Federal Student Loan Refinancing - Is It Right For Me?

Federal student loans has lot of benefits. But with the increase in debt, borrowers choose refinancing! Is refinancing a good idea? Learn more about its consequences.

Updated by Roopsi Gupta on 9th October 2020

Federal student loans are offered by the US Department of education so that you can complete your education. Apart from providing student loans, there are more aids that the government provides to meet the different requirements in achieving the degree. Federal Student Loan Refinancing is ideally not recommended as you are at the risk of losing your protection benefits, forgiveness programs that federal student loans offer you. 

To help you in easing the burden of debt, another option that the government and the private lenders offer is a consolidation and refinancing respectively. Consolidation and refinancing work the same but the former one is offered by the government and the later one is offered by the private lenders. 

When you combine your loans altogether to get better terms, a single payment, and other benefits, it is referred to as refinancing or consolidation. The federal government only consolidates federal student loans but the private lenders can refinance all private loans, federal loans, or a combination of both. 

The difference is in the various terms and conditions which these options are offered at, let us dive in to understand it is the right option for you.

Table of contents

What is student loan refinancing?

To save your money and provide you better deals to repay your existing loans, the concept of refinancing your student loan came into existence. To qualify for refinancing, you require to fulfill the basic requirements like the credit score should be 650 or more than that, stable income that can support your loan repayments, and a cosigner in case you do not have the required credit score.

Generally, there are no fees charged while refinancing your student loans, and you will be able to pay your debts faster and with minimized rates.

Advantages and disadvantages of student loan refinancing

Any offer comes with both pros and cons attached to it. Refinancing is crucial, as it involves financial decisions you must make in your future. Therefore, it is very important to make the right choice considering the consequences. Let's check the pros and cons of the student loan refinancing process. 

Pros of refinancing

  • You can pay your loans faster and easily manage as multiple loans are combined to a single loan, where the payments are made to a single lender

  • If you have a good credit score or a cosigner with a credit score you qualify for much lower interest rates than your previous loan

  • Your monthly payments can reduce according to your new loan term

  • You can switch your loan servicer by refinancing

Cons of refinancing

  • Refinancing is not advised for federal student loans

  • You can lose protection benefits and other protection acts

  • Loose eligibility to forgiveness programs

  • The purpose of refinancing is to pay off existing debt and have a new loan with lower interest rates

  • If you do not find lower interest rates, refinancing may not be worth it

Therefore, proceed with caution, and make a decision before you refinance student loans. 

                                                    Worried about your college tuition? Learn more about best student loans

Check if refinancing federal student loans is right for you?

Before going for refinancing your federal loans with a private lender, it’s important to know the benefits that you will be driving from it. 

Following are some points where you can focus to check the appropriateness of your decision of refinancing federal student loans

1) Will refinancing save money? 

When you refinance your loan with private lenders, it provides you a low rate of interest with new repayment terms but you will lose the eligibility for programs like forgiveness, income-driven repayments, and many more.

The private lenders help you in pre-calculating the rates so that you can see the feasibility to go for the option or not. This will help you calculate the amount that you can save while going for refinancing with private lenders before filling the complete form.

Refinancing is best if you have Grad loans or parent PLUS loans because they generally have high-interest rates and can be minimized with it. 

2) Decided to take repayment options?

As you know in federal loans, you are offered various repayment options based on your income like IBR, PAYE, REPAYE where you can enroll if you want so. In case will be requiring any of them in the future when you don’t have a job or on a break or any uncertainty happens. 

You can even enjoy the benefit of loan forgiveness if you are working in some pre-specified professions and you have any loan the government will forgive your loan. 

A high debt holder should consider these things while deciding on the loans. Student loan repayment is an important phase as it can either help build your credit or it can destroy it. If you plan your repayment systematically then on-time payments can contribute towards building your credit.

But, if you trust your incomes and sure about the financial ability, then you can continue with refinancing your loan with private lenders.

Learn more about Student Loan Repayment Options

3) Terms after refinancing your student loan

Refinancing your student loans gives you a new interest rate, repayment term, monthly payments, and all so that you can easily decide whether you should go for it or not. Compare it with other lenders and even with the federal loan consolidation and see which option is giving you most of the benefits. 

It is important to do this analysis, it will help you in dealing with your debts well. Apart from it, the term of the loan for refinancing is generally more than federal loans refinancing and consolidation does not provide any changes in the interest rates also. 

Thus, there is a lot that private lenders offer but it is on you to compare and make a choice. Even they offer both types of rates- fixed & variable, you decide to go for what suits you the best.

Federal student loans guide helps you understand the various key factors before you make any decision regarding your student loans. The application process and eligibility criteria can save a good deal of your time. Knowing the types of suitable loan can help you take advantage of the relief program each offers you in times of crisis. Choosing the right repayment options will help you make an informed decision to manage your expenses in the future.

Looking to refinance your student loans? Find the best student loan refinancing lenders

Consequences of federal student loan refinancing

Except for what refinancing of federal loan offers, there are a few rights that you lose when you do not go for federal loan consolidation. They are listed below-

  • Student loan forgiveness

  • Income-driven repayment plans

  • Deferment and forbearance

  • Death and disability conditions

These options would help you in case you fail in making payment of your debts. They have a shield to protect you when you are going through any hardships. After making on-time payments till 20-25 years, you will also be eligible to take forgiveness on your loan. All these rights make federal loans more strong, they all can help you in terms when you are working on low pays as well.

But if you have opted for refinancing, you will have to give up on all these rights. Working with a private company will help you but in case you end up losing your job or any other uncertainty then you will not be able to take the benefits of federal loans offered by the US Government.

There is no option to re-convert your loans- once you refinance you will lose the benefits of federal student loans.

Though private lenders offer some benefits like deferment they come up short compared to what the U.S. Department of Education offers. They work according to themselves, so they can change their terms of dealing on their own.

With the arrival of new lenders in the market, it is difficult to know how liberal will they be in terms of any financial crises or will their policies be flexible enough to help you out. Thus, you need to know all the things and then go further with it.

A proper case analysis needs to be done with pros and cons so that you can see what you are gaining and losing while going for federal student loan refinancing. 

Recent graduates may go for consolidation as they do not have any support in case they will not be able to pay their debts and borrowers with good income can go for refinancing as they probably have a good credit score and a stable income which will help them in the long run. 

Explore all the options available to you and pick the one which is best suited for your financial condition.