When it comes to student loans, however, the refinancing picture is more complex.
Sometimes it’s to reduce the monthly payment requirements by stretching them out of a longer repayment period.
And in some cases, it’s just for the administrative ease and simplification of being able to make all the payments to one loan servicer.
In fact, old Federal student loans (under the prior Federal Family Education Loan [FFEL] program) can even be consolidated into new Federal loans eligible for (more) flexible repayment and potential forgiveness, under the Federal Direct Consolidation Loan program.
Unfortunately, though, students who refinance old (or new) Federal student loans a private loan lose access to all of the flexible repayment and potential forgiveness programs.
Also similar to IBR, if the borrower still has a balance after 20 years of payments, the balance is forgiven (though the forgiven amount is taxable as income, unless specifically part of the Public Service Loan Forgiveness program described below). The newest Federal loan program, which just became available in December of 2015, REPAYE has terms similar to PAYE, where monthly payments are again capped at 10% of income, and again allows forgiveness after 20 years (for undergrad, 25 years for graduate school).
Notably, PAYE is a more recent program and older student loans may not be eligible for PAYE (unless consolidated, as discussed below! Unlike PAYE, though, negatively amortizing interest charges with REPAYE only accrue at 50% of the unpaid interest, and only capitalize if you leave the REPAYE program. The PSLF program, which can apply of any of the aforementioned programs, turns a forgiven loan from a taxable event into a non-taxable one.
Which means when it comes to student loans, refinancing – even if it’s for a lower interest rate or a smaller monthly payment – can actually be far more damaging in the long run than keeping the original Federal loans, or simply consolidating (but not refinancing! For those who need to borrow money from time to time, debts can accrue from a variety of sources.
And ultimately, a large number of loans are at best unwieldy to oversee and manage – with a variety of loan servicers to pay, with varying interest rates and loan terms – and at worst can compound too rapidly and spiral out of control, leading to default and bankruptcy.
However, a Federal Direct Consolidation Loan can stretch out payments over a longer repayment period in some cases.