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Student Loans Student Loan Repayment

Is It a Good Idea to Refinance Federal Student Loans?

Updated Apr 05, 2023   |   7 mins read
Written by Jeff Gitlen, CEPF®  
Updated Apr 05, 2023

Latest news on federal student loan relief

On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Through this bill, federal student loan borrowers have the option to suspend payments without penalty until June 30, 2023. All payments on federal loans during this time will be applied to unpaid interest accrued before March 13, 2020, then directly towards the principal balance. Additionally, no interest will accrue during this time.

For this reason, and the speculation over Biden’s planned student loan debt cancellation, we recommend federal student loan borrowers do not refinance their student loans at this time.

Today, student loan debt is at an all-time high. The average borrower from the class of 2018 left school with an average of $28,565 in student loan debt. Some of these graduates are turning to student loan refinancing to help ease the burden, but is this the right move for you?

The decision comes down to what protections you need.

Federal loans offer protections you won’t get with private loans. But if you don’t need these protections, refinancing can help you save money or lower your monthly payment, thanks to low interest rates and longer repayment terms available with some private loans.

On this page:

What you give up by refinancing federal student loans

If you took out federal student loans to finance your education, your loans came with benefits that can help you during your repayment. When you refinance student loans, you pay off your existing loans (often federal student loans) by taking out a private loan, which doesn’t come with the same benefits.

The benefits you’ll be giving up by refinancing federal loans to private student loans include:

Income-driven repayment plans

Income-driven repayment plans are payment options designed to help people struggling to make their monthly loan payments. These plans can be especially helpful if you lose your job or are unable to work.

Federal student loans are eligible for a number of different income-driven repayment plans. Plans like the Income-Based Repayment (IBR) Plan and the Pay As You Earn (PAYE) Plan let you extend your student loan term to 20 or 25 years and limit your monthly payments to 10% to 15% of your discretionary income.

Read more in our full guide to income-driven repayment plans.

Student loan forgiveness

Student loan forgiveness programs are federal and state programs that usually involve forgiving a portion of your debt when you work in a certain field. Qualifying careers usually include public service jobs, like working for a government or not-for-profit organization. They include:

  • Public Service Loan Forgiveness (PSLF). Under the federal PSLF program, people employed by certain not-for-profit organizations and government agencies may be eligible to have the remainder of their loan balance forgiven after making 120 qualifying monthly payments on their loans.
  • Teacher Loan Forgiveness Program. There is also a specific loan forgiveness program for teachers. This is available to teachers working in low-income schools or educational service agencies and will forgive up to a maximum of $17,500 of student loan debt.
  • Income-Driven Repayment. Another way to qualify for student loan forgiveness is through your income-driven repayment plan. After completing 20 to 25 years on an income-driven repayment plan, the remaining balance on your loans will be forgiven.

Student loan forgiveness is very uncommon for private loans. However, PSLF is far from a safe bet even if you have federal loans. According to Forbes, the expanded version of PSLF introduced in 2018 rejected over 99% of applicants in its first year. If you have questions, it pays to talk to your loan servicer.

You can learn more about student loan forgiveness in our guide.

Deferment and forbearance protections

If you can’t make payments on your federal student loans because you’ve lost your job, or for another reason like a medical issue, protections like deferment and forbearance can help.

Under both loan deferment and forbearance, you can temporarily suspend your payments until you’re able to start making them again.

If you have subsidized loans, the federal government will pay interest on your loans during deferment and forbearance, which can be a big help. If you have unsubsidized loans, your interest will still accrue in most cases, adding to your overall loan amount.

It’s also worth noting that some private lenders offer their own versions of deferment and forbearance benefits.

Benefits of refinancing federal student loans

If you feel comfortable potentially giving up the above benefits, then refinancing may be a good option for you. If you qualify, you may benefit from refinancing because of:

  • Lower interest rates. If you have a good credit score or it has improved, you may qualify for lower interest rates than those you are currently paying. Lower rates can save you money over the life of the loan.
  • Lower monthly payments. When you refinance your loans, you may have the option to extend your repayment term. Extending your repayment term can decrease your monthly payments, though it’s important to note that extending your loan repayment could increase the total cost of your loan due to interest payments. However, if your new rate is low enough, you could still save money, even with an extended repayment term.
  • The ability to consolidate student loans. When you refinance you’re able to take multiple student loans (both federal and private) and refinance them into one loan. This is known as student loan consolidation. Making just one payment monthly can simplify your repayment. You don’t have to refinance all of your loans at once—you can pick and choose what loans you want to refinance.
  • The ability to release a cosigner. If you initially took out student loans with a cosigner—which most federal loans require—you can use a student loan refinance as an opportunity to release them from their obligation. If your credit history is strong enough, you can get your new loan entirely in your name.

How to refinance your federal student loans

Refinancing your student loans can be a simple and fast process. Key steps include:

  • Step 1: Review your credit score to see if you meet eligibility requirements. Most will require a credit score of 680 or higher.
  • Step 2: Shop around for a private lender to find one that meets your needs. You can use our guide to compare the best student loan refinance companies. Some lenders will allow you to get prequalified quotes with a soft credit pull, which won’t affect your credit score.
  • Step 3: Gather required documents and data such as your pay stubs, Social Security number, and information about the loans you want to refinance.
  • Step 4: Once you’ve selected a lender from your preapproved offers, submit your application and wait for approval. Make sure you keep making payments on old loans until your refinancing process is complete.

If you need more help with the process, you’ll want to read this guide on how to refinance student loans.

Does refinancing federal student loans make sense for me?

Refinancing your student loans can be helpful, under the right circumstances.

If you’re in a secure financial situation that isn’t expected to change and you have a good credit score to help you qualify for the lowest rates, refinancing can be a good option to help you save money.

If you have fluctuating income or you’re worried about job security, refinancing federal student loans isn’t a good idea. It’s also not a good idea if you’re hoping to take advantage of student loan forgiveness programs or extended repayment options.

Before you refinance your loans and forgo the benefits that come with federal loans, think critically about your situation and what you need. Once you refinance your federal loans with private student loans, you can’t change them back.

Find out more in our guide to student loan repayment.

>> Read More: Scenarios where you can refinance student loans