Read This Before You Refinance Federal Student Loans

Even with low rates, refinancing isn’t right for everyone.
Ryan LaneDec 8, 2020

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Refinancing student loans at a lower interest rate can put more money in your pocket. With federal student loan bills restarting soon and refi rates near historic lows, it might seem like the perfect time to take this step.

But even if you qualify for refinancing, it won’t always make sense if you have federal student loans — and most borrowers do. Ask yourself the following to figure out if refinancing now is right for you.

What’s the latest on the payment pause?

Most federal student loan payments are paused interest-free until Jan. 31. Various members of Congress have proposed multiple extensions of this forbearance, with some lasting until September, but the long-term fate is currently uncertain.

Until there’s a definitive answer, don’t refinance federal student loans.

Refinancing replaces your existing loans with a new private loan. That loan won’t qualify for the federal forbearance. No matter how good a lender’s rate offer is, it won’t beat 0% interest.

If your goal is to pay off loans fast, stick with the forbearance for however long it lasts and make payments directly on your principal balance.

Do you work in public service?

Public service workers should steer clear of refinancing federal loans.

If you can qualify for an existing forgiveness program — like Public Service Loan Forgiveness — keep your government loans. You’ll usually pay the least overall if you get loan forgiveness.

Is your job at risk?

Wait to refinance federal loans if you think you could lose your job or have your hours reduced in the upcoming months.

Even if your employment feels rock solid, look at all your financial obligations — like rent and car payments — before refinancing. If your income changes, could you still afford everything?

Federal student loans have options like unemployment deferments and income-driven repayment plans. These can help keep payments manageable if your situation shifts.

Are you waiting on loan cancellation?

President-elect Joe Biden campaigned on forgiving $10,000 in federal student loan debt for each borrower. Some members of Congress want to go further: canceling $50,000 or all student debt.

How should these proposals affect your decision-making? Start with what Biden has supported, which seems like less of a long shot, and look at how much you owe:

  • If it’s $10,000 or less. Wait to see what happens; refinancing isn’t as huge of a money-saver if your balance is small. Make the required payments (if any) while you wait so you can avoid unnecessary interest, late fees or damage to your credit.

  • If it’s more than $10,000. Refinance some of your loans, but keep your federal loan balance as close to $10,000 as possible. This will maximize your savings from both potential cancellation and refinancing.

If you have one federal loan only — like a consolidation loan — it may not be possible to partially refinance it; ask the lender for its policy. In that case, refinancing will make more sense the larger your balance is.

For example, say you owe $100,000 at 7% interest. By refinancing at 4%, your monthly bills would decrease by $149 and you'd pay $17,836 less overall, assuming a 10-year repayment plan.

If you wait to refinance, you’ll miss out on some of those savings. Weigh that against your faith that loan cancellation will happen and the fact that, until a program’s details are revealed, no one knows who will get forgiveness — if anyone does.

Do you also have private student loans?

This decision is simpler. Private loans don’t qualify for existing government programs and wouldn’t be eligible for federal loan cancellation.

If you can qualify for a lower interest rate, there’s little downside to refinancing private student loans.

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