Refinancing Your Student Loans

Attending business school is a major financial decision—one that has implications for all your finances, including your undergraduate student loans. While you can, of course, continue making undergraduate loan payments while in business school, it might strain you if your b-school tuition, living expenses, and/or personal expenses (perhaps you have a family) are maxing out your resources. If your undergrad loans are federal loans, you can typically opt for in-school deferment if you return to school as at least a half-time student (see studentaid.ed.gov for more information). But, if the interest buildup during deferment would be unaffordable, if your loans were private and do not qualify for deferment, or if you simply want to continue making progress on your undergrad loans while in school, you may consider refinancing them to reduce your interest rate or make monthly payments more affordable.
 

What is Refinancing and How Do I Do It?

 
In short, refinancing means replacing your existing loan (federal or private) with a new loan (typically private) and swapping all the terms and conditions of your old loan for those of the new. While refinancing can produce long-term savings for certain borrowers, it can also involve forfeiting options exclusive to your current loan—so proceed carefully. You should apply to different lenders and compare all your options to decide which one will most benefit your specific situation. Some popular choices are SoFi, CollegeAve, LendKey, Credible, and Earnest, but choosing a refinancing company is all about fit. Typically, banks will examine your credit score, degree, savings, and income to determine estimates (or even if you qualify to refinance with them), but you can also enlist a cosigner if these factors raise concerns. Requesting estimates from different banks within a short time period (e.g., within a 2-week period) will hardly affect your credit score, so don’t be afraid to access as many estimates as possible. The long-term impact of this decision will make the planning worthwhile.
 

What Should I Consider When Refinancing?

 
Behind the initial appeal of saving money lies the fact that refinancing can bring a whole new set of terms and conditions, repayment plan, and quality of customer service. If you are refinancing a federal loan into a private one, for example, you may be giving up forbearance, deferment, income-based repayment, and certain forgiveness options. Of course, you might not need these right now, but you may down the road in cases of unemployment or other unexpected hardships. Also, don’t overlook the fine print considerations on the new loans. In the case of an untimely death, would your cosigner become responsible for your student loan debt? Would you be penalized for paying off your loans early? Moreover, pay attention to the lender’s treatment of you—the customer. After all, this is a transaction, and you should be valued in return for your business. Is the lender willing to provide deferments should you ever need them? Are customer service representatives accessible and responsive?
 

How Do I Know Whether I Should Refinance?

 
If your primary motivation for refinancing is financial (which is typically the case), you should also make sure you’ve explored other possibilities for getting your current loan under control before converting it into a new one. As mentioned, in-school deferment is an option—and a promising one if your income post-graduation will be ample relative to your loan amount or if most of your loans are federal and subsidized (these do not accrue interest while you are enrolled in school). Also, find out whether you qualify for income-based repayment or loan forgiveness plans.

If, for example, you are pursuing an MBA to prepare for nonprofit or volunteer work and are anticipating a low (or no) salary, you may qualify for the income-based repayment plan for federal loans. On this plan, you can make affordable monthly payments and eventually have the remaining balance forgiven. You may also consider the Public Service Loan Forgiveness program, which enables nonprofit-employed borrowers to have loans forgiven after 10 years of qualifying payments (insider tip: you can combine this with the income-based repayment plan to make 10 years of low payments, depending on your income). Even just enrolling in auto-pay services can earn you an interest deduction with several lenders. Contact your current lender(s) and evaluate what options you have for financial relief and/or payment and interest deductions so you can make an informed decision.

Ultimately, you may find that refinancing is—all things considered—the wisest option for you. If so, great! Just make sure that the benefits outweigh the costs, that you are making an informed decision, and that you’ve considered all your options. While the loans may seem daunting now, education is a worthwhile investment—and it most certainly will pay off!