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Dana Miranda
- My student loan debt has grown over time, but it doesn't affect my credit score, so I'm not worried.
- Refinancing might make sense for certain types of debt, but not for federal student loans.
- The benefits of federal student loans are extraordinarily valuable and not worth giving up.
When I left the University of Wisconsin in 2011, I'd borrowed around $30,000 in student loans. I don't know the exact balance, because I didn't think about or look at the debt for at least four years. When a woman from the university's financial aid office finally got me on the phone in late 2014, she let me know my loans were (obviously) in default. She also explained how to get out.
I transferred the balances of multiple federal loans into a Direct Consolidation Loan and applied for income-driven repayment. With my low income at the time, my monthly minimum payment was $0, so these steps got my debt in good standing without adding a financial burden.
By the time I was earning enough to warrant a monthly payment — which fell between $100 and $300 over the years — the debt had grown to $62,000 with interest.
That outstanding debt balance seems huge. It's more than twice the average student loan debt of recent college graduates. But it doesn't figure heavily into my credit score, so holding it doesn't impact my financial situation the way holding the same amount in, say, a personal loan or credit card debt might.
So I've never felt an urgency to eliminate my student loan debt. I like keeping it in good standing by making my required payments and dutifully recertifying my income for the payment plan each year. But I don't pay any more than the minimum, and I haven't made a payment since the student loan pause started in 2020. My priority is keeping the impact of my student loans on my day-to-day experience as low as possible.
That's why refinancing my student loans is out of the question.
Why I'll never refinance my student loan debt
Debt-payoff plans like to tout student loan refinancing, but the route doesn't offer great benefits for most borrowers.
Around 92% of outstanding student loan debt is from federal student loans, while private loans make up just under 8%, according to data firm MeasureOne. If you're among the vast majority with federal student loan debt, refinancing comes with some serious drawbacks.
Refinancing is often promoted as a way to lessen the burden of your debt and pay it off faster by changing terms like your interest rate and how long you have to repay. It's a useful tool for credit cards, personal loans, mortgages, and even private student loans.
But federal student loans are different from every other kind of debt.
Federal student loans come with borrower protections you can't find in any kind of private debt. Private student loans have a few similar features, but nothing as robust as what the Department of Education offers. The most important benefits for me are income-driven repayment and cancellation.
You can roll any federal student loan into a Direct Consolidation Loan and apply for an income-driven repayment plan, like I did. This means you'll owe only one monthly payment, and the amount will be limited to a small percentage of your income after monthly expenses. After 20 or 25 years of on-time payments (including when those payments are deferred or set at $0), the remaining loan balance is canceled.
You cannot do any of this with a private student loan. And when you refinance federal student loans, you're replacing them with a private loan.
Refinancing offers ways to optimize debt elimination: lower interest, lower monthly payments, and a shorter repayment term.
But refinancing into a private loan eliminates the protections federal loans offer against a debt burden your financial situation can't bear. It also eliminates your eligibility for Public Service Loan Forgiveness and any other programs that cancel federal student debt.
Why people think refinancing is the answer
The perceived drawback to income-driven repayment is that your student loan balance will continue to grow with interest the longer you take to repay. That's why my $30,000 in student loans sit at $62,000 11 years later. Financial experts tout refinancing and quick debt-payoff strategies to help you eliminate that balance as quickly as possible.
But … why?
My credit score is in the high 700s and climbing. I was just approved for my first mortgage at a lower-than-average interest rate. I'm eligible for any credit card or personal loan I shop for. I've owed $0 per month toward my student loans for almost three years and running.
What is the drive to eliminate that debt — other than a culture that wants me to feel ashamed about it?
Refinancing my student loans or employing any number of debt-payoff strategies would slam me with a monthly payment of hundreds of dollars that I couldn't get out of for probably a decade (in most cases, not even through bankruptcy).
Keeping my student loans with the Department of Ed. and letting the balance balloon with interest? So far, in the midst of what everyone calls a debt crisis, that's let me live the life I want.