Is It Ever a Good Idea to Refinance Federal Student Loans?
If you ask people whether it’s a good idea to refinance federal student loans, you’ll likely get strong opinions. For most people, it’s not a good idea to refinance because private lenders don’t offer federal protections, like the ability to enroll in an income-based repayment program.
However, if you want to pay off your student loans quickly, refinancing could save you significant money on interest costs, so long as you qualify for a new loan and a lower rate. Keep reading: We’ll help you decide whether refinancing your federal loans is a good idea for your personal financial situation.
Can you refinance federal student loans?
Yes, you can refinance federal student loans if you choose a private student loan company and apply for a loan. If you’re approved, here’s how it works:
- You’ll set up a new account with your private lender.
- The private lender will pay off your federal student loans.
- You’ll have a new interest rate and term, and you’ll make a new monthly payment with your private lender.
Although refinancing to a private lender can save you on interest costs, there’s more to consider before making your decision. Ultimately, it comes down to your debt payoff goals, your job stability, and whether you want to pursue loan forgiveness.
Should you refinance federal student loans? Pros and cons
Most people should not refinance federal student loans. It only makes sense to refinance federal loans if you’re not pursuing student loan forgiveness and you want to pay less interest over time. Here are some of the main pros and cons to know about before making the decision.
Pros
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Lower interest rates
Most people refinance federal student loans to take advantage of lower interest rates. Ideally, choose a lender that doesn’t charge origination fees.
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Straightforward repayment
Refinancing enables you to combine several student loans into one, making it easier to organize your finances.
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Lower monthly payments
When you refinance, you can choose a new term that works best for you. Choosing a longer term with a lower interest rate can give you lower monthly payments and improve your cash flow.
Cons
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Loss of federal protections
This is the biggest drawback to refinancing federal student loans. Borrowers who refinance lose access to income-based repayment plans and the potential for student loan forgiveness.
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Need good credit
To qualify for a student loan refinance, you need good credit or a cosigner with good credit. You also need a steady job history and proof of income.
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Permanent decision
Once you refinance your federal student loans, you can’t undo it. You can choose new private lenders over time, but you can’t go back to having federal student loans.
Ultimately, only you can decide whether refinancing your student loans is right for you. However, if you’re uncertain about your future or worried about your job stability, keeping your federal student loans gives you more options if you run into financial trouble.
Is refinancing federal student loans worth it? How to decide
Refinancing student loans is worth it in a few situations:
- You are not eligible for Public Service Loan Forgiveness (PSLF) and don’t intend to pursue forgiveness in the future.
- You have excellent credit and qualify for a lower interest rate with a private lender.
- You plan to pay off your student loans in the near future.
- You want to combine multiple federal loans into one payment and don’t plan to take advantage of federal income-based repayment programs or federal loan consolidation.
- You have a steady income and don’t need to use income-based repayment programs.
- Your priority is to minimize interest costs as much as possible. Use our refinance calculator to find out how much you could save.
If you work in a high-paying job and industry and have a great income-growth trajectory, refinancing allows you to lower your interest rate, which can accelerate your final debt repayment date. You can then focus those payments on growing your wealth in other ways—like a home purchase, retirement savings, and taxable investments).
Examples of borrowers who should keep federal loans or refinance
Here are two scenarios for student loan borrowers, along with our assessment of whether refinancing federal student loans would be worthwhile.
Example 1: A teacher working toward loan forgiveness
Taylor is a teacher with $90,000 in student loan debt after attending undergraduate and graduate school. Taylor has PSLF eligibility and has made four years of qualifying payments. In this scenario, Taylor should not refinance his federal student loans even if he can get a lower interest rate. Refinancing to private loans would disqualify him from federal loan forgiveness.
Example 2: A marketing associate on track to be debt-free
Sarah has been working in marketing for 10 years. During that time, she has partially paid down her $65,000 student loan debt. Sarah has recently set financial goals, including purchasing a house in the future. To accomplish these goals, she wants to pay down her student loan debt as fast as possible.
Sarah has a steady income and can lower her interest rate by 1.5% if she refinances. Because she wants to pay down her loans ASAP and isn’t interested in pursuing federal student loan forgiveness, it’s a good idea for Sarah to refinance and save money on interest costs.
How to decide what’s best for you
If you’re trying to decide whether refinancing federal student loans is worth it for you, take the time to consider your student loan payoff plan and your employment security. Refinancing is typically a good idea for people who are not pursuing student loan forgiveness, who have steady jobs, and who want to save on interest costs and pay down debt quickly.
Given today’s uncertainty in the future of the federal student loan program, it may make sense to wait a few months before deciding whether to refinance federal student loans.
Alternatives to refinancing
If you don’t want to refinance your federal loans, but you’re having trouble making your payments, you have options. According to the 2023 – 2024 Student Loan Borrower Survey from the Consumer Financial Protection Bureau, 42% of borrowers report they’ve only had a standard repayment plan, and 21% don’t remember choosing a repayment plan.
Many borrowers don’t realize they can change repayment plans and reduce monthly payments. Sometimes, all you need to do is call your student loan servicer to find out what your options are.
Change repayment plan
The federal government offers Income-Based Repayment (IBR) plans, which cap your student loan payment based on your income and family size. If you are already enrolled in an income-based repayment plan, like SAVE, and your payments are paused due to ongoing legislation, check the Federal Student Aid announcement page for up-to-date information.
Consolidation
Another option is to consolidate your federal student loans with a Federal Direct Consolidation Loan. This option allows you to combine two or more federal student loans into one.
A consolidation loan can reduce your monthly payment and make your student loans more affordable. However, make sure you understand whether consolidation will affect forgiveness before enrolling in the program. In some situations, a consolidation loan will “reset” your qualifying payments.
Forbearance
If you can’t make your student loan payments due to a temporary financial issue, like a medical diagnosis or layoff, you can request forbearance for up to 12 months, according to the Consumer Finance Protection Bureau. During this time, interest accrues. On the general forbearance request form, you can ask to stop payments or opt to make smaller ones.
Some private lenders offer forbearance options if you’re having financial trouble, but federal student loans have some of the most generous forbearance and deferment policies.
How to get started refinancing your student loans
If you’ve weighed the pros and cons and decided to refinance your federal loans, start by comparing offers from top-rated lenders. You can use a marketplace like Credible to quickly see rates from multiple lenders or check out our picks for the best student loan refinance companies. SoFi is our top-rated choice, with Earnest and ELFI also offering strong options.
Refinance lenders typically look for credit scores of 650 or higher, so you may want to apply with a creditworthy cosigner if your score is lower. Once you choose a lender, you’ll complete a full application and upload documents like ID and tax forms. For step-by-step guidance, see our guide to refinancing student loans.
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