Should You Refinance Your Federal Student Loans?
Updated: August 31, 2023
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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.
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
Drawbacks of Federal Student Loan Refinancing
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
sources
- Education Data Initiative. "Average Student Loan Interest Rate in 2022." Accessed October 27, 2022.
- Education Data Initiative. "Student Loan Debt Statistics." Accessed October 26, 2022.
- Federal Student Aid. "An Income-Driven Repayment Plan Could Save You Money." Accessed October 27, 2022.
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