When pursuing federal student loan consolidation a decision that needs to be made is whether to apply through a federal or private lender. While both the federal Direct Consolidation Loan and a private refinancing both accomplish the same goal of making it easier to afford the monthly payment, sometimes the private option isn’t the most beneficial.
You Are Enrolled in an Income-Based Repayment Plan
The largest tradeoff when going with a private lender is that you must forfeit your federal repayment and forgiveness options. Several federal repayment programs limit your monthly payment to 10% of your monthly income. Private lenders haven’t offered a similar benefit, yet.
The only way to lower your monthly payment with a private lender is to choose the longest repayment term possible, qualify for a lower interest rate, or a combination of both. Choosing the first option still means you have to repay the entire borrowed amount regardless of how long it takes.
Even if you might be able to get a smaller monthly payment using a private lender, it still can be cheaper to go with a federal consolidation loan because you can literally have thousands of dollars forgiven on any remaining loan balance at the end of the repayment term. This is because most income-based repayment plans have a forgiveness option after 20 years of payments.
You will need to do the math as a longer repayment term for a federal or private loan results in higher cumulative interest charges over the life of the loan.
You Qualify For a Loan Forgiveness Program
Depending on your occupation and salary, you might be able to have your student loans forgiven early. The most popular program is the Public Service Loan Forgiveness program that forgives the loans of government and non-profit employees enrolled in income-based repayment plans after 10 years (120 months) of payment.
If you are currently or have previously served as an AmeriCorps or Peace Corps volunteer, you can also receive federal loan payment credit that is forfeited with private refinancing. No federal loans can be forgiven or canceled by the Department of Education once they are transferred to a private lender. This is because the lender pays off your original loan balance and creates a new loan they finance. Instead of making payments to the DoE, you are repaying the private lender instead.
You Have an Unsteady Financial Future
If you lose your job, become ill, or are currently enduring financial hardship, with federal loans you can request deferment or forbearance where you can delay making payments for 1 to 3 years depending on your circumstances. Interest will still continue to accrue, but, the relief of not having to make a monthly payment can be very beneficial.
Although a select few private lenders have started allowing similar reprieves for hardship cases, most do not. Remaining with a federal lender can also potentially allow you to qualify for $0 monthly payments during these times. These are extreme circumstances that very few cash-strapped borrowers qualify for, but, these same borrowers will not receive this same amount of leniency from private borrowers.
You Receive Employer Tuition Reimbursement Benefits
A benefit that more employers each year are rolling out to help attract and retain Millennial talent is student loan reimbursement. If your employer offers a benefit like this, you may not need to refinance because of the additional monthly contribution. As many borrowers pursue refinancing to get a smaller monthly payment, tuition reimbursement benefits have a similar effect.
Why go through the hassle of refinancing if you are already receiving “free” money each month and are not struggling to make the monthly payment?
You Have Lousy Credit or Need the Longest Repayment Term Possible
One perk of private refinancing is a potentially lower interest rate, especially if you have a small balance and plan to repay the entire balance within 5 to 7 years. This isn’t always the case if you need 15 or 20 years to repay the balance and only have fair credit. Applying with a co-signor might allow you to get a lower interest rate, but, you will still need to see how the rate compares to your average federal loan interest rate.
As the Department of Education uses the weighted average of your current federal loans, your consolidated interest rate will be nearly identical to your current federal rate. While it’s always nice to see if you can get a lower interest rate from a private lender, the federal flat-rate policy is still the cheaper option and benefits those with the longest loans.
You Currently Have a Federal Loan Dispute
The Ombudsman Group is a resource dedicated to resolving disputes related to federal student loans. If you are currently in a dispute, you should wait for it to be settled before deciding to consolidate or refinance. Once you refinance with a private lender, your federal loans can no longer be assisted by this group in the event of a dispute. Examples of disputes include resolving loan balance and payment discrepancies and providing guidance through the default, consolidation, deferment, and cancellation.