Should I Refinance My Federal Student Loans?
Updated September 30, 2021

Should I Refinance My Federal Student Loans?

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One of the best options to save time and money on your student loan debt repayment is through a refinance loan.

However, the benefits of this vary greatly depending on whether your student loans are federally owned or private.

If you have federal loans and are aware of the many benefits they provide, you may then be asking yourself, Should I refinance my federal student loans?

Let’s take a look at why you should (or shouldn’t) refinance your federal student loans, and things to watch out for along the way.

What Is Student Loan Refinancing?

Most Americans are at least familiar with educational debt. After all, student loans are often the necessary bridge between savings and actual college expenses, making a degree possible for many who couldn’t otherwise afford school.

About 70% of today’s college graduates will walk the stage with one or more student loans on their shoulders. But just because student loans are a typical part of the college experience doesn’t mean that they can’t be a huge financial roadblock.

With the average student loan debt clocking in at over $37,000 — and average monthly payments jumping up by 73% in the last decade — it’s easy to see why borrowers might be concerned.

Repayment and Refinancing

When you take out your initial student loan, you and your lender will agree to certain terms. These include your loan amount and interest rate, among others.

However, once the time comes to actually repay that loan, you may discover that those original terms aren’t what they could be. You may now be able to qualify for a better interest rate, lower your monthly payment, or even remove a co-signer who helped you get approved for borrowing.

This is where refinancing comes into play.

When you refinance, you’ll take out a brand-new loan with a private lender. This loan is intended to cover one or more of your existing student loans and will include its own terms and conditions. These new terms will dictate the interest you’ll pay on the debt, how much you’ll pay each month, and who is responsible for repayment.

Student loan refinancing can be a great way to both consolidate your educational debt and minimize the cost and time necessary to pay it back. However, while refinancing is typically a great decision for private loan borrowers, it isn’t always the best choice for those who have federal student loans.

Federal vs. Private Student Loans

When I was 18 years old, I took out a number of student loans to pay the college expenses that my scholarships didn’t cover. I filled out my FAFSA, waited for my financial aid packet, and signed for the funding offered to me.

I didn’t really pay attention to which loans were federal and which were private. Honestly, at the time I didn’t even know there was a difference between the two!

Now I know that there are many key distinctions between private and federal student loans. Some of them may even be enough to dissuade you from refinancing your debt.

As many as 92% of borrowers opt for federally owned student loan products, as opposed to private lending. And based on the features of each, which are laid out in the chart below, it’s easy to see why there’s a significant gap.

Federal LoansPrivate Loans
Interest RatesFixedOften variable
Based on CreditworthinessNoYes
SubsidizedSome areNo
Loan Forgiveness OptionsPrograms are availableNo
Needs-BasedYesLimited only by your credit
Borrowing LimitsLowNo
Income-Based Repayment OptionsAvailableNo

So just what makes federal educational funding so much more appealing than private loans?

Special Features of Federal Student Loans

Government-owned student loans have a few key benefits that make them very enticing to borrowers. Unfortunately, however, these features will be lost if you choose to refinance your loan(s) with a private refinance loan. Be sure to consider this before making your decision.

Federal Loans Are Subsidized

With a subsidized loan, the government takes care of your interest charges while you’re in school. Typical loans will accrue interest from the moment the loan is approved and funded, growing your balance by the day.

Once you graduate, however, your subsidized debt will begin to accrue interest, just like any other loan. You will now be responsible for that interest.

Depending on how long it takes you to graduate and how much you borrow, opting for a subsidized student loan could mean saving thousands of dollars in interest — savings that will be recognized long before you ever even finish school. Thanks to compound interest, the interest you didn’t have to pay will continue to save you money over your loan’s repayment.

You Have the Option of an Income-Based Repayment Plan

Student loans have been called many things, but affordable and easy-to-repay are not usually on that list. If at any point you need to make adjustments to your monthly payment, federal student loans offer what’s called income-driven repayment plans.

There are four options to choose from when requesting an income-driven plan: Revised Pay As You Earn Repayment Plan (REPAYE), Pay As You Earn Repayment Plan (PAYE), Income-Based Repayment Plan (IBR), and Income-Contingent Repayment Plan (ICR). Each is an excellent option if your federal student loan debt accounts for a significant portion of your annual income, or if you simply need to be making lower payments.

Private student loans do not offer any such option. With private loans, you would need to either refinance your debt into a brand-new loan or go into forbearance/deferment, if you suddenly needed to change your monthly payment.

To learn more about income-driven repayment options on your federal student loans, visit the U.S. Department of Education’s federal student aid page.

A Consolidation Plan Is Available

Many borrowers confuse refinancing with consolidation, which is understandable. But while they are very similar — after all, you can easily combine multiple student loans into one through a refinance — there is no true consolidation option for private loans.

However, federal loans are able to be consolidated. Plus, the process is quite simple.

Your existing federal debt will be lumped together into one loan, with a weighted average interest rate. Because the intent of federal student loan consolidation is to simplify the repayment process, you’ll be given only one monthly payment to track.

Oh, and the process takes most borrowers only half an hour or so to complete.

Approval Is Not Based on Your Credit Score

One of the biggest hurdles for private loan funding is creditworthiness. And considering that most borrowers are young adults — many of whom have never carried a credit card or taken out a mortgage — approval can be nearly impossible.

Adding a cosigner to your private loans can make the approval process easier, but this isn’t necessarily ideal. Not only will you tie a parent, spouse, etc., to your educational debt, but it’s likely you’ll still be given a high interest rate. Plus, there’s no guarantee you’ll even be approved.

Federal student loans, however, are handled differently. While you’ll still need to qualify based on financial need, you will not be denied a federal student loan based on your credit. Whether you’re an 18-year-old with a nonexistent credit report, or a 28-year-old with years of account history, you can get approved for federal student loans without worrying about your credit score.

Rates Are Usually (a Lot) Lower… and Fixed!

While they don’t hold a candle to credit cards or personal loans, the interest rates charged by most private student loans can be quite hefty. By contrast, federal student loan rates are typically much more reasonable, allowing you to borrow more for less.

Even better is the fact that federal student loan rates are fixed. This can save you thousands of dollars over time when compared to private loans, depending on trends in the economy over the life of your debt repayment.

As you can see from the chart above, fixed rates for subsidized federal direct loans currently sit at 4.53%, or 7.08% for PLUS loans. If you’re interested in a Perkins loan, the rate is a flat 5%, regardless of your disbursement date.

These rates are fixed and will not change between now and when you make that last loan payment.

Of course, this is a far cry from the average private loan, which climbs as high as 12% with a variable rate and nearly 13% with a fixed rate.

Loan Forgiveness Is an Option

To many, the idea of student loan debt simply being forgiven is too good to be true. However, if you have federal student loans and meet certain requirements after a number of years, you might be able to get the remaining balance on your debt erased.

The program, called Public Service Loan Forgiveness (PSLF), is designed to help public servants get out of debt in exchange for their commitment to the community. Only certain employers will qualify you for loan forgiveness — and you’ll need to make at least 120 monthly payments first — but this option might be a godsend for those with significant federal loan debt.

For more information about the program and eligibility, visit the website here.

Pros and Cons of Refinancing Your Federal Loans

After all of this, you may be wondering whether it’s actually smart to refinance your student loans. This is an especially important question if you have federal loans in the mix.

The answer lies in not only your own personal debt situation, but also how likely you are to take advantage of those benefits offered by the government. Refinancing your federal student loan debt can have its perks, but once you’ve completed the process, there’s no going back.

Let’s take a look at the pros and cons of refinancing your federal student loans, or simply leaving them alone.

The Benefits

No one would refinance their student loans — federal or private — unless there were some great benefits to be had. And one of the biggest benefits that borrowers are after is the ability to lower interest rates.

As we talked about above, federal interest rates are often lower than private loan rates (at least on average). But this isn’t always the case, and a refi might be the ticket to saving thousands of dollars in interest.

Some borrowers — especially those with great credit — might actually be able to snag a lower interest rate with a private refinance loan than they are paying on their federal loans already. This might also be the case when the economy shifts, allowing private loan rates to drop substantially, while your federal loans’ fixed rates stay where they’ve always been.

Additionally, a loan refinance allows you to adjust your monthly payments without needing to apply for federal income-based programs. Want to continue paying down your debt aggressively, but also need a lower payment? Then the right refi loan could be exactly what you need.

The Downsides

The reason so many struggle with whether or not to refinance their federal student loans? There are many downsides to the process. Namely, the fact that you will lose all of the enviable benefits that come along with said loans, once the refi process is complete.

After refinancing federal loans, you’ll no longer be able to take advantage of income-driven repayment plans. If at any point you needed to adjust your monthly payment post-refi, you would need to either go into deferment or forbearance, or refinance the debt all over again.

If there’s a chance that you might be able to qualify for loan forgiveness, you’d lose that opportunity after refinancing. Once you convert your loans from government-held accounts to one big private loan, the entire balance is yours to pay off.

Be refinancing your federal student loans, you’ll also lose the ability to consolidate that debt through an official program. Sure, you can technically consolidate them all into one account with a private student loan refinance, but this isn’t the same as the federal consolidation program.

A refi, by contrast, will impact your credit score and your interest rate will be based on your creditworthiness.

Should I Refinance My Federal Student Loans?

No one can tell you whether or not to refinance your federal student loans. The answer is so very personal. It depends not only on your specific debt, but also on your financial needs and even your career.

Still, for many borrowers, refinancing federal student loan debt is worth thinking long and hard about before making any decisions. Unlike private loans, once you refinance your federal debt you’ll lose a number of very enviable benefits. And unfortunately, there’s no way to ever get them back again.

When It Makes Sense to Refi

There are a few instances when a refinance makes sense, even if you have federal debt.

If interest rates have dropped substantially, and you’re able to lock in a fixed rate that’s significantly less than the weighted average rate of your federal loans, consider a refi. Depending on your balance and how long you’ll be paying it off, dropping your rate by a percentage point or two (if not more) could translate to thousands saved over the course of the loan.

That was the case for Riley Adams, CPA, of Young and the Invested and his wife:

My wife and I refinanced her first tranche of federal student loans three years ago and intend to refinance her second (and final) set shortly. We made the decision after recognizing she won’t have any need applying for protection under her federal student loans… Because of this, we prioritize having a lower interest rate given the depressed levels seen in the market right now. We want to decrease our interest expense as much as possible instead of worry about the protections provided for federal student loans.

Alternately, you have the option of choosing to only refinance the loans bearing an interest rate higher than your refinance loan’s rate. You can mix and match this process, refinancing some or all of your loans, and hand-picking both the federal and private accounts you wish to combine.

This allows you to truly maximize your interest savings. Plus, it’s a great idea if you don’t believe your student loan debt burden to be substantial, when compared to your annual income.

Of course, inadvertently losing out on loan forgiveness when you would otherwise qualify would be painful. For many borrowers, however, the process is an arduous one. It includes many requirements (like 10 years of on-time payments) before you can even apply.

Therefore, it makes more sense for some graduates to put their efforts into lowering the interest burden of their loans as early as possible.

When It Doesn’t

With that said, there are many cases when a refinance of your federal loans is simply a poor move.

Of course, the first instance is if you have a high likelihood of utilizing the government-backed benefits of federal loans. If your student loan debt is significant compared to your annual income, or you are already feeling the cash flow pinch from your monthly payments, keeping your federal loans as-is might be a smart move.

This would allow you to take advantage of income-driven payment plans, should you ever need to lower your monthly payment. Additionally, you would be able to utilize forbearance and deferment options, should the need arise, without defaulting on your loan(s).

The next instance is if you are in a career that has the potential to qualify for loan forgiveness. Of course, there are strict guidelines for qualification, but they are worth considering if you have even a small chance. The savings would be significant!

Lastly, you shouldn’t refinance if your new loan’s interest rate isn’t notably lower than your federal loans’ weighted average. For many borrowers, it wouldn’t be worth losing those federal benefits just to save half-a-percent in interest.

When to Mix-and-Match

Another option is to refinance some of your loans, while leaving others alone. This can be done with your federal student loans, private loans, or both, depending on your unique situation.

You’ve probably heard about the debt snowball method, as it relates to credit card debt and the like. But you may not have realized that this method can also be used to pay down your student loan debt. This is true regardless of the types of loans you hold.

“If you consolidate and refinance your debt, you also won’t be able to benefit by selectively paying down the highest interest debt first, which is a strategy I like,” says Lou Haverty, CFA, of Financial Analyst Insider. Instead, it’s recommended that you refinance the loans with the highest rates, keep loans with lower rates, and then direct your focus on paying each category down strategically.

Real-Life Examples

To show you exactly how much you could save by refinancing — or keeping — your federal student loans, let’s look at a few hypothetical borrowers.

Borrower 1: Anna

First up is Anna. She is in her second year as a third grade teacher and absolutely loves working with kids. She makes $60,000 a year in her middle-class district, although she’s still paying down a $37,000 student loan balance.

All of Anna’s loans are federal, some subsidized. Her weighted average interest rate is 5.12% across the board, and she still has 23 years of repayment left.

Each month, she puts $228 toward her loans. In the end, she will have paid over $26,000 in interest, for a total payment amount of just over $63,000.

A student loan refinance company recently offered Anna a 4.00% rate on her total debt. By taking the offer, she stands to save a lot of money. A 15-year refinance would not only get her out of debt sooner but also eliminates more than $13,700 in interest over the repayment.

While that sounds great, Anna’s mom doesn’t think it’s is the right choice. She has been trying to convince her daughter to teach in a low-income district for five years, to take advantage of the federal Teacher Loan Forgiveness Program. If approved, this program would forgive thousands of Anna’s debt simply for doing what she already does each day.

Ultimately, Anna moves forward with her private refi. Based on the requirements of the loan forgiveness program, she knows that she would need to begin teaching at a secondary level or teach special education, as either would make her eligible for $17,500 in loan forgiveness.

As it stands, Anna would be forgiven of only $5,000 in federal loan debt. This is significantly less than the $13,700 in interest that she could already save today. It also wouldn’t require her to change jobs.

Because of this, Anna moves forward with refinancing her loans.

Borrower 2: Tom

After enjoying his education at a top-tier university, Tom has moved into a career as a civilian contractor with the military. He loves the work and earns a good salary… and is learning a lot.

However, his $62,000 student loan debt (of which $20,000 is federal) weighs heavily each month.

Tom pays $501 monthly, and his weighted average interest rate is 8.55% between the private and federal loans. When he’s done with his loans in 25 years, he’ll have paid $150,399 total.

To save money, Tom considers a full refi. At a rate of 4.75% for a 20-year note, this process would save him $54,241 and five years.

However, Tom works as a contractor for the military. At any time, the contract could end and his job could dissolve, leaving him struggling to make monthly loan payments.

Rather than risk defaulting in a worst-case scenario, Tom decides to do a partial-refi. He still takes the 4.75%/20-year offer to refinance $42,000 in private loans. This will save him $36,745 when all is said and done, and even lower his monthly payment by $68.

Tom will keep his federal loans in place as-is. This offers him a safety net, just in case something were to happen and he would need to opt for an income-driven repayment plan.

In the meantime, he will also be applying that saved $68 each month toward his refi loan’s principal balance. By doing so, he hopes to pay it off even sooner (and for less).

Making Your Decision

So how do you determine whether you should refinance your federal student loans? You’ll first need to take a deep look at your situation, and even your future plans.

For example, a refi might make sense if you don’t foresee ever needing to lower your monthly payment. It might also make sense if you aren’t in a field that qualifies you for loan forgiveness, and/or if you qualify for a notably lower interest rate than you currently have.

However, if the benefits of federal loans could be applicable to you, take time to really evaluate your situation. Forbearance and deferment options, as well as income-driven payment plans and even loan forgiveness can be invaluable to some borrowers. Those benefits and protections are gone forever following a refinance.

If you think that refinancing your federal student loans is the best idea, you can learn more about the process by visiting our guide here. Conversely, if leaving your federal loans alone (or simply consolidating them) seems like the wiser choice, you can find a number of helpful government resources here.


Stephanie Colestock

Stephanie Colestock is a personal finance expert and writer who enjoys teaching people how to be financially independent and confident about their money choices, regardless of obstacles in their path (such as the crippling student loan debt she once held). Stephanie graduated from Baylor University, and is currently working toward her CFP certification. Her work can be seen on sites such as Forbes, Dough Roller, and Johnny Jet, among many others.

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