Should You Refinance Federal Student Loans?

Refinancing federal student loans can save money, but will cost you borrower protections worth keeping right now.
Ryan LaneSep 21, 2021

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Student loan refinancing rates are low right now. But you should probably wait to take advantage of them if you have federal student loans.

Refinancing with a private lender costs you access to government programs. That includes the student loan relief already being offered due to the coronavirus pandemic.

Some refinance lenders are currently instructing borrowers to think hard before refinancing federal loans. You should likely consider that a giant, blinking "caution" sign to hold off on refinancing these loans for now. The interest-free payment pause on all federal student loans ends after Jan. 31, 2022.

If you have private student loans, refinancing remains a good option if you can lower your interest rate.

For federal loans, we recommend that you use the time that student loan relief programs buy you to get your financial house in the best shape possible. Build an emergency fund. Pay off higher-rate debts. Improve your credit score.

That way, when the smoke clears, you'll be primed to get the best refinancing rate possible — if refinancing makes sense for you at that point.

Is refinancing federal student loans a bad idea?

The federal government is offering unprecedented help to borrowers because of the pandemic. As a result, refinancing government student loans would likely be a bad idea in the following situations:

  • Your job might be at risk in the coming months.

  • You wouldn't be able to afford all your financial obligations if your employment did change.

  • You need the current payment suspension to afford other bills.

  • You'll qualify for existing federal loan forgiveness programs.

Some legislators continue to push for additional forgiveness programs. You may not qualify if you refinance federal loans with a private lender.

The most common proposal — cancellation of $10,000 — would likely save you more money than refinancing. But there's no guarantee forgiveness will happen, and it's impossible to say whether you'd benefit without knowing a program's details.

When should you refinance government loans?

Only refinance government loans if you're comfortable with the risks involved. If you're OK giving up federal loan benefits, refinancing student loans could offer long-term savings on high-interest federal loans.

For example, say you owed $30,000 with a 7% interest rate and 10 years on your repayment term. Refinancing at a 3% interest rate — roughly the best you could expect — would save you close to $7,000.

To qualify, you’ll typically need good credit (a FICO score in at least the high 600s) and a debt-to-income ratio less than 50%. If you wait to refinance, work to exceed those benchmarks to get the best deal possible when you do apply.

Can you refinance federal student loans?

You can refinance student loans, but only with a private lender. You can’t refinance student loans through the federal government. You can consolidate federal student loans, but federal consolidation won’t lower your interest rate or save you money.

When you refinance loans, a private lender pays off your existing loans and issues you a new private loan with new terms. Once you refinance government loans, you can’t return them to the federal student loan program. By making this trade, you give up certain benefits.

The risks of refinancing federal loans include losing the following benefits:

Due to the current pandemic, the government is automatically suspending payments and waiving interest on federally held loans for six months, retroactive to March 13, 2020. This student loan relief won't lower your payments, but it will make options like postponing repayment via forbearance less expensive. Private lenders have not offered a similar benefit to date.

If you teach or work in public service or for a nonprofit, you would lose access to the federal Public Service Loan Forgiveness and Teacher Loan Forgiveness programs, which forgive your loans, tax-free.

These include income-driven repayment plans, which can make your monthly payments more manageable if you don’t earn a lot of money. These plans base payments on your income and family size and forgive your remaining debt after 20 or 25 years of repayment. Some refinance lenders offer plans that decrease your payments temporarily. Those that offer income-driven programs are incredibly rare.

If you lose your job or run into financial issues, you may be able to temporarily pause repayment via deferment and forbearance. During deferment, interest does not accrue on subsidized federal student loans. Interest usually accrues on unsubsidized loans, as well as on all loans during forbearance; the government is currently waiving this interest, though.

Some refinance lenders offer postponement options, but you are always responsible for the interest.

Remaining federal debt may be eliminated in instances such as school fraud or if you, or the borrower benefiting from the loan, die or become totally and permanently disabled. Discharge options vary by refinance lender. If your private loan requires a co-signer, that person may still have to pay the debt if you die or become disabled, depending on the new loan terms.

In some instances, it may make sense to refinance only some of your federal loans. For example, you could refinance your higher-interest PLUS loans from graduate school, but not your undergraduate direct loans. This would keep part of your federal protections in place, should the unexpected happen in the future. You can never transfer private loans to the federal government.

How to refinance federal student loans

If you've decided to refinance your federal loans, review offers from multiple lenders to find the best deal. Most private lenders will prequalify you via a soft credit check so you can see your new interest rate.

The main reason to refinance government loans is to save money. You may see refinance lenders advertise big savings, but your situation will determine what you save.

Other potential benefits of refinancing federal loans include the following:

  • Make a single loan payment each month. If you also have private student loans, you can refinance them together with federal loans.

  • Switch student loan servicers. You'll get a new servicer through your refinancing lender, which you may want if you've been unhappy with your federal loan servicer.

A single monthly payment or a different loan servicer likely isn’t worth giving up the peace of mind that comes with government loans. Keep your eye on the savings instead.

How much can refinancing save you?

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