Should You Refinance Your Student Loan?

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If you're struggling to pay back your student loan debt, you're far from alone. Earlier this year, Edvisors reported that members of the class of 2015 graduated from college owing an average of more than $35,000 in student loans. That's the highest this average has been.

You can refinance your existing student loans to ones with lower interest rates. This can help you manage this debt. If your interest rate is lower, your monthly payment will be lower, too. You'll also pay less over the life of your loans, thanks to the lower interest rates.

But there may be costs, too. If you're refinancing federal student loans into private loans — those originated by private banks and financial institutions — you'll lose the protections and programs that government-sponsored student loans provide. And that can end up hurting you in the long run, even if you lower the interest rates and monthly payments on these loans. Federal loans offer loan forgiveness, deferment, and income-based repayment protections. Most private student loans don't come with these protections.

Loan Forgiveness

If you are employed full-time in an eligible public service or non-profit job and you've made at least 120 on-time payments on your federal student loan, the government will forgive the remainder of your student-loan debt.

The Consumer Financial Protection Bureau says that one-fourth of U.S. workers can qualify either for loan forgiveness programs or income-based repayment plans. Consider whether you'd be eligible for loan forgiveness before refinancing with a private lender. (See also: 8 Ways to Get Student Loan Debt Forgiveness)

Deferment

Federal student loans also come with deferment options, which give you more time before you have to start paying them back.

You normally have six months after graduation before you have to start paying on your student-loan debt. But under federal programs, you can apply for additional deferments if you are unemployed, facing economic hardships, or are serving in the U.S. Armed Forces.

Some private loans do offer ways to pause payments as well, but be sure you understand all the terms before making the switch. (See also: 3 Private Lenders That Can Really Save Money On Your Student Loans)

Income-Based Repayment

The income-based repayment plan that the government offers for federal student loans can provide immediate relief if you are employed but not earning a high salary. If you are a new borrower on or after July 1 of 2014 who has no balance on a previous federal student loan, your loan payments will be capped at a maximum of 10 percent of what the government calls your discretionary income, the difference between your income and 150 percent of the poverty guideline for your family size and the state in which you live.

Those borrowers with especially low incomes might not have to make any student-loan payments at all.

If you make these lower payments for 25 years, and you still haven't paid off your student-loan debt, the government will forgive the remainder of what you owe.

For more information about these and other assistance programs – they are too complex to completely sum up in this story – visit the Department of Education. (See also: Which Student Loan Repayment Plan Saves You the Most?)

Refinancing

If you are interested in refinancing your federal student loans, you will have to follow certain steps.

As with any loan application, you'll need to prove that you can afford your new monthly payments, even though they'll be lower than your current ones. Usually that means providing lenders with proof of income as well as bank statements.

You'll also need a good credit score if you want to qualify for interest rates that are low enough to make refinancing worthwhile. Your credit score will be low if you've missed or been late on payments or if you have run up loads of credit-card debt. You'll struggle to qualify for a refinance if your credit score is under 640 on the FICO scale.