments and are not accruing interest on your loans. With a private lender, you will not get a 0% APR, no matter how good your credit score is. However, the emergency suspension is currently in effect on the 30th. September 2021. So, should you start considering refinancing your loans now in October 2021? Not so fast. You may want to avoid refinancing even after the federal payment freeze is lifted. Here are nine reasons not to refinance your student loan.
9. You have almost finished paying off your student loan
If you have been paying off your student loans for a long time, you may be nearing the end of your repayment period. If the loan matures in less than five years, the refinancing process is probably not worth it. You won’t save as much money and you’ll lose access to valuable federal government funds. If this is the case, it is better not to stop there and continue with your repayment plan by contacting a federal student loan servicer.
8. Your rate will not change significantly
Refinancing a student loan can reduce your debt by thousands or tens of thousands of dollars – if you lower your interest rate significantly. But if your student loan already has a decent interest rate or you don’t qualify for the lowest rates, the savings on your new loan may not be great enough to worry about refinancing. There are several factors that affect your eligibility for refinancing and the interest rate you are granted. The most important factor is your credit history.
If you do not have a good credit history, you will not be able to get any of the advertised low interest rates. You can use a co-debtor to get a loan, but by doing so, you are transferring responsibility for your debt to someone else if you are unable to pay. If you don’t qualify for a lower interest rate, it’s best to wait until you qualify for a refinance. Or you may need to find a different repayment strategy.
7. You qualify for an employee loan
This is perhaps the most important of all reasons not to refinance student loans if you work in the public sector. If this is the case for you, there is a good chance that your student loans qualify for public service benefits. The PSLF program allows you to pay off your student loan balance in as little as 10 years. To qualify, you must be employed by one of the following companies:
- Government organizations at all levels (federal, state, local, or tribal).
- Tax-exempt 501(c)(3) nonprofit organizations.
- Other nonprofit organizations that provide qualified community services
- Americorps or Peace Corps
Not only is the remaining debt forgiven after 10 years of monthly payments, but it’s also completely tax-free. When you refinance your student loan, you may be giving up access to one of the most attractive repayment plans. But you will lose your PSLF eligibility if you refinance your federal loans into private student loans.
6. You may need a refund based on your income
Income-based repayment (IDR) plans can lower your monthly repayment. Payments are based on your adjusted gross income. You may not need to use the IDR plan now, but you may need to in the future. Many borrowers are uncomfortable with the loss of this protection, and it is one of the most common reasons for not refinancing their student loans. If you lose your job or start earning less, it becomes even more difficult to pay back your student loans, especially since private lenders don’t offer much support during tough times.
Maybe you don’t plan to work forever or you only want to work part time. It may make more sense to choose a repayment plan that fits your lifestyle. In addition, after 20 to 25 years of IDR payments, the balance of your student loan will be forgiven, although taxes may be deducted from the forgiven amount. 
5. You do not have an emergency fund
While refinancing a student loan can save you money, it can also put you in a tough spot if something bad happens. The way to protect yourself from difficult financial situations is to set up an emergency fund. If you don’t have an emergency fund, you could find yourself in a situation where you can no longer pay your student loans.
Many private lenders offer little or no protection if you run into financial difficulties. Whether it’s health problems, financial difficulties, job loss or something else, public lending institutions generally offer better protection in the face of adversity than private lenders. If you have at least some money set aside for an emergency, you may want to refinance now, assuming you can do so with a lender that offers deferral options, such as Commonbond, Earnest or SoFi. Compare lenders for refinancing here.
4. You have credit card debt
If you have accumulated significant credit card debt, paying it off should be your first priority. According to the Federal Reserve, the average APR for all credit card accounts in 2019 was between 14% and 15%. Credit cards generally have much higher interest rates than student loans. If you have credit card debt, pay it off before you consider paying off your student loan. Yes, you can consider a credit card that offers a 0% introductory interest rate for a longer period, but this is only useful if you can pay off the balance before the introductory period ends.
3. You want to invest instead of paying off your debts
There is a perception that debts should be paid off before investing. In theory, this is a reasonable plan. However, concentrating on loan repayments may also delay the return on investment, which outweighs the benefits of paying off student loans early. There is no perfect answer to the question of which financial gesture is the most important. Your specific situation plays an important role in deciding what is best for you. However, it is difficult to commit 100% to either path. If you want to save for retirement now, it might be best to pay the minimum on your loans and have them forgiven.
2. You plan to live abroad
Maybe your student debt is making you think about fleeing to another country. This may seem like an extreme way to deal with debt, but many Student Loan Planner® clients in other countries pay nothing on their student loans. One of the biggest student loan tips you’ve probably never heard of. This is called the foreign income tax exemption. Allows you to exclude income over $100,000 earned abroad from your U.S. tax return. If you plan to live outside the United States, forgo refinancing and take advantage of this unique repayment strategy.
1. They think that abolishing student loans is the future
Since the election, student loans have received more attention. Many organizations and politicians are calling on President Biden to provide significant debt relief for students. Many are even calling on the president to cancel every American borrower’s student loans up to $50,000. We do not recommend that you lock in your full student loan repayment plan in anticipation of what may happen in the future.
It is impossible to predict who will come to power and whether their proposed plans will become reality. But if you think federal loan forgiveness or cancellation programs will become more important in the coming years, you’re missing your chance if you refinance your student loans now.
Development of a plan for the future
Just like in any other area of life, it is a good idea to have a plan of action regarding student loan debt. You need to know where you stand and determine what action is right for you. Remember, everyone’s situation is different. You may have several good reasons for not refinancing your student loan, while your best friend may have a good reason for doing so. There is no single solution.
Take the time to review your debts, finances, plans, and other factors that are important to your decision. If you are married or in a relationship, ask your partner what you should do. And if you decide to refinance your student loan, make sure the lender you choose doesn’t charge an application fee. Use the Student Loan Planner® student loan refinance calculator to get an idea of how much you can save by refinancing. If you still need help, you can contact our consultants who have helped hundreds of people create custom repayment plans that work. Refinance your student loan and receive a bonus in 2021.
Frequently Asked Questions
Why you shouldn’t refinance student loans?
The average college graduate in this country owes about $30,000 in student loans. Here’s the deal— there’s no way most people can pay that off in today’s economy. And while certain companies are willing to write loans off (or forgive them), the Federal Government still expects you to make on-time payments. So why should you refinance student loans? Refinancing student loans can be a smart choice for some borrowers.
After all, paying off the balances on a loan before it expires can save money and extend the term of the loan. But there are plenty of reasons why refinancing a student loan is a bad idea, and should be avoided at all costs. Here are nine of them.
What is the downside to refinancing student loans?
Refinancing student loans may seem like a great deal at the time, but are you really getting the most out of a loan? Here are some reasons why not to refinance:
1. It Can Be Costly: If you have several loans to choose from, you will likely have to pay an origination fee, which can add up to hundreds of dollars if you have more than one loan.
2. It Can Be Difficult: In order to refinance, you will need to prove to the lender that you will be able to make payments, which means you will need to produce proof of earnings.
3. It Can Remain Gratis: Refinancing can remain free, but there is a limit on the amount of time that you Last week we featured an article that showed you the reasons to refinancing student loans, and how it could save you thousands. Since then, we’ve heard from a lot of readers saying they are considering refinancing their student loans, but for one reason or another, they aren’t. We asked them why they were still in school, and here’s what they told us.
Why you should not consolidate student loans?
Refinancing your student loans can be a great way to save money, but it’s a complex and costly decision that should not be taken lightly. Here are 9 reasons why it may not be the best idea to refinance your student loans.
1. You Might not Qualify for the Best Rates.
2. You Might Face Higher Fees.
3. You Might Face Higher Interest Rates.
4. You Might Have to Pay More Taxes.
5. You Might Face Inheritance Tax.
6. You Might Face Tax Penalties.
7. You Might Have to Pay Late Fees.
8. You Might Face Repayment Schedule Changes.
9. You Might Have to Sign a New Contract.
