Should You Refinance Federal Student Loans?
While the government does not offer federal loan refinancing options, federal student loans can be refinanced through private lenders. In some cases, this can lead to more manageable payments and lower interest rates, but it often comes at the expense of borrower protections offered by the federal government.
It is possible to refinance federal student loans, and doing so may save you thousands of dollars over the life of your loans, but there are things to consider before making the decision.
On this page:
- Pros and Cons of Refinancing Federal Student Loans
- Is Refinancing the Right Option for You?
- How Do You Refinance Federal Student Loans?
- Alternatives to Refinancing Federal Student Loans
Pros and Cons of Refinancing Federal Student Loans
One of the primary reasons borrowers choose to refinance their loans is the ability to secure a lower interest rate or monthly payment. For borrowers with very good or excellent credit, this can translate into thousands of dollars in savings over the life of the loan.
If you are eligible for a lower interest rate than you are currently paying on your federal student loans, then refinancing likely makes sense for you as long as you aren’t dependent on federal benefits and repayment plans (more on that in the next section).
If you refinance to a longer repayment term, your payments may be lower but it will take you longer to repay the debt.
Another potential issue that exists when refinancing federal student loans is the loss of borrower protections that often make federal loans attractive in the first place.
Federal student loan borrowers frequently have access to income-driven repayment plans and student loan forgiveness programs, all of which will disappear once a loan is refinanced through a private lender.
Furthermore, federal loans tend to have more generous forbearance periods, and it’s exceedingly rare to find a private lender that offers the same level of deferment benefits.
Is Refinancing the Right Option for You?
It can be difficult to figure out if refinancing makes sense for you. There are many factors that come into play, so there is no one “right” answer for everyone.
If you have very good or excellent credit and can secure lower interest rates through a private lender, then you may want to consider refinancing your loans.
Historically, Grad PLUS and Parent PLUS loans have interest rates that are relatively high when compares to refinancing options. If you have a Grad PLUS or a Parent PLUS loan, you may want to consider refinancing to a lower rate.
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However, there are certain circumstances that may make refinancing a poor move. This is particularly true if you have poor credit or can’t secure rates that are lower than those applied to your existing federal loans.
Also, borrowers who are enrolled in some of the repayment programs offered by the federal government, specifically income-driven repayment programs that offer forgiveness after 20 or 25 years, must determine how much money they will save over the life of the loan.
The same is true for borrowers working for the government or in the non-profit sector, as they can likely take advantage of the Public Service Loan Forgiveness Program, which will result in loan forgiveness after 10 years of consecutive payments.
Finally, keep in mind that federal loans typically offer more repayment options, many of which can make repayment easier while enrolled in school or during times of financial struggle. This is not often the case with private lenders.
How Do You Refinance Federal Student Loans?
1) Review Your Credit History
You may be asking, “But how can I refinance my federal student loans?” One of the first things you should do if you are considering refinancing your federal loans is to take a look at your credit history and score.
While the fixed rates attached to federal student loans are set by Congress and are not dependent on your credit score or expected income, private loan rates are.
As such, borrowers with average or below average credit scores will have a difficult time finding rates whether those are fixed interest rates or variable rates that justify refinancing. Or, in some cases, borrowers will need to add a cosigner to the loan agreement.
2) Select a Private Lender
If you determine that your credit score is good or that you have a reliable cosigner, the next step would be to select a private refinancing lender. There are numerous private lenders that offer refinancing products, making it important that you shop around before deciding on a specific lender and submitting a loan application.
As you peruse various refinancing options, you’ll want to take note of rates and terms—how much the loan will cost and how long you have to pay it off. Additionally, it’s also important to identify any benefits associated with a specific lender, such as forbearance options, autopay discounts, cosigner release policies, etc.
Keep in mind that today many lenders offer instant rate quotes. Typically, these are based on general information, like the total loan amount to be refinanced, your income, and your credit history. In many cases, lenders use a soft credit inquiry to determine your rates, but always verify this before requesting a quote, as a hard inquiry, particularly more than one, can damage your credit.
Check out our Best Student Loan Refinance Lenders page to quickly compare our top choices.
3) Get Your Personal Information Ready
Though each application process differs, you’ll likely need to provide information about your current loan, like how much you owe.
You’ll also need your current income, social security number, and basic contact information, including your physical address, email address, and phone numbers.
If you need to add a cosigner to your application, you will also need similar information about them, including their social security number.
Alternatives to Refinancing Federal Student Loans
Federal Student Loan Consolidation
Federal borrowers can go through the process of student loan consolidation and combine student loan payments through the federal government’s Direct Consolidation Loan but they cannot consolidate private loans through the federal government.
Enroll in Autopay
If your goal is to lower your rates, you may be able to do so without refinancing your federal student loans. One way to do this is by enrolling in autopay with your loan servicer, which can reduce your rates by up to 0.25 of a percentage point.
Consider Income-Driven Repayment Plans
If your primary goal is to make payments more manageable, you may be eligible for a variety of payment programs currently offered by the federal government. These include the Income-Based Repayment (IBR) Plan, the Revised Pay As You Earn Plan (REPAYE), Pay As You Earn (PAYE), and the Income-Contingent Repayment Plan (ICR).
These programs base monthly payments off a percentage (10% to 20%) of the borrower’s discretionary income, with the expectation that the payments will increase as the borrower progresses in their career and makes more money. Typically, loans entered into these programs are forgiven after 20 to 25 years of consecutive payments.
Refinancing federal student loans is possible, but borrowers should make this decision with caution. In some cases, refinancing can lead to big savings and lower monthly payments. In others, borrowers may find that the rate reduction, if any, does not merit the loss of borrower protections and repayment plans currently offered by the federal government.
Author: Jennifer Lobb
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