Should You Refinance Federal Student Loans?

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Updated on Wednesday, November 14, 2018


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It’s a straightforward question: Should you refinance federal student loans?

The answer, though, might not be as straightforward. The truth is, it depends.

On the one hand, student loan refinancing can be a godsend to borrowers who feel crushed under the weight of student loan debt. Refinancing could get you a lower interest rate on your loans, plus it lets you choose new repayment terms that might be better suited to your situation.

But not everyone can qualify for student loan refinancing, and there could be significant downsides when refinancing federal student loans with a private lender.

If you’re wondering whether refinancing federal student loans is right for you, read on to learn about the pros and cons.

What is student loan refinancing, anyway?

Student loan refinancing has become more popular in recent years as student loan debt has grown to massive proportions. Currently, Americans owe more than $1.48 trillion in student loans, and the average Class of 2017 graduates left school with $39,400 in debt.

Refinancing providers can offer relief in the form of a lower interest rate and the opportunity to restructure your debt. Plus, refinancing lets you combine multiple loans into one, so you only have to keep track of a single payment each month.

Note that student loan refinancing is different than direct loan consolidation, which is a federal program that combines your federal student loans. Federal consolidation doesn’t lower your interest rate, but it could help simplify debt repayment.

Both private and federal student loans are eligible for refinancing, but first, you have to qualify. Private lenders, such as Citizens Bank, SoFi and Earnest, have underwriting requirements for credit and income, so you’ll have to meet their criteria, or else apply with a cosigner who can.

If you’re eligible, refinancing could be a strategic move for getting your student loans under control.

What are the benefits of refinancing federal student loans?

Refinancing federal student loans has three main potential benefits:

  1. Save money on your loans with a lower interest rate throughout the life of the loan.
  2. Choose new repayment terms better suited to your budget.
  3. Simplify your debt by combining multiple loans into one.

Let’s take a closer look at each of these. First, a major benefit of refinancing is qualifying for a lower interest rate. By getting a better rate, you could save lots of money on your debt.

Most lenders let you choose between a variable and fixed rate. Currently, variable rates tend to start out lower, but they could rise over time. If you’re confident you can pay back your loan quickly though, choosing a low variable rate could be worth the risk.

Second, refinancing also lets you choose new terms. If you can afford it, a shorter term could get you out of debt ahead of schedule. On the flip side, a longer term could lower your monthly bills, taking some of the pressure off your budget. Just remember that extending your terms could mean you pay more interest over the life of your loan.

Finally, refinancing lets you combine multiple loans into one new one. If you’re dealing with lots of different payments and loan servicers, this chance to consolidate could make it easier to monitor your debt and keep up with bills each month.

Plus, you’ll be dealing with a new loan servicer, which you might appreciate if you’ve had a bad experience with your old one. When choosing a refinancing provider, check out customer reviews to learn from other people’s experiences.

It’s also worth mentioning that some online lenders offer extra benefits to borrowers who refinance. SoFi, for instance, has a career coaching program, as well as community events that let you network with other professionals. Although these perks probably aren’t the primary reason to refinance student loans, they could be a nice addition.

And note that it’s not just students who can refinance. If you took out a parent PLUS loan, you could refinance to tap many of these same benefits.

What are the downsides of refinancing federal student loans?

Refinancing student loans might sound like the solution you’ve been looking for, but there could be disadvantages to it as well.

The main problem is that when you refinance federal student loans, you turn them into a private loan, and private lenders don’t offer the same programs and protections as the federal government. For instance, federal student loans are eligible for income-driven repayment plans, which adjust your monthly payments along with your income, while private loans don’t generally have this option.

Plus, your federal loans could qualify you for federal loan forgiveness programs, such as Public Service Loan Forgiveness or Teacher Loan Forgiveness. Here too, private loans are not eligible.

Also, your new lender might not be flexible if you run into financial hardship. Most private lenders don’t offer income-driven repayment, for instance, and only a few let you pause payments through forbearance if you lose your job or return to school.

So if you predict you’ll need any federal repayment plans — or are counting on federal loan forgiveness — refinancing wouldn’t be a good move for your federal student loans. In fact, although there are some very good private lenders out there, refinancing probably isn’t a good idea unless you’re fully confident you can pay back your loans on time without needing those federal programs.

Alternative options for managing your student loan debt

If you’re looking for strategies to manage your student loans, remember that refinancing isn’t the only choice.

For example, although most federal student loans automatically get placed on the standard 10-year plan, you can choose an alternative term, depending on your goals. You can also try to qualify for a forgiveness program that will wipe away the remainder of your debt.

Here are four options to consider:

  • Apply for an income-driven repayment plan. Federal Student Aid offers four income-driven plans: Income-Based Repayment, Income-Contingent Repayment, Pay As You Earn, and Revised Pay As You Earn. All these plans adjust your monthly payment to 10%, 15% or 20% of your discretionary income and extend your terms to 20 or 25 years. And if you still have a balance at the end of the term, it could be forgiven.
  • Get on graduated or extended repayment. Both these plans could lower your monthly payments to give you financial relief. Graduated repayment keeps your term at 10 years, but it offers low payments at the beginning which gradually rise over time. Extended repayment, meanwhile, lengthens your terms to 25 years.
  • Work toward federal student loan forgiveness. If you work in a qualifying organization or position, you could get student loan forgiveness through a federal program. You could also get student loan discharge for a qualifying reason, such as school closing or permanent disability, or get forgiveness at the end of an income-driven plan.
  • Prepay your loan ahead of schedule. If you can afford it, you can throw extra payments at your student loans without penalty. Extra payments will cut time off your term and save you money on interest. Just contact your loan servicer to make sure the extra payments are being applied correctly.

If you’re wary of turning your federal student loans private through refinancing, consider the alternative strategies above for reducing your monthly payments or for getting out of debt more quickly.

Should I refinance my student loans? Choosing the right strategy for your debt

Before making any changes to your student loans, make sure to educate yourself about your options. When dealing with a large amount of debt, you want to be fully informed before changing your repayment plan.

If you’re comfortable turning your federal loans private — and giving up federal loan protections — refinancing could be a savvy way to lower your rate and choose new terms upon qualifying. Before choosing a lender, shop around and compare offers to find your best rate.

But if you’re worried about falling behind on bills, wait to refinance until your finances are more stable. In this case, an income-driven plan or other federal option could give you financial relief and help you avoid default.

Whatever you choose, keep chipping away at your debt until you finally get your balance down to zero. By exploring your options for debt management, you can find an approach best suited to your unique financial situation.

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