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Should you refinance federal student loans?

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Refinancing your student loans could save you money, especially if you qualify for a lower interest rate. However, while there are few downsides to refinancing private loans, refinancing federal student loans isn’t always the best choice.

By refinancing federal student loans, you give up valuable protections, like access to income-driven repayment plans and loan forgiveness programs. What’s more, through Aug. 31, 2022, federal student loans have 0 percent interest and no required payments, so in most cases it’s best to avoid refinancing now.

Loan Student
Key takeaway
When you refinance federal student loans, they automatically become private loans and you lose access to federal benefits. You can’t undo refinancing, so be aware of the downsides before proceeding.

What is student loan refinancing?

Student loan refinancing is the process of taking out a new loan with a private student loan lender to pay off all or some of your existing student loan debt. When you refinance, you can choose a different term and interest rate.

If you’ve worked to improve your credit score, you might qualify for a lower interest rate when you refinance. That could save you hundreds or even thousands of dollars in interest over the life of your loan.

Student loan refinancing vs. consolidation

Refinancing is different from consolidation. Refinancing is only done through private lenders, and it could change all of your loan details — your interest rate, repayment period and even lender. However, because of this, you can often get a lower rate or a lower monthly payment.

Student loan consolidation, on the other hand, is offered through the federal government. With this program, you can combine multiple federal student loans into one Direct Consolidation Loan and potentially change your repayment timeline. Consolidating loans may provide access to more repayment and loan forgiveness options, but it won’t necessarily save you money, since your interest rate will be the weighted average of all the loans you’re consolidating. If you choose a longer repayment term after consolidating, you may end up paying more in total interest over the life of the loan.

Should you refinance federal student loans?

It’s possible to refinance federal student loans, but doing so means switching from a federal student loan to a private student loan. With federal student loans, you should never refinance without first understanding the benefits you’ll give up by doing so.

Benefits of refinancing

  • Lower interest rate. If you took out your federal student loans when interest rates were high, refinancing to a private student loan could save you thousands of dollars. This is especially true if you have good credit and can qualify for the lowest advertised rates.
  • Different repayment timeline. Federal student loans are automatically placed on a 10-year repayment timeline. When refinancing, you can choose a shorter timeline to save on interest or a longer one to lower your monthly payments.

Drawbacks of refinancing

  • No access to income-driven repayment. Income-driven repayment plans adjust your monthly payments based on how much discretionary income you have — a benefit that private lenders lack.
  • No loan forgiveness programs. Some federal borrowers qualify for Public Service Loan Forgiveness, which forgives your remaining loan balance after 10 years of qualifying payments. You’ll lose this benefit if you refinance, even if you’re close to meeting the requirement. If the government ever does pass widespread student loan forgiveness, private student loans will also likely not be included.
  • Few defined deferment or forbearance programs. The federal government has established deferment and forbearance options for borrowers. While private lenders may offer hardship programs, they’re usually determined on a case-by-case basis.
  • Forfeit pandemic relief benefits. Some private lenders established coronavirus hardship options early on in the pandemic, but those relief programs have mostly expired. The federal government, on the other hand, continues to waive interest and payments on federal loans through Aug. 31, 2022.

How to refinance your student loans

If you decide to refinance your federal student loans, you should find the best lender, interest rate and loan term to fit your financial situation. Here’s how to get started:

  1. Research lenders. Some lenders cater to specific borrowers, such as borrowers with low credit scores or borrowers refinancing medical school debt. Look for the lenders that fit best with your situation and compare interest rates, terms and fees.
  2. Get prequalified. Once you’ve narrowed down your search to two or three picks, get prequalified with each to find out which will give you the best rate. Prequalification does a soft pull of your credit score to determine what interest rate you qualify for and is the best way to compare your options.
  3. Send in an application. After you’ve been prequalified with a lender, you can submit a full application. During this process, you’ll usually have to provide some form of ID, financial information and employment verification.
  4. Begin payments. Once the application is approved, your new lender will most likely pay off your old loans directly. You’ll have to start making payments to your new lender immediately. Take time to learn how payments work, when they will be due and any other important details you’ll need to manage your loans with the new lender.

Other ways to pay off federal student loans

Refinancing to a new, lower-rate loan is a popular way for borrowers to pay off their student debt faster. 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. You have to meet certain criteria to qualify for loan forgiveness, but you could save thousands of dollars on your loans.
  • Extra payments: If you want to pay off your student loans quickly, simply pay more money every month. Start tracking your expenses and put any windfalls toward your debt. Paying off your loans faster will also help you pay less interest.
  • Autopay discounts: All federal student loan servicers will give you a 0.25 percent 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 companies offer student loan assistance as an employee benefit. If you’re job hunting, look for positions that offer this benefit or see if you can negotiate student loan assistance as part of your new benefits package.
  • State repayment assistance: Some places, like Maine and parts of Iowa, will pay a portion of your student loans if you move there. While you’ll have to meet specific eligibility requirements, you could knock out a significant portion of your debt.

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Written by
Emma Woodward
Contributing writer
Emma Woodward is a former contributor for Bankrate and a freelance writer who loves writing to demystify personal finance topics. She has written for companies and publications like Finch, Toast, JBD Clothiers and The Financial Diet.
Edited by
Student loans editor