Should You Refinance Your Federal Student Loans?

Refinancing federal student loans requires careful consideration as doing so comes with risks. It’s important to understand the pros and cons, how refinancing works, and when it’s a good idea. The government doesn’t offer refinancing options, only a debt consolidation program. Before refinancing, decide if you’re willing to give up your federal loan protections.

By Christopher Boston

Edited by Amy Wilder

Updated: October 18, 2024

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A college degree can be expensive. For many, taking out student loans is one of the best ways to afford higher education. A federal student loan is a great finance option as it covers expenses like tuition, room and board, books, supplies, transportation costs and electronic devices. Additionally, federal loans offer flexible payment terms.

However, many find it difficult to manage student loan payments. Some borrowers may consider student loan refinancing. This is when you take out a new loan to pay off your existing student loans. Refinancing can help consolidate multiple loans or allow you to find lower interest rates.

Before you decide on refinancing federal student loans, make sure you weigh the pros and cons. Doing so comes with risks, as refinancing is only available through private lenders. You lose protections exclusive to federal borrowers when you refinance.

Learn what federal student loan refinancing is, how it works and when it’s a good idea, to determine if it’s the right option for you.

Key Takeaways

It’s possible to refinance your federal student loans. You can find the best refinancing options by comparing lenders and loan offers. Research and compare loan requirements before submitting your application.

There are potential benefits to refinancing federal student loans, such as getting lower interest rates.

Refinancing federal student loans comes with drawbacks. For instance, it leads to disqualification for federal loan forgiveness programs.

WHAT WE’RE GEEKING OUT ON:

Pros & Cons of Federal Student Loan Refinancing
When to Refinance Your Federal Student Loans
How to Refinance Federal Student Loans
Frequently Asked Questions About Federal Student Loan Refinancing

Pros & Cons of Federal Student Loan Refinancing

The total student loan debt in the country is $1.745 trillion. Around 92.7% of this, or $1.617 trillion, accounts for outstanding federal loan balances. Many may look to refinancing to lighten the burden. However, doing so comes with risks and potential consequences. If you refinance your federal loans, you’ll lose your federal loan benefits. Additionally, the process isn’t reversible.

The pros of refinancing federal student loans should outweigh the cons. This will help you be sure that you’re making the right decision and help you minimize risks.

Benefits of Federal Student Loan Refinancing

Combine Multiple Loans

If you have existing loans from multiple lenders, you can use refinancing to consolidate your debt. By taking out a new loan to pay off your student loans, you end up with a single monthly payment, which makes payments easier to manage. It can also prevent missed payments and related penalties.

Lower Interest Rate

If you have a good credit score, you’ll have better chances of scoring a lower interest rate. This can be advantageous if you got high-interest rates when you first took out your federal loans. More competitive rates can help you save money in the long run.

Faster Debt Repayment

Refinancing federal student loans allows you to extend your repayment terms to get lower monthly payments. You may also choose a shorter repayment term, which could help you save on interest. However, the latter may cause you to have higher monthly payments.

Transfer Parent Loans

Parents who took out parent PLUS loans to pay for their children’s undergraduate education may benefit from refinancing federal student loans. It can help transfer the loans to their children.

You may find lenders who offer options for children who want to refinance their loans and take ownership of their debt. If the loan refinancing application gets approved, your child will be responsible for the repayment.

Drawbacks of Federal Student Loan Refinancing

Forfeit Pandemic Relief Benefits

The federal government waived interest and suspended payments on federal loans in response to the Covid-19 pandemic. The 0% interest rate has been extended until December 31, 2022. You can divert your financial resources to other needs during this period.

Refinancing federal student loans now will make you ineligible for this benefit. That’s because refinancing is done through private lenders.

Lose Access to Income-Driven Repayment

Federal borrowers may also qualify for income-driven repayment (IDR) plans. These allow borrowers to adjust their monthly payments to 10 – 20% of their discretionary income. If you meet certain requirements, your payments on an IDR plan can be counted toward Public Service Loan Forgiveness, which forgives the remaining loan balance of individuals working full-time for qualifying employers for a certain period.

Although refinancing can get you a lower monthly payment, you’ll no longer be qualified for IDR plans.

Lose Eligibility for Federal Deferment or Forbearance

Borrowers may qualify for deferment or forbearance. This is temporary relief that allows qualified individuals to suspend their payments in certain cases. These options can be useful for borrowers experiencing a life-changing event, like losing their job, becoming seriously ill or paying huge medical bills. You’ll lose eligibility for this program if you refinance your federal student loan.

Disqualification in Loan Forgiveness Programs

The government offers loan forgiveness programs, such as the Public Service Loan Forgiveness. If you qualify for this benefit, your remaining loan balance will be forgiven after 10 years of qualifying payments. Once you choose federal student loan refinancing, you’ll no longer be eligible for this and other federal forgiveness programs.

When to Refinance Your Federal Student Loans

Federal student loans are a great option to finance your education. If you’re struggling with repayment, you may be considering refinancing. However, it’s important to know the pros and cons first. For instance, although getting lower interest rates and monthly payments may be possible, you may lose eligibility for loan forgiveness programs and income-driven plans.

Asking the right questions can also help you make an informed decision. You can start with the following:

Is your household income stable? If you don’t have a steady income or risk losing your source of income in the near future, refinancing federal student loans isn’t a good idea. You may not want to lose your eligibility for various federal benefits that could help you manage your payments.
Are you eligible for loan forgiveness? If you work for a qualifying employer for a certain period, you may be eligible for loan forgiveness, which will erase your remaining loan balance.
Will you ever need federal loan protections in the future? If you think you’ll need federal loan protections such as deferment and forbearance in the future, you may not want to refinance because this will make you ineligible for these programs.
Do you have access to more favorable repayment terms? Compare the repayment terms for your current federal student loan and those offered by refinancing lenders. If you think the new terms are more favorable, then refinancing may be a good option.
How much will you save if you decide to refinance now? Calculate your savings. Refinancing may not be for you if you won’t be saving much. Refinancing your federal student loans may be more advantageous for you if you get significant savings.

Whether refinancing federal student loans is beneficial for you depends on your individual needs and financial situation.

Is Federal Student Loan Refinancing a Good Idea?

YES IF:

You have good credit and can qualify for a lower interest rate.
You want to extend your repayment term to get lower monthly payments.
You want to have a shorter repayment plan.
You aren’t qualified for loan forgiveness programs.
You want to transfer a parent PLUS loan to your child.

NO IF:

You have a poor credit score and aren’t qualified for lower interest rates.
You don’t have a stable job and can’t risk losing deferment and forbearance protections.
You’re eligible for loan forgiveness.
You’re qualified for income-driven repayment plans.
You don’t want to forfeit federal loan benefits, such as the pandemic relief.

How to Refinance Federal Student Loans

Generally, the refinancing process is similar to applying for private student loans. Below are the basic and general steps to refinancing federal student loans.

1
Research & compare lenders
The first thing you need to do is to check lenders. Some may cater to specific types of borrowers, such as those with poor credit scores. The best options depend on your needs and situation. You can start your research online. Check reviews from current and former clients, if possible.
2
Get prequalified from various lenders
Narrow down your options to at least three lenders. Get prequalified to find out which company offers the best rates and terms. Prequalification typically only involves a soft credit check, which doesn’t affect your credit score.
3
Compare & choose an offer
Compare the rates and terms from your prequalification. Find the offer you think is best for your financial situation. Make sure you read the loan agreement thoroughly. Clarify any points that are unclear to you to avoid unexpected fees.
4
Submit requirements & complete the application
Once you’ve chosen a lender, check the requirements. Gather the necessary documents and submit your application. You may need to provide personal details, an ID and financial and employment information.
5
Start making payments on the new loan
If your loan application gets approved, your new lender will pay off your existing loans directly. Then, you’ll start making payments to the new lender. Be sure to keep track of your monthly payment amount and schedule.

Frequently Asked Questions About Federal Student Loan Refinancing

Explore federal student loan refinancing by exploring the answers to frequently asked questions.

When is refinancing federal student loans not a great idea?

Refinancing federal student loans comes with risks. You’ll be losing eligibility for federal programs and benefits. So, if you’re eligible for any of these programs, refinancing wouldn’t be wise.

Additionally, if you’re not qualified for more competitive interest rates and you won’t be saving much, federal student loan refinancing may not be for you.

How do I know if I qualify for loan forgiveness?

Federal borrowers qualify for loan forgiveness if their income is below $125,000 per year. If you’re a Pell Grant recipient, you may be eligible for student loan forgiveness of up to $20,000. If you’re not, you may get up to $10,000.

At what age can I stop paying student loans?

Generally, you can’t stop paying private student loans. However, some lenders may offer forbearance options. If you have federal student loans and are qualified for deferment and forbearance, you can pause your payments. If you’re eligible for income-driven plans, you may lower your payments based on your income and get loan forgiveness after 20 – 25 years.

If you work in public service, you may consider Public Service Loan Forgiveness, which forgives your remaining debt if you work for a qualifying employer for a certain period. If you have a parent PLUS loan and you decide to refinance to transfer the loan to your child, you’ll no longer be responsible for making payments.

What happens if I don’t pay my federal student loans?

Failure to make payments will have consequences. If you’re a day late, your loan will be in delinquent status until you pay. If you don’t pay for 90 days, your delinquency will be reported to the three major credit bureaus, which will affect your credit score.

If you’re 270 days late, your loan will be in default. This means your entire loan balance will be due in full. Your loan may also be transferred to a collection agency, which could lead to more fees. The government may also pursue a legal case against you if your loan is in default.

Will federal student loan refinancing hurt your credit?

Refinancing federal student loans means taking out a new loan. The new lender will conduct a hard credit inquiry when evaluating your application. This will affect your score temporarily.

If you fail to make payments on time, your delinquency will be reported to the major credit bureaus and will impact your score.

What is a good interest for a student loan?

Student loan interest rates may vary. The average interest rate for all types of student loans is 5.8%. Interest rates for federal student loans may vary per year. Currently, the rate for new undergraduate loans is 3.73%.

However, interest for federal student loans is waived and set to 0% as part of the government’s pandemic relief program. An interest rate equal to or below the average may mean it would be advantageous for you to refinance.

About Christopher Boston

Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.

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sources

Education Data Initiative. "Average Student Loan Interest Rate in 2022." Accessed September 18, 2024.
Education Data Initiative. "Student Loan Debt Statistics." Accessed September 18, 2024.
Federal Student Aid. "An Income-Driven Repayment Plan Could Save You Money." Accessed September 18, 2024.

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