After College: Should You Refinance Your Federal Student Loan Debt?

If you owe on federal student loans borrowed to pay for college, and especially if you watch late night TV commercials, you may be wondering what “refinancing” is and whether it’s the right thing for you?

When you “refinance” you borrow a private loan to pay off your federal loans, IMG_6807pledging to repay the new loan according to terms and conditions stated in its promissory note.

This sounds a lot like a Federal Direct Consolidation Loan but it’s not. Your new loan isn’t coming from the U.S. government so your rights and responsibilities on it are no longer based on laws governing federal student loans. Instead, the promissory note you’ll sign with your new lender defines your rights and responsibilities, and certain benefits and protections you now enjoy most likely won’t be available on your new, private, refinancing loan. Here are some key examples:

Interest Rates: Your federal student loan interest rates are generally fixed for the life of those loans. Refinancing lenders stress that their loans offer lower interest rates than you’re currently being charged — thereby lowering your monthly payments and saving you money in the long run. However, their promissory notes IMG_6803may allow their lenders to raise their interest rates later, perhaps many times.

Deferment and Forbearance: You may defer or forbear payment on your federal loans under certain conditions — returning to college, part-time employment, financial distress, etc. But such postponements may not be available once you refinance, or at least not available for the same circumstances.

Repayment Flexibility: When you owe the government, you get a 6-9 month grace period and the right to make payment under any of 7 different federal repayment plans that best meet your needs. Some of these plans will lower your monthly payments. Your grace period may not be the same on a refinancing loan, and refinancing lenders don’t usually offer you all the same repayment options.

Debt Cancellation, Discharge, and Forgiveness: Federal law creates opportunities through which your debt to the government may be cancelled, discharged, or forgiven. Understand none of these opportunities exist on refinancing loans.

How can you tell if a refinancing loan is good for you? Closely scrutinize its promissory note. If that note doesn’t explicitly guarantee benefits and protections you may need or want, don’t borrow it!

Looking for ways to make your college debts more manageable? Feel free to contact College Affordability Solutions for help.

Special Bulletin: Public Service Loan Forgiveness in Jeopardy for Thousands!

If you work for a 501(c)(3) or some other tax-exempt organization and are hoping to have some of your federal student loan debt discharged under the Public Service Loan Forgiveness (PSLF) program, you may be in for a rude shock.

In a March 30 story, the New York Times reports that the U.S. Department of Education (ED) is taking the position that thousands of PSLF approval letters sent by FedLoan Servicing Servicing, the company ED hired and supervised to administer PSLF, were invalid.

FedLoan’s letters reportedly confirmed to borrowers that the jobs they held with nonprofit organizations qualified them for PSLF. However, many of these decisions wete retroactively declared invalid, and affected borrowers got no explanations or opportunities to appeal. According to the Times, four borrowers and the American Bar Association have gone to court against ED to restore those borrowers’ lost PSLF eligibility.

What should you do if you get caught up in this mess? Ultimately you, too, may have get a lawyer and take ED to court. But you should also:

* Contact your U.S. representative and senators to ask them to intervene with ED on your behalf; and

* File a complaint with the Consumer Finance Protection Bureau because members of congress interested in passing a bill to fix this problem will no doubt ask it provide accurate input on the problem and how many Americans are affected.

* Most of all, whether or not you’ve been informed that ED has invalidated correspondence you’ve received from FedLoan, keep working with your employer to submit your PSLF certification form once a year; and stay on top of of this issue by monitoring for developments related to it on the internet, in the news media, or on this website.

College Affordability Solutions will its best to keep you posted on this in the future.