More than ever, Americans are pursuing advanced degrees. According to the United States Census Bureau, the number of people with graduate degrees has more than doubled since 2000. And while the decision to pursue a graduate degree is fraught with questions — financial and otherwise — if you’re like most American students, you’re going to borrow student loans to pay for it.
According to the 2018 annual “The Condition of Education” report from the National Center for Education Statistics (NCES), the majority of grad students — 60% of master’s students and 75% of professional and doctoral students — took out loans to pay for their education. And just as the number of advanced degree holders has doubled, so has their debt. For example, the average medical school debt rose from $124,700 in 2000 to $246,000 in 2016, according to the report. And the debt load for doctorates more than doubled from $48,400 to $98,800.
And this is in addition to any loans students acquired to pay for their undergraduate degrees. According to 2017 statistics from the Federal Reserve, the average undergraduate debt load is $32,731. That makes it quite likely that graduate school could put you six figures or more into debt.
So if you’re heading to grad school, you may be wondering how to reduce the overwhelming student loan debt. It starts with figuring out what to do with all those undergrad loans before taking on even more.
What to Do With Your Undergrad Loans Before Grad School
Since most graduate students continue to rely on student loans to pay for their education, it makes good financial sense to mitigate the overall debt by reducing or eliminating undergraduate loans. And there are several options for paying back your undergraduate student loans.
- Pay Them Off Before Grad School. If your undergrad debt is low enough to enable you to pay it off in a few years — and you can wait a few years before starting grad school — the best course of action is to pay off your undergraduate loans before starting the next phase of your education. That way, the debt doesn’t pile up to an overwhelming level. To pay off your student loans faster, take on a side hustle or even a second job. You can put all the income from that second stream toward tackling your debt.
- Defer Them While in School. If paying them off first isn’t feasible, you can defer them while you’re in school. All federal loan borrowers qualify for academic deferment on their loans as long as they’re enrolled at least half-time at an accredited degree-granting institution. Additionally, those participating in graduate fellowships qualify for a deferment. And those completing medical or dental residencies qualify for a mandatory forbearance (suspension of payments), meaning your loan servicer has to grant it. Just be aware that interest will continue to accrue on all your unsubsidized federal loans.
- Look Into Careers That Offer Repayment Assistance. Many jobs offer student loan repayment assistance as a benefit. Whether the assistance comes from a public organization or a private employer, these programs are typically designed to attract highly qualified job candidates to high-need positions. These include teachers working in shortage areas, health care workers participating in medical research projects, and lawyers willing to work as public defenders. See our article on jobs that qualify for repayment assistance for a list of additional career-specific programs.
- Consolidate Your Undergraduate Loans. Student loan consolidation essentially combines all your student loans into one. Technically, the U.S. Department of Education (ED) issues you a new loan in the total amount of all your original loans, which they then put toward the loan’s payment. Thus, you’re left with one loan to pay instead of several. Later, if you want to add in your grad loans, you can reconsolidate — greatly simplifying repayment. Note that you can only consolidate federal loans.
- Refinance Your Undergraduate Loans. Refinancing is like consolidation in that you can opt to combine all your original loans into one new one. However, refinancing goes through a private lender, so you lose access to government repayment options. The benefit is that you could get a lower interest rate — which can save you significant money over the life of your loan.
If you don’t have access to options that offer repayment assistance, refinancing probably sounds like the best option since it means you may pay less overall. But there are risks associated with transferring your debt to a private lender, so it pays to do your homework to find out if it’s the best option for you.
Pro tip: If you’re thinking about refinancing your student loans, start with Credible. They give you the ability to compare multiple lenders at one time. Plus, when they refinance through Credible, Money Crashers readers receive up to a $750 bonus.
The Pros & Cons of Refinancing Your Undergrad Student Loans
In general, government student loans offer advantages over private student loans. These include lower interest rates, more generous deferment and forbearance terms, and extensive options for repaying your student loans, including income-driven repayment. However, refinancing offers one clear advantage — lower interest rates. And this could mean you end up paying back less overall. So the decision on whether to pursue refinancing requires careful weighing of all pros and cons.
If you can qualify for a refinance loan, the perks available from private lenders can help you better manage your debt.
- You’ll Repay Less Over the Life of Your Loan. The No. 1 reason to refinance your undergraduate student loans is to get a better interest rate. Private lenders compete for your business by offering the lowest rates — and that means you’ll likely beat the fixed interest rate offered on your federal loans. And unlike regular private school loans — which can carry interest rates as high as double those of federal loans — many refinance loans offer rates that are half or less of those on federal student loans. That’s especially true if you later opt to refinance graduate school loans, as federal interest rates are significantly higher on graduate school loans than undergraduate loans. And a lower interest rate means you pay back less overall because less interest will accrue on your loan over the repayment term.
- You’ll Repay Your Loans Faster. A lower interest rate doesn’t just mean saving money. It also means you can potentially pay off your student loans quicker. For example, if you keep making the same size payment as you were on your loans when you had a higher interest rate, more goes toward knocking out the principal balance. And that results in a shorter repayment duration. That’s an especially good strategy if you plan to work for a few years to put everything you can toward your undergrad loans before starting grad school.
- Some Careers Qualify for Special Perks. While these apply exclusively to grad school debt and not undergrad, it’s worth mentioning that some private lenders offer exclusive perks for certain types of students. For example, recognizing both the high-income potential of a medical career and the need for some relief during low-paying residencies, lenders like Splash Financial allow residents to make lower payments during one’s residency. Additionally, they offer interest rates that are drastically lower than those on federal loans. Similarly, Laurel Road offers special refinance loans to dental students who undertake residencies, even if they need to take out further loans. And members of the American Dental Association get a special interest rate reduction on Laurel Road’s refinance loans.
While the lower interest rates of private refinance loans can help students pay off their debt more quickly, private student loans — including refinance loans — aren’t without significant drawbacks.
- It Requires Excellent Credit. Anyone with a credit score under 700 need not apply, as that’s the minimum score required by most of the top student loan refinance lenders. That could leave out borrowers just graduating with their undergrad degrees who haven’t yet had time to build up a credit history. Additionally, undergrad student loans can further affect one’s credit score by influencing their debt-to-income ratio. And the best rates — the whole reason for refinancing — are reserved for only the most creditworthy borrowers, which means you could need a co-signer to qualify.
- Interest Will Accrue on Them While You’re in Grad School. While you’re in grad school, interest accrues on all federal unsubsidized loans as well. However, if you have any subsidized federal loans or Perkins loans, the ED covers the interest on them during periods of academic deferment. So if you refinance those loans into a private loan, you’ll lose that benefit. And even a very low interest rate can’t compete with no interest rate.
- You May Have to Make Payments During Grad School. While some refinance lenders offer in-school (“academic”) deferment, many don’t. And even of those that do, some lenders have allowable deferment terms that are far shorter than what’s needed to complete a typical grad program. For example, while a master’s degree requires two years of coursework, lenders like SoFi, Earnest, and Citizens Bank only allow one year of academic deferment. That means if you refinance your undergraduate loans before graduate school, you could be stuck paying them on top of paying your grad school tuition — with no other option. Government deferment programs are much more generous.
- You Have Fewer Options if You Face Sudden Economic Hardship. Unfortunately, the future is highly unpredictable. And even if you’re expecting a well-paying future career, you could become unemployed through no fault of your own. But if you refinance your federal student loans with a private lender, you’ll no longer have federal loans. And that means you’ll lose access to their extensive allowances for economic hardship deferment and forbearance. While some lenders have provisions for economic hardship, they’re often for very short periods. And they’re typically lumped together with all reasons for deferment. That means if your lender allows a total deferment of 12 months, and you use it up for academic deferment while in school, you won’t have any remaining if you fall on hard times. However, the ED doesn’t lump all reasons for deferment together. And their forbearance allowances are virtually unlimited.
- You Have Fewer Options if You Make Less Money Than Expected. In a perfect world, your graduate degree will drastically increase your income. But grad school might not land you that well-paying career you dreamed of. And if you refinance your undergrad loans with a private lender, you’ll lose access to the ED’s extensive repayment options. That includes all the income-driven repayment plans — which cap your payments at a certain percentage of your income. That means if you are underemployed (or even unemployed), your monthly payment could be as low as $0. And you’ll still qualify for forgiveness of any remaining loan balance after the required number of payments, even if those payments are zero. That option isn’t available with private student loans or refinance loans.
- You Lose Access to Student Loan Forgiveness. The ED’s forgiveness programs allow any remaining balance — after making the required number of income-driven payments — to be discharged. However, you must be enrolled in an income-driven repayment program to qualify. Granted, most students never have a high enough debt relative to their income to have any balance remaining after the required 20 years of payments. And that means forgiveness may not be worth it. But of those who’ve borrowed more than $100,000 of student loans, the majority are graduate students, according to the Pew Research Center. And these high-amount borrowers are exactly the ones who could benefit from forgiveness. But there’s no such thing as loan forgiveness from a private lender.
- You Lose Access to Public Service Loan Forgiveness. Your federal student loan balance could be gone in as few as 10 years while making payments based on income — including payments as low as $0 — if you qualify for public service loan forgiveness (PSLF). If you decide to work in a nonprofit or public sector job — like teaching, public health, social work, or public defense — you could have any outstanding balance remaining on your loans forgiven after 10 years of qualifying work.
- You Lose Access to Perkins Loan Cancellation. Although the federal Perkins loan program expired in 2017, if you have a Perkins loan, working in a qualifying career — like teaching, nursing, or law enforcement — can result in loan forgiveness after a certain number of years. See the ED’s Student Aid information site for more details.
- You May Limit Your Career Options. Because you won’t have access to the vast array of federal repayment and forgiveness options, your career choices may be limited. While some students enroll in grad school to further their passions, those passions might not be well-paying — such as teaching. But if you lose access to options like PSLF, you might have to give up your teaching aspirations to pursue something with a higher income just to deal with the debt.
The Verdict: Should You Refinance Your Undergraduate Loans?
Although there’s a long list of cons when it comes to refinancing your student loans, that doesn’t mean it’s necessarily wrong for you.
Refinance Your Undergrad Loans Before Grad School If…
- You Can Manage the Payments. If you’re planning to continue working while in grad school, it’s always best to keep paying on your loans. If you opt to defer them, your debt will build up, especially since interest continues to accrue on all but subsidized federal loans. And with the lower interest rate of a refinance loan, you’ll be able to knock them out all the faster. Just keep in mind there’s always the possibility you could lose your job or decide managing work and school is too overwhelming. And if you refinance, you’ll be stuck making payments without extensive options for deferment.
- Saving Money Is More Important Than Suspending Payments. You will save money if you refinance your student loans as long as you don’t opt for an extra-long repayment period — like 20 or 30 years. If you stick with a standard 10-year time frame, the lower interest rate will result in less money paid back over the life of the loan. And saving money is the whole point and purpose of refinancing. But if you need to suspend payments during school, keep in mind you can always opt to refinance after grad school.
- You Want to Pay Off Your Loans as Fast as Possible. A lower interest rate and no break in payments mean you’ll get those undergrad loans paid off as fast as possible. In fact, refinancing is an ideal option if you’re attempting to pay off your undergrad loans entirely before even starting grad school. If you refinance at a lower interest rate and make as large a monthly payment as possible, you could have them paid off in far fewer than the standard 10 years.
Don’t Refinance Your Undergrad Loans Before Grad School If…
- You Won’t Be Able to Make Any Payments While in School. Even among lenders that allow some time for academic deferment, none allow more than 24 months — and you need that if you’re going for a law degree, medical degree, or Ph.D. So don’t refinance your undergrad loans unless you know you can make the payments while you’re in school — because chances are you’ll need to defer. That’s especially true if you’ll be working a low-paying job, working only part-time, or need to rely on a spouse or family member for your living expenses while you’re in grad school.
- You Want to Preserve Access to Government Repayment Programs. Although the interest rates on federal loans are higher than private refinance loans, preserving a “safety net” may be worth it to you. Unfortunately, no one knows what can happen in the future. And a private lender will force you to pay up, even if you become unemployed. Plus, if you can’t pay, you become subject to debt collection, and the lender may even sue you for the total amount due.
- You Want to Pursue Public Service Loan Forgiveness. If you plan to work in a career field that qualifies for PSLF, a refinance is more likely to cost money than save it. That’s because PSLF allows the ED to forgive any remaining balance on your loans after you’ve made 10 years of qualifying payments. And those monthly payments could be extremely low, depending on your income. On the other hand, if you refinance, your payments aren’t and can’t be tied to your income — they’re tied to your interest rate and the length of your repayment term. And no private lender forgives loans.
- You Have a Perkins Loan. Perkins loans give those with significant financial need access to higher education. As such, they have a low, fixed interest rate of 5%. While most private lenders advertise rates even lower, the lowest rates are always variable. That means they’ll fluctuate with market conditions and could go up. But the fixed rate on a Perkins loan stays the same. Additionally, Perkins loans have multiple options to qualify borrowers for cancellation or discharge. Keep in mind, though, you can always refinance all your other loans and leave any Perkins loans out of the refinance.
If you do opt to refinance, be sure to apply with several lenders and compare offers. Look at interest rates, terms and conditions, and total loan costs. Using a site like Credible makes it easy. Credible allows you to submit a single application to get offers from a variety of lenders.
Grad school can be an exciting opportunity to further your knowledge and expertise. It can also provide a path to a more lucrative career. For example, according to the Financial Times, in 2017, over two-thirds of MBA graduates doubled their salaries within three years of completing their degrees. And BLS data shows that in 2019, Americans with professional degrees earned 49% more than those with only a bachelor’s.
But all that potential comes with a high price tag. So it’s smart to think about how to manage the debt on top of the undergrad loans you already owe.
Whether or not you decide refinancing your undergrad loans will make managing it easier, think carefully before refinancing federal student loans. You never know whether you’ll need to access the ED’s repayment or forgiveness programs or their more generous economic hardship and academic deferment terms.
However, if you borrowed any private loans to supplement your undergraduate financial aid — and you’re able to get a better interest rate by refinancing — there’s little reason not to. Just make sure you read and understand all the terms and conditions before signing.
Dealing with student loans can be burdensome, and the prospect of adding even more debt to the pile can feel overwhelming. But understanding all your options and thinking carefully about whether graduate school is ultimately worth it can help you manage them. It all comes down to deciding what makes the most financial sense for you.
Are you headed to grad school? How do you plan to deal with your undergraduate loans?