Oct
10
2023
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Can You Refinance Defaulted Student Loans?

By | Debt Payoff, Fresh Out of School, Student Loans, student_loan | No Comments
Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.

Student loan debt is at an all-time high, with more students graduating with debt than ever before. Consider this: Almost 44 million borrowers have federal student loan debt and they owe, on average, $37,338. As recent graduates begin their careers, it can be overwhelming to figure out how to make monthly student loan payments.

Ignoring your payments may seem like an easy way out, but student loan default can have extreme consequences. If you’re struggling with student loan payments or are already in default, there are ways to recover. For instance, you could consolidate defaulted student loans. Refinancing defaulted student loans may also be an option. This guide will help you figure out your best option.

What Is Student Loan Default?

If your student loan is in default, it means you have failed to make payments on your student loans for several months in a row. However, there are a few steps that occur before defaulting on student loans.

Federal student loans are considered delinquent once you miss a student loan payment. After 90 days of delinquency, your loan servicer can report the missed payments to the three major credit bureaus. Generally, after 270 days of nonpayment, your loan will go into default.

If you have private student loans, they can go into default even sooner. Typically, after you miss three payments or 120 days, your private student loans go into default. Different lenders have different terms when it comes to default, however, so be sure to check with yours to get the specifics.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

How Common Is Defaulting on Student Loans?

Defaulting on student loans is fairly common. The latest data from EducationData.org finds that one in 10 student loan borrowers has defaulted on a loan. In fact, roughly 4 million student loans go into default every year, and about 7% of loans are in default at any given time. As of 2021, the median loan balance among delinquent and defaulted borrowers was $15,307.

What Are the Consequences of Student Loan Default?

Defaulting on your student loans can have some steep consequences. For starters, the entire balance of your student loans could become due in full.

If you default on your student loans, your lender may eventually turn your debt over to a collection agency who will usually start calling, emailing, and even texting you to try and collect on your debt. You may even have to pay collection fees on top of everything else.

If you default, you may lose eligibility for programs that could help you manage your debt, such as deferment, forbearance, or Public Service Loan Forgiveness.

Once your student loans are in default, your loan servicer or collection agency will report your default to the three major credit bureaus, which will negatively impact your credit score.

And if your servicer can’t collect the money you owe on your federal student loans, they can ask the federal government to garnish a portion of your wages or your tax refund.

How Can You Recover From Student Loan Default?

If you failed to make payments on your student loans and they’ve gone into default, you don’t have to let it ruin your financial future. Here are some steps you can take to get back on track.

Loan Rehabilitation

One option for getting out of student loan default is student loan rehabilitation. To rehabilitate your loan, you work with your loan servicer and agree in writing to make nine reasonable and affordable monthly payments over a period of 10 months.

In order to rehabilitate a Direct Loan or FFEL program loan, your monthly payments must be no more than 20 days late. Your loan servicer will determine the new monthly payment, which is 15% of your discretionary income.

When you have successfully rehabilitated your loan, the default may be wiped from your credit history. Note that any late payments reported to the credit bureaus before the loan went into default will remain on your credit reports.

Private student loans are not eligible for rehabilitation.

Consumer Credit Counseling Services (CCCS)

Credit Consumer Counseling Services (CCCS) are typically nonprofit organizations that offer free or low-cost counseling, education, and debt repayment services to help people regain control of their finances and make a plan to get out of debt.

If you’ve defaulted on your student loans, a credit counselor can help by analyzing your financial situation and student debt, laying out all the options for student loan debt relief, and helping you choose the best path forward.

CCCS agencies can also help you set up a budget and manage other debts. In some cases, they will work with your creditors to come up with payment plans where creditors agree that they will not pursue collection efforts or charge late fees while on the plan.

One word of caution: Credit counseling agencies are not the same thing as debt settlement companies, which are profit-driven businesses that often charge steep fees for results that are rarely guaranteed. Even if they are successful in reducing your debt, their fees (plus the unpaid interest and late payment charges on the debt) can add to what you initially owed, reducing your actual savings.

To ensure you find a reputable credit counselor, you might start your search using the U.S. Department of Justice’s list of approved credit counseling agencies.

Repaying Your Loan in Full

Another option to get out from under the shadow of student loan default is to repay your loans in full. Of course, if you had the funds to do so, you probably wouldn’t have defaulted in the first place. That said, you could look into ways to cover the balance due, such as borrowing from a family member or close friend.

Options for Private Student Loans

If you have private student loans that are in default, you can contact your lender and see what possibilities are available. Some lenders may have hardship options similar to the federal programs. As mentioned, the time it will take for your unpaid private loan to go into default depends on the lender — but the timeframe could be relatively short, even just 120 days.

However, if you’ve only recently missed a payment, you can start making payments again (and repay the missed payment) to try to prevent your loan from going into default.

Is Refinancing an Option for Defaulted Student Loans?

If your student loans are currently in default, refinancing your loans can be difficult. When you refinance your student loans, you take out a new loan with a private lender to pay off the existing loans. When you apply for a refinancing loan, lenders will use your credit score and financial history, among a few other factors, to determine if you qualify.

If your loan is already in default, your credit score has likely decreased significantly and will likely impact your ability to get approved for a new loan. If you have a family member or friend who is willing to cosign the loan, however, you may be able to refinance your student loans that way.

Another possibility for refinancing your student loans would be to rehabilitate your loans first. A lot of lenders might turn you down for having a defaulted loan on your credit history, but others might be willing to look past that and onto your education and income potential to approve you for a loan.



💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.

Can you Consolidate Defaulted Student Loans?

Another way to recover from student loan default is to consolidate your student loans in default. If you have federal loans, you can pursue defaulted student loan consolidation with the Direct Consolidation Loan program. This program allows you to combine one or more federal loans into a new consolidation loan.

To be eligible, you must either make three full, on-time, and consecutive payments on the defaulted loan or agree to make payments on an income-driven repayment plan.

Private student loans aren’t eligible for Direct Consolidation Loans. However, you can consolidate these loans with a private lender by refinancing.

Tips for Consolidating Defaulted Student Loans

Wondering how to consolidate defaulted student loans? To consolidate federal student loans, first gather all the documents you need. This includes your personal information such as your name, address, email, Social Security number, and FSA ID; financial information such as your income; and details about your loans, including amounts, account numbers, and loan servicers.

Next, go to studentaid.gov to fill out the Direct Consolidation Loan application. You’ll need your FSA ID to log in. Specify the loans you want to consolidate.

Then, choose one of the income-driven repayment plans if that’s the option you prefer. Review the plans in advance to determine which one is the best option for you.

Filling out the application typically takes less than 30 minutes.

Pros and Cons of Student Loan Consolidation

Choosing to consolidate defaulted student loans has advantages and disadvantages you’ll want to weigh before you move forward.

Advantages include:

•   One loan and one monthly bill. This means there will be less for you to keep track of.

•   Lower payments. When you consolidate, you can choose an income-driven repayment plan or to lengthen the term of your loan, which could lower your monthly payments. (Note: You may pay more interest over the life of the loan if you refinance with an extended term.)

•   Fixed interest rate. You’ll get a fixed interest rate for the life of your loans with Direct Loan Consolidation. The new rate is a weighted average of all your federal loan rates, rounded to the nearest eighth of a percent.

•   Access to forgiveness programs. With a Direct Consolidation Loan, you might be able to get access to programs you weren’t eligible for previously, such as Public Service Loan Forgiveness.

Disadvantages include:

•   Longer repayment period. You could end up repaying your loans for an extra year or two, which will cost you more overall.

•   Pay more in interest over the life of the loan. With consolidation, the outstanding interest on your loans is added to the principal balance, and interest may accrue on that higher balance.

•   Possible loss of benefits. Consolidating loans other than Direct loans could mean giving up perks you have with those loans, such as rebates or interest rate discounts.

This comparison chart of the pros and cons of student loan consolidation can be helpful as you consider the question of should you refinance or consolidate your loans.

Pros of Student Loan Consolidation Cons of Student Loan Consolidation
Simplified payments with just one bill to pay each month. Longer repayment period means paying more overall.
Monthly payments may be lower. Pay more in interest over the term of the loan.
Fixed interest rate. Could lose benefits associated with current student loans.
Possible access to certain forgiveness programs.

How to Manage Student Loans Without Going Into Default

If you’re struggling to make student loan payments but haven’t yet defaulted on your loan, taking action now could help prevent financial issues in the future. Here are some options that could help you take control of your student loan debt and avoid going into default.

Take Advantage of the Temporary Grace Period

Federal student loan payments and interest accrual has been paused since March 2022 in order to alleviate some of the financial challenges created by the coronavirus pandemic. However, the latest debt ceiling bill officially ended the payment pause, requiring interest to begin accruing again on Sept. 1. and payments to resume on October 1.

The Department of Education understands that restarting student loan payments after such a long pause will put many borrowers in a difficult financial position. So to prevent struggling borrowers from facing the harsh penalties of defaulting on their loans, there will be a 12-month ramp-up period to help borrowers adjust to repayment.

During this period, which takes place from Oct. 1, 2023 to Sept. 30, 2024, federal student loan borrowers who don’t make their payments on time and in full will not be reported to the credit bureaus, have their loans placed in default, or be referred to debt collectors.

Forbearance or Deferment

If you’re unable to make payments on your student loans due to a sudden and temporary economic change, you might consider applying for student loan deferment or forbearance. Both allow you to temporarily pause your loan payments.

If your loans are in forbearance, which is granted for 12 months at a time, you will be responsible for paying accrued interest during the forbearance period. If your loans are placed in deferment, which can last up to three years, you may not be responsible for accrued interest during the deferment period, depending on the type of loan you hold.

While your loans are in deferment or forbearance, you do have the option to make interest-only payments on the loan. If you choose not to, the accrued interest on most loans will be capitalized, or added to the principal balance. You’ll then be charged interest based on the larger loan amount.

Applying for Income-Driven Repayment (IDR)

Another option to help manage your student loans is income-driven repayment. There are four income-driven repayment plans available to federal student loan borrowers. Depending on the type of plan you qualify for, your monthly payments will be anywhere from 10% to 20% of your discretionary income. (Beginning in July 2024, the new SAVE plan will adjust payments to 5% of discretionary income.)

Income-driven repayment plans also stretch out the repayment term of the loan to either 20 or 25 years, depending on the specific plan. This means that while you could pay less per month, income-driven repayment could cost you more in interest over the life of the loan. The good news is that if you have any remaining debt at the end of the term, it will be forgiven (but you may need to pay income taxes on the canceled amount).

Consolidating Your Loans

Even if you’re not in default, you can consolidate your federal loans through the Direct Loan Consolidation program. As mentioned, the new interest rate will be the weighted average of the existing loans, rounded to the nearest eighth of a percent. So you won’t lower your effective interest rate, but you’ll only have to keep track of one monthly payment.

Refinancing Your Loans

If your monthly student loan payments are difficult for you to manage, you could consider refinancing with a private lender. If you have a combination of private and federal student loans, you could refinance both types into a single, private loan.

Refinancing can give you an opportunity to qualify for a lower interest rate or lower monthly payments, and you’ll only have to worry about tracking one payment each month. You may also be able to customize your repayment term — either lengthening or shortening the term.

By lengthening the term, you could reduce your monthly payments, but you may end up spending more money in interest over the life of the loan. To see how refinancing could impact your student loans, plug your numbers into this student loan refinance calculator.

It’s important to note that if you’re thinking of taking advantage of any federal programs such as income-driven repayment or Public Service Loan Forgiveness, refinancing may not be a good idea, as you’ll lose your eligibility for these programs.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

Does consolidating student loans remove default?

No. When you consolidate your student loans, the record of the default will stay on your credit history. Another option is loan rehabilitation, which removes the default from your credit history.

Can you consolidate defaulted student loans?

Yes, you can consolidate defaulted student loans. If you have federal loans, you can consolidate them with Direct Loan Consolidation. To be eligible, you must either make three full, on-time, and consecutive payments on the defaulted loan or agree to make payments on an income-driven repayment plan. You can fill out an application at studentaid.gov. You can consolidate private student loans with a private lender.

Can you refinance student loans that are in default?

You can refinance student loans that are in default, but it may be difficult. That’s because your credit score has likely decreased, which may impact your ability to get approved for refinancing. If you have a family member or friend who is willing to cosign the loan, you may be able to refinance your student loans that way. Or, you could rehabilitate your loans first, which could help improve your odds of being approved for refinancing.

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Oct
10
2023

Defaulting on Student Loans: What You Should Know

By | Debt Payoff, Fresh Out of School, Student Loans, student_loan | No Comments

Defaulting on student loans is something that happens after you miss a series of payments on your loan. The number of loan payments missed before the loan enters default varies between federal and private student loans, but the consequences of defaulting on either type can be severe — including having the loans go to a collections agency and potential negative impacts on your credit score.

For a year following the resumption of federal student loan payments in October 2023, a temporary “on-ramp” transition period means that missing required monthly payments generally won’t lead to defaulted loan status. Below we discuss how this on-ramp works, as well as what typically happens if you miss your required federal student loan payments.

What Is Student Loan Default?

Student loan default is a term for when you completely stop paying student loans. This can occur if you fail to make required monthly payments on federal or private student loans. Millions of federal student loan borrowers, however, did not have to make any required payments during the Covid-19 forbearance.

Most federal student loan borrowers had a 0% federal student loan interest rate from March 13, 2020, until Sept. 1, 2023, under the pandemic-era payment pause. These borrowers, including those with defaulted and nondefaulted loans held by the U.S. Department of Education, did not have to make federal student loan payments over that three-year period.

The 2023 debt ceiling bill officially ended the Covid-19 forbearance, requiring federal student loan interest accrual to resume on Sept. 1 and payments to resume in October 2023. Any federal student loan borrower who received the Covid-19 forbearance relief will be eligible for the 12-month on-ramp protection automatically.

If you’re covered by the on-ramp, you’re protected from having your federal student loans reported as delinquent or placed in default from October 2023 through September 2024. But federal student loan interest will still accrue during the on-ramp, so failing to pay may increase your student debt burden.


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

Take control of your student loans.
Ditch student loan debt for good.

Student Loan Default vs. Delinquency

Student loan delinquency is the early stage of missing a required loan payment when due. If you fail to pay over an extended period, you could face greater consequences for reaching late-stage delinquency and carrying defaulted student loans.

Federal student loans are typically considered delinquent when you’re past due on a required payment by at least one day but less than nine months. Federal student loans are typically reported to the credit bureaus as delinquent if you are 90 or more days past due.

A delinquent federal student loan typically becomes defaulted if you fall at least 270 days past due on a required payment. The typical metrics of delinquency vs. default don’t apply during the on-ramp of October 2023 through September 2024 for eligible borrowers who miss payments during that 12-month period.

Lenders of private student loans can set their own parameters for delinquency vs. default. Banks, credit unions, fintech companies, and state-related nonprofits offer private student loans. Some may consider you in default if you are 60 or more days delinquent on a private student loan. Others may define default as falling 180 days past due after receiving a final demand letter.

Can You Default on Student Loans?

Yes, it’s possible for borrowers to default on student loans. If a borrower is struggling to make monthly payments on their student loans, default can be an option if they do not take any other action. If you are having issues making monthly payments on your federal student loans and just stop making payments, after a certain number of missed payments, the loan will enter default.

Private student loans can also go into default, though they may enter default more quickly than a federal student loan.

Recommended: What is the Student Loan Default Rate?

How to Default on Student Loans

To get more technical, defaulting on federal student loans is a process that takes place over a period of nonpayment. Typically when you first miss a payment, the loans are delinquent but not yet in default. At 90 days past due, your lender can report your missed payments to credit bureaus. And when you reach 270 days past due, your student loans are typically considered in default.

Keep in mind that most federal student loans are protected from entering default during the on-ramp period. (If you entered the Covid-19 pandemic with a defaulted federal student loan held by the U.S. Department of Education, the Education Department in December 2022 started reporting those loans as “current” rather than “in collections” to credit reporting agencies.)

Here’s what you can expect if you’re eligible for the on-ramp from Oct. 1, 2023, through Sept. 30, 2024:

•   You won’t be considered delinquent if you miss a required payment

•   Late payments or missed payments won’t be reported to the credit bureaus

•   Your loans won’t be placed in default

•   Debt collection agencies won’t contact you about your on-ramp eligible loans

For private student loans, the terms for defaulting can vary. Private student loan lenders may report an account as delinquent when it’s 30 days past due and consider you in default if you’re 60 days or more past due on a required payment.

Private lenders may also place student loans in default if the borrower declares bankruptcy, passes away, or defaults on another loan. Terms may vary by lender, so if you have private student loans, double-check how they define default.

Defaulting on your federal or private student loans can have serious consequences, but there are ways to avoid defaulting on your student loans or recover if your loans are currently in default. If you’re worried about student loan default, the most important thing you can do is educate yourself on what it is, and how to avoid it.

Below we highlight four potential consequences of what happens when your student loans default.

What Happens When Your Student Loans Default?

Here are four potential consequences of what can happen if you default on your federal or private student loans:

1. Collection Agencies Might Come Knocking

When a borrower defaults on student loans, the lender may eventually turn the debt over to a collection agency. The collection agency will then attempt to recover the payment, typically bombarding you with frequent letters and phone calls.

Collection agencies may also attempt to determine what other assets, including bank accounts or property, would allow you to pay your debt. On top of dealing with regular calls from debt collectors, you may also be responsible for paying any additional fees the collection agency charges on top of your student loan balance.

2. Loan Forgiveness and Forbearance Options Are No Longer on the Table

Student loan default on federal loans means that the federal government can revoke your access to programs that might make it easier for you to pay your loans, including loan forgiveness or forbearance. This means that even if you qualify for something like the Public Service Loan Forgiveness program, you could be rendered ineligible if you let your loans go into default.

Additionally, borrowers in default may lose eligibility for all future types of federal financial aid.

3. Your Credit Score Might Be Impacted

Once your student loans are in default, the lender or the collection agency will report your default to the three major credit bureaus. This means that your credit score could take a hit. A low credit score can make it harder for you to get a competitive interest rate when borrowing for other needs, like a car or home loan. In fact, having federal student loans in default can make it difficult to buy or sell real estate and other assets.

4. You Might Have to Give up Your Tax Refund, or a Portion of Your Wages

If your loan holder or a collection agency can’t recover the amount owed, they can request that the federal government garnish your tax refund and even some of your income. For example, if you filed your taxes and were eligible for a refund, the government would instead take that refund money and apply it toward your defaulted student loan balance. On top of that, the government can garnish your wages, which means that they can take up to 15% of each paycheck to pay back your loans.

Recommended: What Happens When Your Student Loans Go to Collections?

How Can You Get Student Loans Out of Default?

Defaulting on student loan debt is a serious matter, but the good news is that there are ways of getting out of default.

First, stop avoiding those collection calls. If your student loan provider or a collection agency is calling, your best bet is to meet your lender or the agency head-on and take charge of the situation. The lender or the collection agency will be able to talk through the repayment options available to you based on your personal financial situation. They want you to pay, which means that they might be able to help find a payment plan that works for you.

The lender may be able to offer a variety of options tailored to your individual circumstances. Some of these options might include satisfying the debt by paying a discounted lump sum, setting up a monthly payment plan based on your income, consolidating your debts, or even student loan rehabilitation for federal loans (more to come on this). Don’t let your fear stop you from reaching out to your lender or the collection agency.

How to Avoid Defaulting on Student Loans

Of course, even if you can get yourself out of student loan default, the default can still impact your credit score and loan forgiveness options. That’s why it’s generally best to take action before falling into default. If the student loan payments are difficult for you to make each month, there are things you can do to change your situation before your loans go into default.

First, consider talking to your lender directly. The lender will be able to explain any alternate student loan repayment plans available to you.

For federal loans, borrowers may be able to enroll in an income-driven repayment (IDR) plan. These repayment plans aim to make student loan payments more manageable by tying them to the borrower’s income. This can make the loans more costly over the life of the loan, but the ability to make payments on time each month and avoid going into default are valuable.

The Saving on a Valuable Education (SAVE) Plan is one of the IDR options to consider if you’re a federal student loan borrower. The SAVE Plan is the most affordable repayment plan for federal student loans, according to the U.S. Department of Education. Borrowers who are single and make less than $32,800 a year won’t have to make any payments under the SAVE Plan. (If you are a family of four and make less than $67,500 annually, you also won’t have to make payments.)

Is Refinancing an Option?

Refinancing student loans could potentially help you avoid defaulting on your student loans by combining all your student loans into one, simplified new loan. When you refinance student loans, you might be able to secure a lower interest rate or loan terms that work better for your situation.

If a borrower is already in default, refinancing could be difficult. When a student loan is refinanced, a new loan is taken out with a private lender. As a part of the application and approval process, lenders will review factors including the borrower’s credit score and financial history among other factors.

Borrowers who are already in default may have already felt an impact on their credit score, which can influence their ability to get approved for a new loan. In some cases, adding a cosigner to the refinancing application could help improve a borrower’s chances of getting approved for a refinancing loan. Know that if federal student loans are refinanced they are no longer eligible for federal repayment plans or protections.


💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.

Help on Defaulted Student Loans

If you default on a federal student loan, here are some programs that can help you get them out of default:

Loan Rehabilitation

To apply for student loan rehabilitation, contact your loan servicer. In order to rehabilitate your federal student loan you must agree to make nine voluntary, reasonable, and affordable monthly payments within 20 days of the payment due date. This agreement must be completed in writing. All nine payments must be made within 10 consecutive months.

Private student loans do not qualify for federal student loan rehabilitation. Federal Direct Loans or loans made through the Federal Family Education Loan (FFEL) program qualify for student loan rehabilitation.

Loan Consolidation

Consolidating your federal student loans into a Direct Consolidation Loan is another option to get your defaulted federal student loans out of default. To consolidate defaulted federal student loans into a new Direct Consolidation Loan you have two options, which are:

•   Repaying the consolidated loan on an income-driven repayment plan.

•   Making three monthly payments on the defaulted loan before consolidating. These payments must be consecutive, voluntary, on-time, and account for the full monthly payment amount.

Again, private student loans are not eligible for consolidation through a Direct Consolidation Loan.

Recommended: Understanding How Student Loan Consolidation Works

Consumer Credit Counseling Services (CCCS)

Credit Consumer Counseling Services (CCCS) are usually non-profit organizations that offer free or low-cost counseling, education, and debt repayment services to help people facing financial difficulties.

If you’ve defaulted on a student loan, a credit counselor can help by looking at your entire financial situation along with your student debt, laying out your options, then working with you to come up with the best option for student loan debt relief.

If you’re struggling with multiple debts, a credit counselor may be able to set up a debt management plan in which you make one monthly payment to the credit counseling organization, and they then make all of the individual monthly payments to your creditors.

While counselors usually don’t negotiate down your debts, they may be able to lower your monthly payments by working with your creditors to increase your loan terms or lower interest rates.

Just keep in mind: Credit counseling agencies are not the same thing as debt settlement companies. Debt settlement companies are profit-driven businesses that often charge steep fees for results that are rarely guaranteed. Debt settlement can also do long-term damage to your credit.

To avoid debt settlement scams and ensure you find a reputable credit counselor, you might start your search using the U.S. Department of Justice’s list of approved credit counseling agencies.

The Takeaway

Student loan default can have serious negative effects on your credit score and financial stability. If you’re worried about defaulting on your student loans, or you have already defaulted, consider taking immediate steps to remedy the situation before it gets worse. Contact your lender or loan servicer to learn about options available, and consider refinancing your loans to secure a lower interest rate or monthly payment. (You may pay more interest over the life of the loan if you refinance with an extended term.)

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

Does a defaulted student loan ever go away?

It is possible to rehabilitate or consolidate a defaulted federal student loan to get it out of default. Some private lenders may offer programs or assistance to borrowers facing default, but they are not required to do so.

Will my student loans come out of default if I go back to school?

No, if you have student loans already in default, going back to school will not remove them from default. Students who have student loans in default will need to get the loans out of default before they will qualify to borrow any additional federal student loans.

Are defaulted student loans forgiven after 20 years?

Defaulted loans are not forgiven after 20 years. Students in default may consolidate or rehabilitate their loan and then enroll in an income-driven repayment plan, which could potentially qualify them for loan forgiveness at the end of their loan term, up to 25 years.

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOSL1023002

Read more
Oct
05
2023
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Can You Pay Off Student Loans with Your 401(k)?

By | Debt Payoff, Fresh Out of School, Investing, Student Loans, student_loan | No Comments

If you’re one of the 44 million Americans who currently hold a portion of the country’s more than $1.7 trillion student debt—and are perhaps now back to making payments after a three-year pause—chances are you’re looking for solutions to get rid of that debt ASAP. After all, the average student who borrowed money to pay for school graduates with just over $37,000 in federal student loan debt alone.

Paying off that much debt is an impressive feat which takes discipline and commitment. If you’re currently living under the heavy weight of your student loans, you may have considered using your 401(k) for student loans. But should you really cash out your 401(k) for student loans?

It probably goes without saying that figuring out how you’re going to pay off your student loans is overwhelming—and there isn’t one definitive solution. And while it’s certainly tempting to just take the cash from your 401(k) and pay off a high-interest loan, there are some serious drawbacks to consider before running with that plan.

The Downsides of Using Your 401(k) to Pay Off Your Student Loans

A potential benefit of using your 401(k) to pay off student loans is that you can eliminate your debt in one fell swoop. However, withdrawing money from your 401(k) should be considered a last resort option—or maybe not an option at all. That’s because there are several major downsides to doing so:

•   Early withdrawal penalty: If you’re under the age of 59½, you’ll generally have to pay a 10% early withdrawal penalty on the amount you take out. The amount you withdraw will also be considered taxable income, which means you could owe a hefty tax bill for that year.

•   Opportunity cost: By using your 401(k) money to pay off student loans, you are potentially losing out on an overall higher return from your investments. For example, if your loan has an interest rate of 6% and your 401(k) returns an average of 8% per year, you essentially lose 2% a year by liquidating those funds to pay off your loans.

•   Difficulty catching up: With your stunted 401(k) balance, you’ll need to make much larger contributions going forward to make up for it, which could strain your budget. Plus, there is a cap on the total amount you can contribute to a 401(k) each year. You may never be able to fully make up for the growth you would have experienced if that money stayed invested.

When deciding whether or not to withdraw money from your retirement savings, it’s important to note that while you borrow loans for other expenses in life, there’s no such thing as a “retirement loan.” You’re responsible for ensuring you have enough money to live on in retirement.

While it can feel like student loans are preventing you from living your life or meeting your financial goals today, saving for retirement can be a valuable investment in your future.


💡 Quick Tip: Get flexible terms and competitive rates when you refinance your student loan with SoFi.

Alternatives to Help Control Your Student Loan Debt

If you’re struggling with student loan payments, there are alternatives to taking money out of your 401(k) that can help you get your student loan debt under control while keeping your retirement savings intact. Here are a few examples:

Applying for Income-Driven Repayment

One option is applying for an income-driven repayment (IDR) plan. These plans reduce your payments to a small percentage of your discretionary income. The term length also gets extended out to 20 or 25 years, depending on the specific program. At the end of the repayment term, any remaining debt is forgiven. The exception is the newest plan, Saving on a Valuable Education (SAVE), which awards forgiveness for some borrowers with smaller balances within as few as 10 years.

Keep in mind that extending your repayment term usually means paying more in interest over the life of the loan. Any canceled IDR debt may also be taxed as income. Still, if your payments are far too high to afford on the Standard Repayment Plan, income-driven repayment could provide much-needed relief. In fact, if your income is below a certain threshold, you could qualify for $0 payments.

Pursuing Loan Forgiveness

There are also many programs that forgive student loans after you’ve worked in a qualifying profession and made a certain number of payments. On the national level, Public Service Loan Forgiveness (PSLF) is one example. If you work for a qualifying employer in the public service sector, such as the government or a non-profit, you can have your loans forgiven after 120 payments. Other similar programs include Teacher Loan Forgiveness and National Defense Student Loan Discharge.

In addition to federal forgiveness programs, there are also hundreds of programs offered through states, schools, and other organizations.

Refinancing Your Student Loans

When you refinance your student loans, you take out a brand new loan from a private lender, who will review your credit history and other financial factors to determine how much they will lend to you and at what rate. You then use those funds to pay off your existing loan(s).

With a solid financial picture and credit history, you could qualify for a lower interest rate. This could result in lower monthly payments, as well as reducing the amount of money you spend in interest over the life of the loan (depending on the loan term, of course).

You could also lower your monthly payments by extending the length of the loan term. This results in paying more money in interest over the life of the loan, but could help free up some cash flow more immediately.

It’s important to note that refinancing federal student loans with a private lender means you’ll permanently lose access to federal loan benefits including income-driven repayment plans, forbearance, and deferment.

To help you decide if refinancing is a good idea, take a look at SoFi’s student loan payoff calculator to see when you might pay off your current loans. Then compare that with a potential new loan—you may be surprised at how much of a difference refinancing can make. And with more wiggle room in your budget, you could make headway toward student loan repayment and save for a retirement you’ll be able to enjoy.

Take control of your student loans.
Ditch student loan debt for good.



💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.

Options for Using Your 401(k) to Pay Off Debt

If you decide to pursue using 401(k) funds to pay off student loans despite the many risks and drawbacks, there are a few ways to go about it. First, you’ll need to determine how much you are eligible to withdraw from your 401(k), and what penalties and taxes you would encounter. In most cases, you would be responsible for a 10% penalty and regular income taxes on a withdrawal from your 401(k) prior to age 59 ½.

There are a few exceptions to this rule. For instance, if you were laid off, you may be able to withdraw money penalty-free as long as certain requirements are met.

And depending on the exact terms of your 401(k) plan, you may be able to withdraw the money from your plan without penalty in certain hardship situations—like to cover tuition or medical expenses.

If you already attended college and are trying to use your 401(k) to pay back student loans, that doesn’t qualify for a hardship withdrawal. If you’re not sure what the exact rules of your plan entail, it’s worth contacting your HR representative or the financial firm that handles your company’s 401(k) program.

Again, using money from your 401(k) to pay off debt can be a risky proposition. While on the bright side it would potentially allow you to eliminate your student debt, it also puts your retirement savings at risk. You’ll not only potentially have to pay a penalty and taxes on the withdrawn amount, but you’ll also lose out on years of compounding returns on money you take out.

Still, depending on your circumstances, you might be considering cashing out your entire 401(k). Alternatively, however, you could borrow against your 401(k) by taking out a 401(k) loan. Here’s a bit more info about those two options.

Cashing Out Your 401(k)

Withdrawing money from your 401(k) can seem like a tempting idea when your student loan payments are causing you to stress at the moment and retirement feels like it’s ages away.

But making an early withdrawal comes with penalties. If you withdraw your money prior to the age of 59 ½ you’ll pay a 10% penalty on the amount you withdraw, in addition to regular income tax on the distribution itself. In addition to the taxes and the early withdrawal penalty, money that you withdraw loses valuable time to grow between now and retirement. That is why, as mentioned, simply withdrawing money from a 401(k) very rarely makes sense, when you consider the taxes, penalties, and lost growth.

To reinforce this point, let’s consider a (completely hypothetical) person who earns $68,000 per year and is a single filer, putting them in the 22% income tax bracket. (And remember, this is just an example – there are many other factors that can come into play, but this should give you a high-level glimpse into why withdrawing cash from your 401(k) might not be the best call.)

If this person cashed out $20,000 from their 401(k), they would have to pay a 10% penalty of $2,000 right off the top. Then they’d need to pay federal income taxes at the highest end of their bracket, totaling $4,400. So even though this person took out $20,000 from their account, they actually receive just $13,600. Depending on their state, they might also pay state income taxes, let’s not get bogged down on that right now.

Now let’s assume they used that money to pay off $13,600 in student loans, which have a 5% interest rate and five years left on the loan. In this scenario, they would save roughly $1,798.93 in interest.

So essentially, this person would have incurred $6,400 in penalties and taxes in order to save $1,798.93 in interest. Plus, had they let that money stay invested in their 401(k) over the next five years, that $20,000 could have grown to more than $28,000, assuming a 7% average return. That’s why cashing out a 401(k) to pay off student loan debt might not be a great idea.

Borrowing from Your 401(k)

When you borrow money from your own 401(k), you are really borrowing from yourself. You are accessing your retirement funds and then paying them back, with interest, in an attempt to replenish your savings. So these loans don’t require a formal application or credit check.

Not all companies offer 401(k) loans, so it’s important to check with your employer to confirm if the option is available to you. (And for the record, you can’t take out a loan from an employer-sponsored 401(k) if you’re no longer with that employer.)

In addition to the rules determined by your employer, the IRS sets limits on 401(k) loans as well. The current maximum loan amount as determined by the IRS is 50% of your vested balance
or $50,000, whichever is less. If you have a balance of less than $10,000, you may be able to borrow up to $10,000.

The IRS also requires that the money borrowed from your 401(k) be paid back within five years based on a payment plan that is established when you borrow the money. There is an exception; if you buy a house with the money you withdraw, you may be able to extend the repayment plan.

If you don’t pay the loan back according to the terms, it’s considered defaulted and the balance may be treated as a distribution instead. That means you’d owe penalties and taxes on that amount for that year.

Note that if you change jobs, your 401(k) plan will roll over, but not your loan. If you leave your employer with an unpaid 401(k) balance, you’ll face an accelerated payment plan.

Interest rates are usually set by your plan administrator, and are relatively low compared to other financing options. It could be a viable option for those interested in securing a lower interest rate for their debt, but don’t qualify for student loan refinancing due to their credit history or other factors.

A 401(k) loan typically offers a relatively low interest rate and doesn’t require a credit check.

You may want to crunch some numbers and compare the interest rates on your student loans with the interest rate on a 401(k) loan before you commit to this course of action.

If your student loan interest rate is lower than the potential interest rate on your 401(k) loan, it could make sense to keep your retirement savings intact.

The other factor to consider is the missed growth on the money you borrow from your 401(k), which is why 401(k) loans could make more sense for high-interest debt such as personal loans or credit cards, but are typically less ideal for low-interest debt such as student loans or mortgages.

Hardship Withdrawals

While a hardship withdrawal won’t be an option if you are looking to pay off your student loans, it could be worth considering if you are planning on attending graduate school or are assisting a family member with their college education.

To qualify for a hardship withdrawal, you must meet certain criteria. You must prove your need is immediate and heavy. Tuition for the school year usually qualifies as immediate.

Student loan repayment wouldn’t qualify because they provide a repayment plan over a set period of time. You must also prove the expense is heavy. Usually, that means things like college tuition, a down payment on a primary residence, or a qualifying medical expense that is 10% or more of your adjusted gross income.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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05
2023
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Do Student Loans Expire?

By | Debt Payoff, Fresh Out of School, Student Loans, student_loan | No Comments

Federal student loans never expire. Unlike private student loans, federal loans have no statute of limitations, which is the time limit creditors have to use legal means to collect on a debt. And while the clock technically can run out on private student loans, that doesn’t mean your student loans have vanished — lenders simply can no longer sue you to collect the debt. Plus, waiting it out will wreak havoc on your finances, anyway.

As such, waiting for student loans to expire is not a recommended tactic to manage student loans. Read on to learn more about why your student loans aren’t likely to expire and more effective ways to deal with student loan debt.

Why Federal Student Loans Don’t Expire

When does my student loan expire?

The answer to that question is “never” when it comes to federal loans. There’s no statute of limitations for collections on federal student loans. This means that if you stop making payments, your loan servicer or a debt collector can sue you to force repayment, regardless of how long it’s been since you last made a payment.

So what happens if you do stop paying your federal student loans altogether? First, your total balance will continue to increase. Whether or not you’re making any payments, interest will accrue, which means that every month your lender will add your new interest fees to your principal loan balance.

After at least 270 days of non-payment, your federal student loan will be in default. This can cause a number of things to happen, including loan acceleration (meaning your entire balance becomes due) and your loan getting sent to collections, which can damage your credit score and lead to additional fees from a collection agency.

Additionally, the federal government may decide to withhold your tax refund or even garnish wages directly from your paycheck. Your loan holder can also sue you to force you to pay up.

There is one temporary exception to this situation. Following the end of the federal student loan payment pause, which lasted from March 2020 to October 2023, the Biden administration instituted a special “on-ramp” period to protect financially vulnerable borrowers from experiencing the negative consequences of missing payments.

From Oct. 1, 2023 to Sept. 30, 2024, federal loan borrowers who miss one or more payments will not be considered delinquent or in default, have their missed payments reported to the credit bureaus, or have past-due loans referred to collections agencies. Any payments missed during this time will be due once the on-ramp period is over. And the normal process around loan default will resume Oct. 1, 2024.

Recommended: What Happens When Your Student Loans Go to Collections?

Why Private Student Loans May Expire

Unlike federal student loans, private student loans may be bound by a statute of limitations on collections. The statute of limitations varies by state and is generally between three and 10 years from the date you stopped paying your loans. Once the statute of limitations is up, the debt becomes “time-barred.”

Before you stop making your monthly payments, it’s important to know that a statute of limitations is not the same thing as an expiration date on your loans. A statute of limitations is merely a limit on the time that a lender or debt collector has to sue you in court to force you to pay back the loans.

Even if your debt is time-barred, you still technically owe the money, and failure to pay could lead to student loan default. When you default, you may face negative impacts to your credit score, and you may still end up dealing with collection agencies, plus any additional fees they may charge.

One Way You Can Get Rid of Student Loans

You can technically get rid of federal student loans in bankruptcy. However, doing so is extremely rare.

To potentially get your student loans (federal or private) discharged in bankruptcy, you would have to prove that paying your loans would cause you “undue hardship” (to borrow a phrase right from the U.S. Bankruptcy Code). Proving that paying your loans would cause undue hardship typically involves passing the Brunner test. This is a tool bankruptcy courts use that basically lays out ways in which you might claim undue hardship.

In short, it’s far from a sure thing, and the process is not especially clear-cut. But whether you’re 19 or 90 years old, your federal student loans will not just automatically expire after a period of non-payment — and failing to pay has some serious consequences.

Alternative Options to Manage Student Loan Debt

Just because federal student loans don’t expire doesn’t mean there aren’t other ways to manage your student loan debt. Here are a few other options you might explore.

Public Service Loan Forgiveness

Public Service Loan Forgiveness (PSLF) is available to professionals who work for qualifying employers in certain fields such as government, the nonprofit sector, and healthcare. This program is meant to encourage graduates to fill needed jobs in the public service sector without worrying about making enough money to pay off their student debt.

PSLF requires that you make 120 payments (the equivalent of 10 years, though they don’t need to be consecutive) while working full-time for a qualifying employer. Only payments made under certain repayment programs (such as income-driven repayment) count toward forgiveness. Still, federal loan forgiveness may be a good option for public servants with lots of debt left to pay.

Income-Driven Repayment

Income-driven repayment (IDR) plans reduce your payments to a percentage of your discretionary income. For borrowers who fall below certain income thresholds, payments could be as low as $0. There are four IDR plans available today:

•   Saving on a Valuable Education (SAVE), which replaced REPAYE

•   Pay As You Earn (PAYE)

•   Income-Based Repayment (IBR)

•   Income-Contingent Repayment (ICR)

In addition to reducing payments, these plans also extend the repayment term up to 25 years. Once the repayment period is up, any remaining debt is forgiven (but may be considered taxable income). For the SAVE plan, in particular, certain borrowers with smaller balances could have their loans forgiven after just 10 years of payments. In some sense, it might seem like the loans have “expired.” But really, the loans were repaid according to the terms of the IDR plan and the debt is considered satisfied.

Student Loan Refinancing

Another option to save money on your student loans is student loan refinancing. Loan refinancing doesn’t change the underlying amount that you owe. However, it may reduce the amount of money you spend on interest and help you secure better payment terms, which can add up to some serious cash over the life of your loan. When you refinance a federal student loan, you replace it with a private student loan.

Refinancing your federal and private loans based on your current credit score and income may allow you to score a brand new loan with a better interest rate or a shorter payoff term. To see how refinancing your loans could help you spend less money in interest, you can take a look at this student loan refinance calculator. Just know that if you’re working toward PSLF, refinancing with a private lender will disqualify your loans from this and any other federal program.

Take control of your student loans.
Ditch student loan debt for good.

The Takeaway

If you’ve been waiting around for your federal student loans to expire, you’re out of luck — federal student loans don’t expire. While private student loans may expire due to their statute of limitations, your debt won’t just disappear when this happens. Your finances will also suffer in the meantime. This is why it’s important to look into other ways to manage your student loan debt, such as student loan refinancing or income-driven repayment.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Oct
05
2023
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The Advantages and Disadvantages of Student Loan Refinancing

By | Fresh Out of School, Student Loans, student_loan | No Comments
Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.

Americans currently owe a total of over $1.63 trillion in federal student debt, with the average student borrower graduating with $29,100 in loans to pay off, according to the College Board.

If you have student debt, refinancing is one way you can change your repayment terms, which may make it easier or more affordable to pay off your student loans.

Student loan refinancing is when your existing loans are paid off by a new loan from a private lender, such as a bank, online lender, or other financial institution. The new loan may have a new term, a better interest rate, and adjusted monthly payments.

But there are pros and cons of refinancing student loans. While it may save you money, you can lose access to federal loan benefits and protections if you refinance federal student loans. Here’s what to consider to decide if this option is right for you.

The Pros of Student Loan Refinancing

Refinancing student loans has a number of potential benefits that could make it easier to repay your student loan debt. Here are some of the most common pros of refinancing student loans.

Take control of your student loans.
Ditch student loan debt for good.

Lowering Your Interest Rate

Perhaps the biggest benefit of refinancing student loans is the potential to secure a lower interest rate than the ones your loans currently have. If you’re paying a high interest rate, refinancing could be worth considering, especially in a low-rate environment

Rates vary by lender, but most offer the best rates to borrowers with strong credit and a steady source of income. If you’re earning a stable income and have a good FICO score of 670 or higher, you may qualify for a competitive student loan refinance rate.

And, when you refinance to a lower interest rate, you could end up reducing the amount of money you spend over the life of the loan. Lowering your rate can also result in a more affordable monthly payment.

Reducing Your Monthly Payment

When you refinance your existing student loans, you’re given the option to adjust your repayment term. You can often choose terms anywhere from five to 20 years, depending on the lender.

Extending the term of your loan could result in more affordable monthly payments. That said, you may pay more interest over the life of the loan if you refinance with an extended term. When choosing a new repayment term, try to strike a balance between a monthly payment you can afford and a repayment term that won’t rack up a burdensome amount in interest charges.


💡 Quick Tip: Ready to refinance your student loan? With SoFi’s no-fee loans, you could save thousands.

Getting a Single Monthly Payment

Paying your bills consistently and on time is key if you want to improve your credit or maintain good credit. Payment history is an important factor in your credit score so you don’t want to miss payments.

If you owe multiple student loans, refinancing can help you combine them into one, streamlining your bills to a single payment each month. With a single monthly student loan bill, it may be easier to stay organized, make your payments on time, and stick to your debt reduction plan.

Keep in mind that you don’t have to refinance multiple student loans. You can choose to refinance a single loan if it would yield you a better interest rate. And if you do owe several loans, you can cherry-pick which ones you would like to refinance (if any) and leave the others as they are — the choice is up to you.

What’s more, federal loan borrowers also have the option of federal loan consolidation, which involves combining federal loans into a single Direct consolidation loan. This process won’t lower your interest rate, but it will keep your loans federal and help simplify repayment. Note that private student loans are not eligible for federal loan consolidation.

Choosing Between Variable and Fixed Rate Loans

When you refinance your loans, you might have the option to choose a fixed or variable rate loan. If you prefer the security of a stable rate over a longer period of time, consider choosing a fixed rate loan.

If you plan on repaying your student loans ahead of the term, you might consider choosing a variable rate. Variable rates often start lower than fixed rates, but could increase over time.

Applying With a Cosigner — or Releasing One From Your Loan

If you’ve recently graduated and haven’t built up much credit, you may benefit from applying with a cosigner. A cosigner accepts legal responsibility for your loan in the event that you’re not able to pay it.

If your cosigner has better credit and a higher income than you do, they may look more favorable to the lender, which could ultimately help you qualify for a lower interest rate. Even if you aren’t required to borrow with a student loan cosigner, some lenders might still give you the option to have one on the loan.

On the flip side, refinancing also gives you the opportunity to release a cosigner from your existing student loan. Not all lenders allow you to remove a cosigner from your loan, and those that do often have a set of eligibility requirements in order to apply for one, such as a year or two of on-time payments, a credit check, or proof of employment.

If you can refinance a co-signed student loan in your own name, you can assume full responsibility for the loan and let your student loan cosigner off the hook. Some lenders also let students take over Parent PLUS loans from their parents through refinancing, if they can meet eligibility requirements on their own.


💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.

The Cons of Student Loan Refinancing

While refinancing your student loans might end up lowering your interest rate or making payments easier to manage, it’s not the right decision for everyone. As mentioned earlier, there are both pros and cons of refinancing student loans. Here are some of the possible disadvantages of refinancing student loans:

Losing Access to Federal Repayment Plans

When you refinance your federal student loans with a private lender, you lose access to federal repayment plans. This includes the Standard, Graduated, and Extended Repayment plans. This could be especially important if you are planning on taking advantage of any federal income-driven repayment plans, as you would no longer be eligible.

The government offers four income-driven plans: PAYE, Income-Based Repayment, Income-Contingent Repayment, and the new SAVE plan. The SAVE plan offers the most affordable structure for borrowers to date, and it’s worth exploring if you’re having trouble paying your student loan bills on your current plan.

Since refinancing federal student loans replaces them with a private loan, you’ll also lose the opportunity to qualify for programs such as the Public Service Loan Forgiveness program, which forgives the loans of graduates working in the public sector after 10 years. It’s important to review your student loans in detail and determine which federal plans you may want to take advantage of before you consider refinancing federal student loans.

No Longer Eligible for Federal Repayment Protections

If you refinance your federal student loans with a private lender, you won’t be eligible for repayment protections like student loan deferment or forbearance. Both deferment and forbearance might give you the opportunity to temporarily pause or lower your monthly payments.

When your loan is in deferment you may or may not be responsible for paying the accrued interest on the loan. However, if your loan is in forbearance you will be responsible for paying the accrued interest on the loan.

Starting in the spring of 2020, the Department of Education offered emergency forbearance at 0% interest on all federal student loans. However, that forbearance came to an end in the fall of 2023. President Biden’s federal loan forgiveness initiative was also struck down by the Supreme Court, so that offer is no longer an option for borrowers.

Losing Any Remaining Grace Periods

Most federal student loans have a grace period — usually the first six months after you graduate — where you don’t have to make any loan payments. If you refinance your loan shortly after graduation, you might lose out on that benefit if the private lender doesn’t honor existing grace periods.

Difficult to Qualify

Unlike most federal loans, you’ll need to show that you’re creditworthy to secure a student loan refinance with a private lender — or have a cosigner with good credit who is willing to take full responsibility for your loan if you’re not able to.

The better your credit history, the more likely you are to qualify for competitive interest rates. Eligibility requirements vary from lender to lender, so it’s a good idea to shop around and compare your options. SoFi, for example, evaluates factors including employment and/or income, credit score, and financial history.

Refinancing Can Cause Repayment to Take Longer

When you refinance a student loan, you can change the terms of your loan, such as the interest rate or the term of the loan. If you increase the term of your loan, it will take longer to repay it. And even though you may lower your monthly payments, you’ll likely pay more total interest over time.

Federal Student Loan Consolidation

Student loan consolidation is different from refinancing. A Direct Consolidation Loan allows you to combine multiple federal student loans into one federal loan, resulting in a single monthly payment.

When you consolidate your loans into a Direct Consolidation Loan, you won’t necessarily lower your interest rate. The new interest rate will be a weighted average of the interest rates on your previous loans, rounded up to the nearest one-eighth of 1%.

When you consolidate your federal loans through the federal government, however, you should still have access to most federal loan benefits like income-based repayment, deferment, and forbearance.

Student Loan Refinancing With SoFi

Everyone’s financial situation is different, and it’s important that you make the best decisions for your individual circumstances. When you refinance, lenders will review your current financial situation, earning potential, and credit score (among other financial factors) to determine your new interest rate.

If you decide to move forward with student loan refinancing, consider SoFi. When you refinance with SoFi, there are no origination fees or prepayment penalties. See what you could save by refinancing with the SoFi student loan refinance calculator.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

How hard is it to qualify for student loan refinancing?

Private lenders take into account a range of factors when considering eligibility for student loan refinancing, such as your credit history, debt-to-income ratio, and employment. Applying with a qualified cosigner can help you qualify or access better rates if you can’t meet a lender’s credit requirements on your own.

Do refinanced student loans have lower interest rates?

When you refinance your student loans, a private lender pays off your existing loans and issues you a new loan with new terms. One of the potential benefits of refinancing is that you may be able to secure a lower interest rate than your existing loans. The best rates typically go to borrowers with strong credit or a creditworthy cosigner.

Can you refinance student loans with a cosigner?

Applying for student loan refinance with a creditworthy cosigner may help you qualify if you don’t meet a lender’s eligibility requirements for refinancing. Having a cosigner may also help you secure a more competitive interest rate.

Can refinanced student loans still be forgiven?

No, refinanced student loans are not eligible for federal loan forgiveness programs. Once you refinance a federal student loan, you lose access to federal benefits and protections, such as forgiveness.

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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