Should I refinance my federal student loans?

Americans collectively owe $1.62 trillion in federal student loans as of January 2024. For many, refinancing these loans can offer lower interest rates and streamlined monthly payments. However, refinancing federal debt can come at a cost. When you refinance federal student loans, you lose access to certain benefits and protections, including flexible repayment plans, temporary loan relief, and the possibility of loan forgiveness.

Here's what to consider before refinancing your federal student loans. 

How does refinancing federal loans work? 

Refinancing federal student loans involves replacing your existing loans with a new private loan. This new loan comes with its own interest rate and terms, which might differ from those of your federal loans.

If you have good credit and a steady income, you might secure a lower interest rate with a private refinance loan. You may also be able to extend your student loan repayment period, lowering your monthly payments. Additionally, refinancing multiple student loans can simplify your finances by leaving you with just one monthly payment.

However, refinancing federal loans means they become private loans, and there are significant differences between the two. By refinancing, you lose access to federal benefits and protections like loan forgiveness, deferment, forbearance, and flexible repayment options. While some private lenders offer similar benefits, it varies by lender. 

Pros and cons

Pros of refinancing federal student loans

• Potentially secure a lower interest rate: If you have a good credit score (670 or higher on the FICO scale) and a stable income, refinancing federal loans may get you a lower interest rate. This can reduce your overall loan costs.
• Lower monthly payments: Refinancing creates a new loan with new terms, allowing you to shorten or extend your repayment period. Extending your repayment period will lower your monthly payments, though you'll pay more in interest over time.
• Simplify loan repayment: Refinancing multiple federal loans into one can streamline your monthly payments, leaving you with just one student loan payment and due date each month instead of managing multiple loans.

Cons of refinancing federal student loans

• Loss of federal benefits and protections: Refinancing federal loans means giving up benefits exclusive to federal loans, such as loan forgiveness, deferment, forbearance, and income-driven repayment plans.
• Eligibility depends on credit and other financial factors: Most private lenders run a credit check when you apply for a student loan refinance. Your eligibility for refinancing, along with the rates and terms offered, will depend on your credit score and overall financial situation.
• No guarantee of a lower interest rate: While the goal is often to secure a lower interest rate, there's no guarantee. Federal student loans already offer relatively low rates, and your refinanced rate will depend on financial factors like your credit score, income, and debt-to-income ratio. Loans with bad credit, for instance, may have higher rates.

How refinancing federal loans affects your borrower benefits

When you refinance federal student loans, you lose the federal benefits and protections you previously had. This is because your loans become private, and private lenders don't necessarily offer the same perks guaranteed with federal loans.

Specifically, if you refinance federal student loan debt, you may lose access to:

• Deferment and forbearance: Deferment and forbearance allow you to temporarily pause loan payments due to financial hardship, military service, continuing education, or other circumstances.
• Flexible loan repayment options: Federal loans offer income-driven repayment plans such as SAVE, PAYE, IBR, and ICR that adjust your loan payments based on your income and family size. These plans also forgive your remaining loan balance at the end of your repayment period.
• Loan forgiveness: Programs like Public Service Loan Forgiveness (PSLF) and Teacher Loan Forgiveness (TLF) are exclusive to federal loans.
• Loan discharge or cancellation: Federal student loans may be eligible for discharge or cancellation under certain conditions like bankruptcy, school closure, or death, which private loans might not offer.

Before refinancing, consider whether you might need these benefits in the future.

Refinancing vs. consolidation

While refinancing is available for both federal and private student loans, consolidation is exclusively for federal loans. Like refinancing, consolidation combines your existing federal loans into one new Direct Consolidation Loan, simplifying your repayment process.

Student loan consolidation can lower your monthly payments by extending your loan term or granting access to more income-driven repayment plans. Additionally, consolidation can make certain types of federal loans eligible for loan forgiveness programs, unlike refinancing, which removes access to these federal benefits.

However, consolidation does not lower your interest rate like refinancing can. Instead, any outstanding interest on the loans you consolidate is added to the original balance, potentially increasing the total interest paid over the life of the loan. Your interest rate on a Direct Consolidation Loan is the weighted average of the rates of the loans you consolidate, rounded up to the nearest one-eighth of a percent. This is a fixed interest rate and does not depend on your creditworthiness, so it may be slightly higher but remains constant over the loan's life.

Consolidation might make more sense than refinancing if:

• You have multiple federal student loans in repayment.
• You have FFEL loans that need to be consolidated in order to qualify for an income-driven plan or PSLF.
• You want to switch loan servicers.

Choosing the best refinance companies

There are several factors to consider when determining which student loan refinance lender is right for you and your current loan. When comparing refinance lenders, pay attention to:

• Eligibility criteria: Some lenders have minimum credit score and income requirements. If you don't meet these requirements, you may be able to apply with a creditworthy cosigner.
• Interest rates: Prequalify with multiple lenders to get an estimated rate without impacting your credit score. Compare these rates carefully, and look for fixed-rate loans if you prefer predictable monthly payments.
• Repayment terms: Most lenders offer various repayment term options, usually ranging from five to 20 years. A longer term means higher monthly payments but less interest costs. A shorter repayment term translates to lower monthly payments but more interest charges over time.
• Loan amount: Check the minimum and maximum loan amounts qualifying for refinancing with each lender.
• Relief options: Some lenders offer financial hardship relief options, such as deferment or forbearance. This can be crucial if you face financial difficulties.
• Customer service reputation: Research the lender's reputation and customer service by looking at reviews and ratings from other borrowers.
• Available discounts and other perks: Some lenders offer discounts, such as interest rate reductions for setting up autopay payments, or other perks that could benefit you.

Current student loan refinance rates

How to refinance federal student loans

You can expect to go through the following steps to refinance your student loans:

1. Research lenders: Start by researching different lenders to understand their offerings and your approval odds. Consider what’s important to you in a lender and your refinancing goals to narrow down your search. 
2. Get prequalified: Once you have a shortlist of lenders, get prequalified. This involves a soft credit inquiry, so it won’t impact your credit score. Prequalification gives you an idea of your approval chances and potential loan terms. Remember, prequalification does not guarantee approval — you’ll still need to apply formally. 
3. Apply for a refinance loan: Based on your prequalification results, choose a lender and apply. The application process is typically online. Be aware that the lender will conduct a hard credit pull at this stage, which may temporarily affect your credit score.
4. Manage payments on your new loan: If approved, sign the necessary paperwork and accept the loan. The lender will pay off your existing loans, and you’ll start making payments to your new refinance lender. Continue making payments on your old loans until you receive confirmation that the refinance is complete. 

FAQ

Can a federal student loan be refinanced?

Yes, it’s possible to refinance a federal student loan. However, doing so will result in losing access to federal benefits and protections like income-driven repayment, loan forgiveness, and deferment and forbearance options.

Is there a penalty for refinancing a student loan?

No. Generally, you won’t pay any application or origination fees with student loan refinancing.

Will refinancing my student loans hurt my credit score?

Refinancing may cause a slight, temporary dip in your credit score due to a hard credit inquiry. However, the impact is usually minor. 

How do I find the best student loan refinance rates?

To find the best rates, start by prequalifying with multiple lenders. This involves a soft credit check and gives you an idea of your potential rates without affecting your credit score. 

What should I consider before refinancing federal student loans?

Consider whether you can benefit from federal programs like income-driven repayment or loan forgiveness. If you don’t qualify or need these benefits, refinancing your federal loans might help you lower your loan costs.

Check out: Should I refinance my student loans?