Should you refinance federal student loans?

Refinancing is one option for students seeking relief from their existing student loan payments, which can result in lower monthly payments and better interest rates.

However, refinancing is not the best choice for everyone. It can result in losing federal loan protections and access to other repayment plans and forgiveness programs. It’s worth considering all options before moving forward with refinancing student loans.

What happens when you refinance federal student loans?

When you refinance your federal student loans, you take out a new loan with a private lender to pay off all or some of your existing student loan debt. Refinancing your federal student loans can be a great way to reduce your monthly expenses, but there are trade-offs.

For example, refinancing a federal student loan can result in losing its benefits, such as income-driven repayment plans and loan forgiveness programs.

Before refinancing any student debt, be sure to understand the process and the fine print you’ll want to keep an eye out for.

Pros and cons of refinancing your federal student loans

It’s possible to refinance federal student loans, but doing so means switching from a federal student loan to a private student loan. With federal student loans, you should never refinance without first understanding the benefits you’ll give up by doing so.

Pros of refinancing

• Lower interest rate. If you took out your federal student loans when interest rates were high, refinancing to a private student loan could save you thousands of dollars. This is especially true if you have good credit and qualify for the lowest advertised rates.
• Different repayment timeline. Federal student loans are automatically placed on a 10-year repayment timeline. When refinancing, you can choose a shorter timeline to save on interest or a longer one to lower your monthly payments.
• Combine multiple loans. If you have loans from multiple lenders, refinancing can help you bundle up all of your accounts into one. This can make it easier to pay your debt.

Cons of refinancing

• No access to income-driven repayment. Income-driven repayment plans adjust your monthly payments to 10 to 20 percent of your discretionary income — a benefit private lenders lack.
• No loan forgiveness programs. Some federal borrowers qualify for Public Service Loan Forgiveness, which forgives your remaining loan balance after 10 years of qualifying payments. You’ll lose this benefit if you refinance, even if you’re close to meeting the requirement. You also won’t be able to receive broad loan forgiveness offered by the Biden administration.
• Few defined deferment or forbearance programs. The federal government has established deferment and forbearance options for borrowers. While private lenders may offer hardship programs, they’re usually determined on a case-by-case basis.
• Forfeit pandemic relief benefits. Some private lenders established coronavirus hardship options early in the pandemic, but those relief programs have mostly expired.

When to refinance federal student loans

Although, in most cases, it doesn’t make sense to refinance federal student loans, there are times when it’s worth considering. Kristen Ahlenius, accredited financial counselor and director of education at Your Money Line, says to ask yourself the following before refinancing federal loans:

• Your household income is very stable. “Suppose you experience a reduction or loss of income or even decide to return to school. In that case, there is greater guaranteed flexibility in the federal space than with a private lender,” Ahlenius says. “Of course, a private lender might offer some options, but these options aren’t standardized.”
• You know loan forgiveness programs aren’t an option. Loan forgiveness is available for some borrowers who work for a nonprofit or government organization. “Be advised that forgiveness is only available for qualifying loans which never includes private student loans,” Ahlenius says. “Before refinancing, be sure you can’t or won’t qualify for other forgiveness opportunities.”

How to refinance your student loans

If you decide to refinance your federal student loans, you should find the best interest rate, lender and loan term to fit your financial situation. Here’s how to get started:

1. Research lenders. Some lenders cater to specific borrowers, such as borrowers with low credit scores or borrowers refinancing medical school debt. Look for the lenders that fit best with your situation and compare interest rates, terms and fees. If you don’t know where to start, you can always use the help of a lending marketplace, such as LendKey, which allows you to compare offers from multiple lenders.
2. Get prequalified. Once you’ve narrowed your search to two or three options, get prequalified with each to determine which will give you the best rate. Prequalification does a soft pull of your credit score to determine what interest rate you qualify for and is the best way to compare your options.
3. Send in an application. After you’ve been prequalified with a lender, you can submit a full application. During this process, you’ll usually have to provide some form of ID, financial information and employment verification.
4. Begin payments. Once the application is approved, your new lender will pay off your old loans directly. You’ll have to start making payments to your new lender immediately. Take time to learn how payments work, when they will be due and any other important details you’ll need to manage your loans with the new lender.

Student loan refinancing vs. consolidation

Although people use the terms “refinancing” and “consolidation” interchangeably, they are different.

Refinancing is only done through private lenders, and it could change your loan details — your interest rate, repayment term and even lender. Because of this, you can often get a lower rate or a lower monthly payment.

Student loan consolidation is offered through the federal government. With this program, you can combine multiple federal student loans into one Direct Consolidation Loan and potentially change your repayment timeline. Consolidating loans may provide access to more repayment and loan forgiveness options. However, it won’t necessarily save you money because your interest rate will be the weighted average of all the loans you’re consolidating. If you choose a longer repayment term after consolidating, you may pay more in total interest over the life of the loan.

Other ways to pay off federal student loans

Refinancing to a new, lower-rate loan is a popular way for borrowers to pay off their student debt faster, but it isn’t the only way. Other options include:

• Student loan forgiveness: Depending on your situation, you might qualify for full or partial forgiveness of your federal student loan debt. You have to meet certain criteria to qualify for loan forgiveness, but you could save thousands of dollars on your loans.
• Extra payments: If you want to pay off your student loans quickly, pay more monthly. Start tracking your expenses and put any windfalls toward your debt. Paying off your loans faster will also help you pay less interest.
• Autopay discounts: All federal student loan servicers will give you a 0.25 percent discount each month when you sign up for automatic payments. If you apply the savings toward extra payments, that small discount can add up over time and help you eliminate your student debt a little faster.
• Employer student loan assistance: Some companies offer student loan assistance as an employee benefit. If you’re job hunting, look for positions that offer this benefit or see if you can negotiate student loan assistance as part of your new benefits package.
• State repayment assistance: Some places, like Maine, will pay a portion of your student loans if you move there. While you’ll have to meet specific eligibility requirements, you could knock out a significant portion of your debt.

The bottom line

Refinancing student loans is just one option for those with private loans that require repayment. Consider all options, including the types of loans you have and what your repayment paths are. Make sure that you can secure a better interest rate and lower your monthly payment before moving forward with a refinancing plan.