Should You Refinance Federal Student Loans? What to Consider

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Jennifer Calonia

By Jennifer Calonia

January 5, 2022

Although some individuals are eager to begin a New Year, federal student loan borrowers are dreading the implications of 2022. The administrative freeze on federal student loan payments and interest charges — a protection that has offered financial relief to borrowers throughout the pandemic — was originally set to expire on January 31, 2022. 

The Department of Education recently announced its latest extension of the federal student loan pause through May 1, 2022 giving borrowers 90 days of additional respite.

The Student Debt Crisis Center, a nonprofit organization, found that approximately 68 percent of borrowers with federal student loans are employed full-time. Among that group, a staggering 89 percent said they didn’t have enough financial security to restart payments in February.

If you have student debt, the overall uncertainty of the federal student loan system might make you wonder whether refinancing federal student loans can ease your financial burden. Here’s what to know before making any moves.

What Is Federal Student Loan Refinancing?

Student loan refinancing is provided by private institutions, like banks, credit unions, or online lenders. You can choose to refinance federal loans and your existing private student loans. Also, you can decide to refinance all of your student loan debt or only some loans. 

During a federal student loan refinance, the private lender will completely pay off the remaining federal student loan balance that you’ve opted to refinance. Since the original federal loan was paid off, your outstanding debt is now removed from the federal loan system.

The lender then creates a new private student loan for the balance it paid on your behalf. Ideally, the refinance loan will have more favorable terms and a lower interest rate, depending on your credit. Under the new private student loan, you’ll repay the lender in monthly installment payments of the principal, plus interest. 

How a Direct Consolidation Loan Differs

Sometimes, student loan consolidation is confused with refinancing. These two practices are completely different. You can’t refinance federal student loans without converting them into a private loan. However, you can consolidate federal student loans using a Direct Consolidation Loan.

This option combines your selected federal student loans, and simplifies your repayment experience by creating one payment and due date to remember. It’s also an opportunity to extend your repayment term up to 30 years. 

A consolidation loan won’t guarantee you a lower interest rate. Instead it averages the interest rates of your original loans to determine your new rate. Consolidating your federal loans is an option if you want to streamline your payments while keeping your loans within the federal student loan program.

What to Consider Before Refinancing Federal Student Loans

To decide whether refinancing your federal student loans is the right choice for your student debt situation, there are a few questions to consider.

Is Your Current Interest Rate High?

Your loan interest rates determine how much you’ll pay in addition to the principal amount you borrowed for school. Fixed rates for 2021-2022 Direct Subsidized and Unsubsidized Loans for undergraduate students are at 3.73%. Graduate Unsubsidized Loans and Direct PLUS Loans as high as 5.28% and 6.28%, respectively. 

Although your federal interest rate stays fixed once you accept the loan, interest rates can vary depending on when you first initiated the loan. For example, Direct Subsidized Loans initiated between 2008-2009 had a fixed rate as high as 6%.

Many refinance lenders, including Saving For College’s featured private refinance lenders, offer fixed interest rates below 4%. Borrowers with strong credit might be eligible for rates below 2.5% which can mean significant savings over time. 

If your existing interest rates are higher than your eligible student loan refinance rate, you might consider refinancing your federal loans.

What Type of Federal Loans Do You Have?

In the interest rate example above, you’ll notice that the fixed rate depends on the federal loan type. If you’re a graduate student or parent with Direct PLUS Loans, there might be a stronger case to refinance your federal loans.

Graduate-level borrowers who might already be working professionals and parents generally have better credit and earn a reliable income to qualify for competitive refinance rates. Similarly, parents with strong credit can help their student borrower be eligible for a lower interest rate by cosigning on the refinanced student loan.

PLUS Loans also don’t inherently qualify for Public Service Loan Forgiveness. To be eligible for federal forgiveness programs, you must consolidate your PLUS Loans to access the Income-Contingent Repayment Plan.

However, if you have a PLUS Loan, but don’t plan on pursuing federal loan forgiveness programs, refinancing your student loan for a lower interest rate can be financially advantageous.

How Stable is Your Income?

Federal student loans offer many benefits during times of financial uncertainty. For example, as a student who’s enrolled at least half-time, you’re not required to make federal subsidized loan payments during your education and for six months after leaving school. Also, during this time, the federal government pays the accruing interest on your behalf. 

The Department of Education also offers four income-driven repayment (IDR) plans for borrowers who can’t afford payments under the Standard 10-Year Repayment Plan. There are four IDR plans: 

  • Income-Based Repayment 
  • Income-Contingent Repayment 
  • Pay As You Earn 
  • Revised Pay As You Earn

Depending on your eligible loans, adjusted gross income and family size, an IDR plan can help reduce your monthly federal loan payments to 10% to 20% of your income. This federal benefit can be a lifeline in times of financial hardship. 

However, if you’re confident that you won’t need to rely on these income-driven programs, refinancing federal student loans can still have you money long term.

Will You Want Access to Loan Forgiveness?

Public Service Loan Forgiveness (PSLF) is a government program that’s available to eligible federal student loan borrowers. 

It requires you to work for a qualified government or nonprofit employer for at least 10 years while making loan payments under an IDR plan. After 120 qualifying payments, your remaining federal loan balance is forgiven. You won’t have to repay the forgiven balance, and you’re there are no tax liabilities associated with the forgiven amount. 

This is a lucrative forgiveness program that’s available, regardless of your profession, as long as you have eligible loans, and meet employer and payment requirements.

Even if you’re not pursuing PSLF, you might be eligible for loan forgiveness under an income-driven repayment plan. After 20 or 25 years of payments, depending on your plan, the remaining balance might be eligible for loan forgiveness. Forgiven amounts through IDR, however, are considered taxable income.

If you know you won’t work in public service to qualify for PSLF, or don’t want to wait 20 or more years to be student debt-free under IDR forgiveness, student loan refinancing might be an option to explore.

Pros and Cons of Refinancing Federal Student Loans

Pros Cons
Potentially lower interest rate Potentially no deferment or forbearance protection
Fixed and variable rates available No access to loan forgiveness programs
Potentially lower monthly payment  Lose income-driven repayment options
Longer or shorter loan term Must meet credit and income requirements

The Bottom Line

Other changes are happening concurrently within the federal student loan system, like expiring contracts between the Department of Education and servicers, like FedLoan Servicing and Granite State. Transferring your student debt to a private lender might seem like a simple solution.

With the latest freeze extension, borrowers should avoid refinancing until after payments resume to get the most value from this administrative protection. 

When federal loan payments resume, deciding whether to refinance involves nuances that are specific to your student loan situation. There are also many ways to approach refinancing if you feel it’s the right path for you.

For example, it remains uncertain whether President Biden’s promise to cancel $10,000 in student debt per borrower will actually come to fruition. However, if you believe that the $10,000 loan cancellation measure — or some portion of it— will be enacted in the future, you can choose to only refinance your loan amount above that figure.

Regardless of how much of your loan balance you decide to refinance, always compare a handful of student loan lenders to find the best offer, and only refinance after the administrative freeze ends to maximize the existing 0% interest rate.

A good place to start:

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