The vast majority of student loan borrowers rely on federal loans. In fact, The Institute for College Access & Success reported that more than 90% of outstanding education debt was in the form of federal loans.
If you’re one of the many borrowers with federal student loan debt, you may be researching your options to accelerate your loan repayment. Student loan refinancing is a commonly recommended strategy, but you may be wondering, “Can you refinance federal student loans?”
While the answer is yes, it can be a bit complicated. The federal government allows you to consolidate your debt with a Direct Consolidation Loan, but you can’t refinance your loans to take advantage of lower rates. To get a lower interest rate, the only workaround is to refinance your loans with a private lender, which but be sure to weigh the pros and cons of refinancing.
Should I Refinance My Federal Student Loans?
To refinance your federal student loans, you’ll have to work with a private lender. The lender will pay off your federal loans, and from then on, your loans will be privately held. When does it make sense to refinance federal student loans? It can pay off in the following ways:
1. You Could Save Thousands
Federal student loans currently have relatively low rates, but that’s not always the case. In just the past few years, rates have been significantly higher. For example, Direct PLUS Loans issued between July 1, 2018, and June 30, 2019, had an interest rate of 6.6%. With such a high interest rate, it can be difficult to make any progress against the principal.
With student loan refinancing, you could secure a lower interest rate depending on your creditworthiness. Over time, that lower rate could allow you to save a substantial amount of money.
Consider this example. Danny had $30,000 in federal student loans at 6.6% interest and a 10-year repayment term. If he makes the minimum payments every month, he will repay a total of $41,060 the high interest rate would cause him to accrue over $11,000 in interest charges.
If Danny refinanced his loan and qualified for a 10-year loan at 4.25% interest, he’d cut his monthly payment and overall cost. He will repay just $36,877 a savings of nearly $4,200.
| Original Federal Loan | Refinanced Loan | |
|---|---|---|
| Interest Rate | 6.6% | 4.2% |
| Loan Term | 10 Years | 10 Years |
| Minimum Monthly Payment | $342.17 | $307.31 |
| Total Repaid | $41,060 | $36,877 |
| Savings | $4,183 | |
2. You Could Slash Your Monthly Payments
If you want to free up cash in your monthly budget and aren’t eligible for an income-driven repayment plan for your federal student loans, another option is to refinance your loans. You could qualify for a lower rate or choose a longer loan term to reduce your monthly payments. Some lenders offer terms as long as 20 years.
A longer term will lower your monthly payments, but you will pay more in interest over time. However, the higher overall cost is worth it for some people to get more breathing room in their budgets each month.
For example, let’s say Danny refinanced his loans and qualified for a 20-year loan at 6.25% interest. His monthly payments would decrease from $342.17 per month to just $219.28 a savings of $123 per month. But, he’d pay $22,627 in interest charges due to the longer loan term.
3. You Could Pay Off Your Loans Much Faster
Debt can affect many aspects of your life. If you’re sick of worrying about your student loan balances and want to pay them off faster, student loan refinancing can help you accomplish that goal.
If you refinance your federal loans and qualify for a lower interest rate, more of your payments will chip away at the principal instead of accrued interest. You can pay off your loans months or even years ahead of schedule by regularly making extra payments.
For example, Danny refinanced his loans and qualified for a 10-year loan at 4.25% interest. Thanks to the lower rate, his payments dropped from $342 to $307. But Danny wanted to pay off his loans faster, so he kept making his previous payment amount. By paying $342 every month $35 more than his new minimum payment he would pay off his loans 14 months sooner. And he’d save nearly $900 in interest charges.
Small changes can add up. Here’s how increasing his payments would affect Danny’s repayment:
| Monthly Payment | Monthly Payment + $35 | Monthly Payment + $50 | Monthly Payment + $100 | |
|---|---|---|---|---|
| Payment Amount | $307 | $342 | $357 | $407 |
| Time to Repay | 10 Years | 8 Years, 10 Months | 8 Years, 4 Months | 7 Years, 2 Months |
| Total Repaid | $36,877 | $35,989 | $35,674 | $34,828 |
| Savings | N/A | $888 | $1,203 | $2,049 |
4. You Can Simplify Your Monthly Payments
Analysts with SavingforCollege.com found that the typical undergraduate student has as many as 12 student loans by the time they graduate. Juggling so many loan servicers, due dates, and minimum payments can cause you to accidentally miss a payment and rack up late fees.
By refinancing your federal student loans, you can combine all of those loans into one, and you’ll have just one payment to remember each month.
Is Refinancing Government Student Loans a Bad Idea?
Should I refinance my federal student loans? If you’re asking yourself that question, there are a few drawbacks to consider:
1. You Can’t Enroll In An Income-Driven Repayment (IDR) Plan
With federal loans, you have the option of enrolling in an IDR plan if you can’t afford your monthly payments. Once you refinance your loans, they’ll become private loans, and you’ll no longer be able to take advantage of IDR plans as they are for federally held loans only.
2. You Won’t Be Eligible for Loan Forgiveness
The federal government offers a few loan forgiveness programs, including Public Service Loan Forgiveness and Teacher Loan Forgiveness. These programs are only available to federal loan borrowers. Once you refinance your loans, you’ll no longer be eligible for federal student loan forgiveness.
3. You Won’t Qualify for Federal Forbearance or Deferments
Federal student loans have benefits like forbearance or deferments. If you return to school, lose your job, or have another financial hardship, you can use forbearance or deferment periods to postpone your payments.
If you refinance your federal loans, you won’t qualify for those programs and will have to work with your new lender if an emergency pops up that affects your repayment. Some private student loan and refinancing lenders offer their own hardship programs, but they work differently than federal forbearance programs and are usually shorter in duration.
How to Refinance Federal Student Loans
If you weigh the pros and cons and decide to refinance your federal student loans, you can refinance your debt by following these seven steps:
1. Check Your Credit Reports: Before shopping for a lender, review your credit report and make sure all of your information is accurate. You can get your free credit reports at AnnualCreditReport.com.
2. Collect Your Information: Lenders will ask for information about your income and employment, so you can save time by collecting some documents before applying. Gather your recent pay stubs, W-2 forms, and your current loan statements.
3. Research Refinancing Lenders: There are many refinancing lenders out there, so shop around and choose a few lenders to request more information. Lenders can vary in terms of rates, available terms, and benefits, so make sure you do your homework.
4. Use Loan Prequalification Tools: Some lenders, including College Ave, allow you to prequalify for a loan and view potential options without affecting your credit score.
5. Select a Loan Option: You typically will have several loan options to choose from, such as different repayment term lengths and whether you choose a fixed or variable interest rate. In general, the shorter the loan term, the lower your interest rate, so select an option that fits your budget and overall goals.
6. Submit Your Application: Once you have decided on a lender and a loan, you can submit an application. The lender will ask you for your Social Security number, contact information, and details about your employment and income. The lender will also ask for your consent to a hard credit check, a necessary step to qualify for a loan.
7. Wait for Confirmation: If approved, the lender will notify you about next steps. Until you receive a confirmation that your existing federal student loans have been paid off, continue making all of your payments by their due dates to avoid unnecessary late fees.
Repaying Your Student Loans
As a federal student loan borrower, you have access to benefits like IDR plans and Public Service Loan Forgiveness. But your debt may have high interest rates, causing interest to accrue rapidly. If that’s the case, you may be wondering, “Should I refinance my federal student loans?”
There’s no one right answer for everyone; whether or not refinancing makes sense is dependent on your goals. But if you don’t think you’ll need those federal benefits and want to pay off your debt faster and save money, student loan refinancing can be a good choice.
If you aren’t sure, you can use the student loan refinance calculator to find out how much you can save by refinancing your federal student loans.
