Should you refinance federal student loans?


When you refinance your student loans, you might be able to secure a lower interest rate and save money. With private student loans, it generally makes sense to refinance if you can lower your interest rate. But if you have federal student loans, saving money shouldn’t be your only consideration. Federal student loans come with valuable protections that you may give up if you refinance your student debt with a private lender.

What does it mean to refinance federal student loans?

Student loan refinancing is the process of taking out a new loan to pay off all or some of your existing student loan debt. It changes your loan terms, including your interest rate. If you’ve worked to improve your credit scores, you might qualify for a lower interest rate when you refinance. A lower interest rate could potentially save you money each month and over the life of your loan.

Just be careful not to confuse refinancing with consolidation. Like refinancing, a student loan consolidation will change your loan terms. You might even be able to switch to a lengthier repayment timeline and drop the size of your monthly payment.

Yet while consolidating can result in a single monthly payment for all of your federal student loan debt, bundling those loans together won’t reduce your interest rate or save you money. A longer repayment period could even increase the amount of interest you pay overall.

Can you refinance federal student loans?

It is possible to refinance federal student loans, but there’s no federal mechanism you can use to do so. Should you decide to refinance federal student loans, your new loan will be issued by a private lender.

Refinancing federal student loans into private student loans has the potential to save you money. But there’s a downside to consider as well. When you opt to refinance government student loans into private ones, you’ll permanently lose access to number federal benefits, including income-based repayment plans, forbearance options and forgiveness programs.

Things to know about refinancing a student loan

Before you apply to refinance your student debt, there are some important factors you should consider to make sure it’s a wise choice.

Consider specific federal benefits you might have to forfeit

With federal student loans, you should never refinance without first understanding the benefits you’ll give up by doing so. Perhaps the most important benefits you’ll forfeit if you refinance federal student loans with a private lender are income-driven repayment plans, including:

Income-Based Repayment (IBR).
Pay As You Earn (PAYE).
Revised Pay As You Earn (REPAYE).

As a federal student loan borrower, you may turn to these programs if you experience an income reduction or lose your job. Some income-driven repayment plans may even offer forgiveness of your remaining balance after 20 to 25 years.

With federal student loans, you might also be eligible for Public Service Loan Forgiveness if you work an eligible public service job or for an eligible nonprofit. Should you refinance to a private student loan, you’ll lose the ability to apply for this and other loan forgiveness programs, even if you would have been eligible otherwise.

Finally, all federal student loan borrowers can currently enjoy coronavirus payment relief courtesy of the CARES Act, which waives interest and suspends payments on federal student loans through Sept. 30, 2020. Private student loans don’t qualify for this federal relief, though some private lenders are offering alternatives to affected borrowers.

Calculate the potential savings

Most people refinance student loans in an effort to save money — so if you’re thinking about refinancing, you should take time to crunch the numbers in advance. The following steps may help you figure out the potential savings on a student loan refinance.

Check your credit reports and scores. This will let you know where you stand and which lenders might be the best fit. Some lenders, for example, specialize in borrowers with excellent credit. Yet if you have credit problems, you might want to check your options with lenders that cater to those with poor credit instead.
See if you prequalify. Many lenders will let you check your potential interest rate with a soft credit inquiry. This prequalification process allows you to compare loan offers with multiple lenders without the possibility of hurting your credit score.
Calculate the savings. Be careful not to fixate on the size of the monthly payment alone, as a smaller payment isn’t the same as an overall savings. A student loan calculator can help you compare the total amount you could save on interest with each loan offer you receive. Remember to include any fees to your calculations as well.
Other ways to pay off federal student loans

Refinancing to a new, lower-rate loan is a common strategy borrowers use to pay off their student debt sooner. But there are other ways to pay down federal student loans as well.

Student loan forgiveness: Depending on your situation, you might qualify for full or partial forgiveness of your federal student loan debt. The programs aren’t necessarily easy to navigate, but they can save some borrowers thousands of dollars.
Extra payments: A solid strategy you can use to pay off your federal student loans or any other debt is to make extra payments. You can pay more than you owe each month, send extra payments when you get bonuses or tax refunds or do some combination of both. Either way, paying more than your monthly payments can help you reduce your principal quicker and save on interest.
Autopay discounts: Many student loan servicers will give you a small discount each month when you sign up for automatic payments. If you apply the savings toward extra payments, that small discount can add up over time and help you eliminate your student debt a little faster.
Employer student loan assistance: Some employers offer student loan assistance as an employee benefit. If you’re looking for a new job, keep your eyes open for such offers or see if you can negotiate student loan assistance as a part of your new benefits package.
Should you refinance your federal student loans?

Everyone likes to save money. And if you can use those savings to pay off your student debt sooner, all the better. Yet, potential savings aside, only you can decide whether refinancing your federal student loans makes sense for your situation.

If there’s a chance you may need to rely on income-driven repayment benefits in the future, it’s unwise to refinance government student loans. The same may be true if you think you can qualify for student loan forgiveness. However, even in situations where refinancing doesn’t make sense, you can still work to save money by using other approaches to eliminate your student loan debt sooner than scheduled.

Featured image by fizkes of Shutterstock.

Learn more:
The best student loan refinance companies
How to qualify for student loan forgiveness programs
How to refinance your student loans in 4 steps

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