By Amy Beardsley
When it comes to student debt, more than half of borrowers are struggling to make their payments. Refinancing your student loan is an excellent option to lower your monthly bill or to pay less interest over the life of your loan.
Even though refinancing could make student loan debt more manageable, the latest survey by Student Loan Planner found that 85% of borrowers are afraid to refinance their student loans. Why do borrowers fear refinancing when it could save them thousands of dollars?
According to the survey, half of borrowers didn't know you can refinance more than once and 65% of respondents haven't refinanced their student loan at all. Two-thirds of respondents can't name more than two refinancing companies, while almost half (40%) of borrowers who did refinance shopped at only one place.
Why Are Student Loan Borrowers Not Refinancing?
The most important reason for refinancing student loans, selected by 76% of survey respondents, was to get a lower interest rate. Considering that even a small drop in your interest rate can reduce the total amount you pay by several thousand dollars, it makes sense.
For the borrowers who did refinance, 70% got significant savings by having their rates cut by roughly 1%-3% overall.
With these results, why have 65% of borrowers not refinanced their loans? StudentLoanPlanner.com Founder Travis Hornsby says, "There's a lack of public knowledge on how to best apply." Since only a third of respondents were able to name more than two student loan refinancing companies, it seems that most people simply don't know what their options are or how to access what's available.
The primary reason for not refinancing is that they're afraid, however, with 85% of those surveyed saying they have fears about to the process. Refinancing a student loan is relatively straightforward, but borrowers worry they'll make a mistake with their student loans. Having debt and carrying the burden of it leads to feelings of doubt and mistrust. Most borrowers feel they've already made the mistake of borrowing too much, and they don't trust lenders to put their best interests ahead of business profits.
There's also a fear of the unknown. The possibility of losing a job, tax consequences from student loan forgiveness, or life changes that make payments unaffordable are common worries that keep people from refinancing.
FOMO is Real
By far, the biggest fear behind borrowers not refinancing is the fear of missing out, cited by 32% of borrowers. They're hopeful that the government will introduce a new student loan forgiveness program, and they could miss out on the benefits if they refinance now.
There is some truth to this, since any federal loans you refinance essentially become private student loans. Private student loans don't qualify for federal programs like income-driven repayment plans and student loan forgiveness.
Whether or not there will be a new forgiveness program is anyone's guess, but Hornsby says borrowers "have been conditioned that student loan repayment options will always get more generous."
He has a point. The first forgiveness program was created in 2007 under the College Cost Reduction and Access Act, and new programs introduced since then have had better benefits and fewer restrictions. The two latest programs, the Pay As You Earn (PAYE) in 2012 and Revised Pay As You Earn (REPAYE) in 2015, are considered the two most generous income-driven repayment options to date.
According to the survey results, the hope for a new student loan forgiveness plan has many borrowers waiting to refinance. But there may never be another plan introduced, and you could miss out on thousands of dollars in interest savings by not refinancing now.
Should You Refinance?
Refinancing may help lower your high interest rates and make student loan payments more manageable, but it doesn't always make sense to refinance your federal loans into private student loans.
The federal student loan forgiveness and repayment plans do offer several benefits to borrowers. The Teacher Loan Forgiveness and Public Service Loan Forgiveness (PSLF) programs are especially helpful for some teachers and others working in the public sector. In that case, sticking with these federal payment options is a good choice.
Even though your credit wasn't as important when you first received federal financial aid, having poor credit can hurt your chances of refinancing your student loan. If you have poor credit, says Hornsby, "The best option is to seek a cosigner who is willing to make payments for you if you're unable." That person could be a parent or spouse and could make it easier to qualify and get a lower interest rate. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
Shopping around at multiple lenders before committing to refinancing your student loan can help you get the best interest rate. Not everyone qualifies for a lower amount, however, and refinancing might not be the best route if you can't cut at least 1% off the interest you're paying.
When you refinance, your repayment term is often shorter. Longer terms usually mean lower monthly payments, while having a shortened repayment schedule saves you on interest but it can also increase your payment amount. If you're struggling to pay your current monthly student loan bill or couldn't afford the payments under a new repayment term, you probably shouldn't refinance.
The Survey Says
Even though refinancing might deliver more benefits, borrowers are holding out hope for new and improved student loan forgiveness programs. It's the fear of missing out on these hypothetical programs that is getting in the way of some student loan borrowers taking advantage of better repayment terms now.
Generally, if you have good credit and good income, aren't working in the public sector, and don't see a need for deferment or forgiveness, refinancing might be a good option. Ask yourself these questions before you refinance your student loan. You could save yourself a lot of money if you do.
Find out quickly at what rate you can refinance your student loan.