How to Partially Refinance Student Loans and Who Should Consider It
If she could start over, Vy Chuong said she would.
Chuong, 26, of Seattle, refinanced about $ 55,000 in federal student loans with a private lender in February. A month later, the government suspended most federal interest-free loan payments until September. This hiatus has since been extended until January 2021.
Chuong’s new loan is not eligible.
“Honestly, I have regrets,” she said. “I should have waited.”
Chuong knows she can’t change things. But she would like to know that it was possible to refinance only some of her loans. She says she would have refinanced half of her balance – that way she could have saved money and kept some federal protections.
Here’s how and when this strategy might make sense.
How to partially refinance student loans
When you refinance, a lender pays off your existing student loans and replaces them with a new loan.
If you have more than one loan, partial refinancing is simple: just choose which ones to refinance. These can be the ones with the largest balances or the highest interest rates, depending on your repayment goals.
If you only have one loan, you’ll want to ask the lender not to pay off all of the debt. This is called a “underpayment”. Such requests are common, says Donovan Herman, director of operations at Purefy, which refinances student loans for the Pentagon Federal Credit Union.
“This happens most often without us ever having spoken with (the borrowers),” says Herman.
He adds that PenFed is reaching out to confirm these requests. But contacting a lender before applying can prevent this back and forth and ensure that the lender offers this option; not all of them do.
When to consider partial refinancing
Do not refinance federal student loans while payments are suspended without interest.
Once this ends, refinance some of your federal loans This might make sense if you want to partially hang on to programs like Income Based Reimbursement, in case you ever need it.
This strategy can also help clarify who is responsible for a loan. For example, suppose you are helping pay off a parent’s loan that was borrowed on your behalf. Taking over that debt might make repayment easier, but you might not want it if you’re only responsible for part of it, Herman says.
In this case, you could refinance only the amount that you are supposed to repay.
Another potential use could be if you are going to divorce and a decree, a prenuptial or postnuptial contract obliges you to pay part of the debt.
A divorce court can’t make you pay off someone else’s federal loans, says Joshua RI Cohen, a lawyer in West Dover, Vermont, who operates TheStudentLoanLawyer.com. He adds that it is unlikely that a judge will make you repay a private loan only on behalf of your spouse.
But if you’ve co-signed a private loan together, you might want to split the debt.
“It’s like a mortgage or a car, and they split it up because of the divorce court,” Cohen says.
Cutting out the part you owe would not remove you as a co-signer on the original loan. To do this, you would need two separate refinances, provided each spouse could qualify.
What about debt cancellation?
Once the current forbearance ends, the primary consideration regarding refinancing federal loans may be the possibility of general cancellation of student debt.
If you want to wait for cancellation, but don’t think it will write off your entire balance, refinancing some of your debt could maximize your savings.
For example, suppose you owe $ 100,000 in federal loans at 7% interest, and assume that President-elect Joe Biden will write off $ 10,000 for each borrower. If you refinanced $ 90,000 of your debt at 4%, you would save a total of $ 16,053 in interest charges, assuming a 10-year repayment plan.
Combined with the amount forgiven, that would reduce your debt by $ 26,053.
Chuong saved on interest charges by refinancing at a lower rate. But her private loans will not be eligible for federal loan cancellation, which she says “would be life changing” for any borrower.
“It’s a shame that I am not the beneficiary,” said Chuong.
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Ryan Lane writes for NerdWallet. Email: [email protected]