Student Loan Refinancing vs. Income-Driven Repayment Plans

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Updated on Thursday, January 3, 2019


If you’re looking to wrangle your student loan debt, you’ll want to consider all the alternatives available to you. Two helpful options are student loan refinancing and income-driven repayment (IDR) plans, each of which could lower your monthly payment.

Let’s review the similarities — and the significant differences — between these two choices as you search for the best path for your repayment.

Refinancing vs. income-driven repayment plans

One of the main calling cards of student loan refinancing is that it could lower your monthly payments. Income-driven repayment plans for federal loans also afford you this breathing room.

But that’s where the two begin to diverge.

One key distinction is that refinancing is completed with a private lender, allowing you to consolidate both federal and private loans.

Using your credit score as a barometer, lenders quote you fixed, variable or hybrid interest rates on a consolidated loan that you would use to pay off all your original debt. Typically, you can choose to repay this new, refinanced loan over a variety of different term options, usually ranging between five and 20 years.

IDR plans, meanwhile, are solely available through the Department of Education (DoED), so only federal loans are eligible for this option.

By choosing one of four IDR plans, you could repay your loans over 20 to 25 years, rather than the 10 years afforded by your original standard repayment plan. You can calculate your potential payment amounts under each plan using the DoED’s Repayment Estimator.

To choose the best strategy, first, consider your goals. You might be motivated to do more than lower your monthly payment, for example. You could also be hoping to

  • … lower your overall interest rate
  • … retain your federal repayment protections
  • … repay your debt as soon as possible
  • … lower your monthly payments

Think about what could help your situation most. Then you can see how that matches up with what refinancing and IDR plans make possible.

3 reasons to refinance your student loan debt

As you consider refinancing college debt, note that lenders will need to decide whether you’re creditworthy before you can take advantage of this option. Unlike applying to switch to an IDR plan, obtaining refinancing will depend on factors, such as your credit history. With strong credit, you increase your odds of a successful application and qualifying for a low interest rate.

1. Lower your monthly payment — and your interest rate

By switching from a standard 10-year repayment plan to, say, a 15- or 20-year term with a refinancing lender, you could reduce what you owe each month. Like with IDR plans, however, this also increases the total cost of your debt because you’ll end up paying more interest.

The real advantage of refinancing is that you could secure a lower interest rate, cutting down on the interest you’d repay over time. Lenders typically offer lower variable rates that could arise during your repayment, as well as fixed rates that remain unchanged for the entire term of the loan.

On the other hand, if quickly ridding yourself of debt is the goal, you might opt to make more substantial payments over a shorter time frame, maybe a term of five or seven years. That could add up to serious savings, as you can see from our Student Loan Refinance Calculator.

2. Consolidate your federal and private loans

You might not just be sick of the size of your monthly payments. You could also be frustrated by having to juggle a bunch of different payments to various lenders or servicers.

Through refinancing, your new lender would pay off all your old loans. Going forward, you’d send just one monthly payment to one place.

You might be attracted to this simplicity, even if it doesn’t result in additional savings.

3. Start fresh with the lender of your choice

When you borrowed federal loans in the first place, you didn’t get to choose your loan servicer. And if you took out private student loans, you might have come to regret the lender you chose back when you were a teen or 20-something.

By refinancing, you could press the restart button, choosing which lender you’d like to manage your newly consolidated debt. Banks, credit unions and online lenders are all competing for your business.

When selecting a lender to refinance your education debt, ensure they meet all the criteria you’re looking for, whether that’s a low rate, speedy customer service or even the option to pause repayment fd if you suffer financial hardship.

3 reasons to opt for an income-driven repayment plan

IDRs are another good option if you have federal loans, although switching to an income-driven repayment plan won’t directly consolidate (or group) your loans into one new, simpler loan.

Still, you could always take out a direct consolidation loan with the DoED first, combining your loans together, then opt for an IDR afterward. In fact, consolidation loans could make you eligible for any of the IDR plans on offer, if you’re not eligible already.

With that in mind, here are three reasons to choose IDR.

1. Lower your monthly payment to a percentage of your income

If you’re currently paying more than 10% of your income on your federal student loans, you could loosen their stranglehold on your finances via IDR plans. Three of the four IDR options cap your monthly payments at one-tenth of your discretionary income.

If you’re unemployed or earning an especially small income, your payments under IDR could be as low as $0. Keep in mind, however, that interest would continue to accrue, making your total repayment more expensive.

Not all plans are created equally, however. Compare them side by side using the Repayment Estimator mentioned above to see which is best for you. If you’re married, for example, you might pay more per month on the Revised Pay as You Earn plan as it takes your spouse’s income into account, even if you file taxes separately.

Your monthly payment could also increase from year to year. With any IDR plan, you would need to recertify your wages and family size annually, and then your loan servicer adjusts your monthly payment accordingly.

2. Switch plans easily (without needing a strong credit history)

Applying for an IDR plan usually takes 10 minutes or less. You submit an Income-Driven Repayment Plan Request for each of your loans at Then you provide your federal income tax return information or alternative documentation, such as a pay stub.

It might be a relief to know that, unlike with refinancing, your credit history won’t factor into this process whatsoever. Also, if switching to an IDR plan helps you keep pace with your repayment, then it could help you build a better, stronger credit history. That may come in handy if you decide that refinancing is right for you down the road.

3. Keep your government-exclusive repayment protections

By merely switching repayment plans within the federal aid system, you wouldn’t lose the perks that only the government offers. These benefits center around repayment protections in case you struggle to make payments even after switching to an IDR plan. The protections include:

  • Repayment plans: You’re not locked into a plan forever and could always switch to suit your needs best.
  • Deferment and forbearance: You could press the pause button on your payments for any number of reasons, including a job loss or other economic hardship.
  • Subsidies: The interest on direct subsidized loans could be subsidized (or covered) by the DoED if you pause your repayment through deferment.
  • Loan forgiveness: With IDR plans, whatever you owe after 20 to 25 years of prompt payments is forgiven. You also might be eligible for other debt-canceling programs, such as Public Service Loan Forgiveness.

Refinancing vs. income-driven repayment plans: Which is right for you?

Now that you know the basics of your refinancing and IDR options, it’s time to return to your repayment goals. Below is a series of objectives along with which alternative — refinancing or IDR — might be best to consider first.

Of course, the suggestions above aren’t one size fits all — your own situation might call for you to go the other way, or even pass on both options.

But if either seems like a good fit, your next step will depend on what you’ve chosen. If you’ve decided that refinancing is the way to go, see if you have the  credit score to qualify. If IDR plans address your goals, on the other hand, learn more about starting your application.

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