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Should You Refinance Federal Student Loans?

Refinancing federal student loans can save you money, but you lose access to valuable repayment options and borrower protections.
Feb. 14, 2019
Loans, Student Loans
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You should refinance federal student loans only if you’re comfortable giving up federal loan protections and it will save you money.

If you would answer “yes” to any of these questions, you likely shouldn’t refinance federal student loans:

  • Will you qualify for federal loan forgiveness?
  • Will you need income-driven repayment?
  • Is your job at risk?
  • Are you unprepared financially for an emergency?

Here’s how to weigh the risks and benefits of refinancing student loans to decide if it’s the best move for you.

Risks of refinancing federal student loans

When you refinance federal student loans, a private lender pays off your existing federal loans and issues you a new private loan with new terms.

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

» MORE: Learn the differences between consolidation and refinancing

Once you refinance with a private lender, you can’t return your federal student loans to the federal student loan program. By making this trade, you give up certain benefits. The risks of refinancing federal loans include:

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. No private lenders offer loan forgiveness.
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. None offer income-driven programs.
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 some federal student loans. 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.

Benefits of refinancing federal student loans

The main reason to refinance federal student loans is to save money by reducing your interest rate. That may lead to a lower monthly payment, a shorter repayment term or both. To get the best deal, you’ll typically need to have excellent credit, strong income prospects and a college degree.

The main reason to refinance federal student loans is to save money by reducing your interest rate.

You may see refinance lenders advertise big savings, but your situation will determine what you save. For example, let’s 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.

» CALCULATE: Should I refinance my student loans?

It may make sense to refinance only your higher-interest federal student loans. For example, you could refinance PLUS loans from graduate school, but not your undergraduate loans. This would keep part of your federal protections in place, should the unexpected happen in the future.

Other potential benefits of refinancing include the following:

  • Make a single loan payment each month. If you also have private student loans, you can include those when you refinance.
  • 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 federal student loans. Keep your eye on the savings instead.

How much can refinancing save you?

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