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Should You Refinance Federal Student Loans?

Refinancing federal student loans can save you money, but you’ll lose repayment options and borrower protections.
Oct. 7, 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 government 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 decide if refinancing student loans is the right move for you.

Can you refinance federal student loans?

It’s possible to refinance federal student loans, but only with a private lender. 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

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:

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 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.

Can you refinance some of your student loans?

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.

» MORE: Best student loan refinance companies

How to refinance federal student loans

If you’re comfortable giving up federal loan benefits, review refinance offers 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. To get the lowest rate, you’ll typically need to have excellent credit, strong income prospects and a college degree.

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. 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?

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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