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Federal student loans generally have lower interest rates than private student loans, but borrowers with excellent credit can often find lower rates elsewhere. Today, federal loans can have rates as high as 6.28%, and in the past they were as high as 8.5%.
If you have good credit and a reliable income, refinancing for federal student loans can be a good idea. You can potentially lower your interest rate and save thousands of dollars, but there are several risks. Here is what you should consider before deciding to refinance Federal Student Loans.
Federal Student Loan Refinancing: How It Works
Can You Refinance Federal Student Loans? Sure, but whether it’s a good idea or not, it’s a more complicated question.
To refinance federal student loans, you look for a private lender who offers student loan refinancing. You submit your loan application and apply for a loan large enough to cover your existing student debt. If approved, the private lender will pay off your current federal loans and you will have a new loan in the future.
Refinancing your loans means you will have completely different terms than you had before. You will have a new interest rate, a new repayment term, a minimum payment, and a new loan manager.
When you refinance federal student loans, they become private loans and you can no longer enjoy the benefits of federal loans. Keep in mind that the process is not reversible. You cannot refinance private student loans federally; it will always be private loans.
Weigh the pros and cons of refinancing federal student loans
1. Advantages: you can get a lower interest rate
Depending on when you took out your federal loans and the type of loans you have, you could have a relatively high interest rate. By refinancing your loans, you could benefit from a lower rate and save money over the life of your loans.
You can usually choose between an adjustable and fixed rate loan when you refinance your debt. Right now, refinance lenders are offering rates starting around 2% for borrowers with excellent credit and reliable income.
2. Advantages: you can pay off your debt faster
If you refinance your loans and get a lower rate, more of your payments will go toward principal instead of interest charges. You can also take this opportunity to shorten your repayment term if you wish.
If you shorten your repayment period from seven to five years, for example, your monthly payments may increase, but you can save money in the long run by getting rid of debt faster. If you’re determined to get rid of your debt fast, you can pay off your loans months or even years ahead of schedule.
3. Pro: you can combine your loans into one
The typical college graduate will have eight to 12 different student loans when they leave school. Managing so many loans, payments and due dates can be a recipe for disaster. It’s easy to confuse dates and loan officers, causing you to miss payments and damage your credit.
When you refinance your loans, your loans are combined into one. You can even combine federal and private student loans, so you only have one monthly payment to withhold.
4. Advantages: you can transfer the loans from parents to a child
If you’re a parent who took out PLUS Parent Loans to pay for your child’s undergraduate education, refinancing your loans has a major benefit – you can pass them on to your child. Some refinance lenders allow your child to refinance the loans and take over the debt. If your child is approved, your debt will be paid off and you will no longer be responsible for paying it off.
5. Disadvantage: you are no longer eligible for income-based reimbursement
As a federal loan borrower, you are eligible for income-tested repayment plans (IDRs). If you qualify, your loan manager will calculate your payment based on a longer term and a percentage of your discretionary income. Plus, any remaining debt can be canceled after 20 or 25 years depending on your situation.
You might qualify for a much lower monthly payment, but you are no longer eligible for IDR plans once you refinance your debt.
6. Disadvantage: You will not be eligible for loan forgiveness programs
Federal loan borrowers are eligible for loan forgiveness programs such as the Public Service Loan forgiveness and the Teacher Loan forgiveness. But once you refinance your federal loans, you are no longer eligible for federal forgiveness programs.
During his candidacy, President Joe Biden supported $ 10,000 in federal loan forgiveness per borrower. While there has been no update on this proposal, it’s important to note that the blanket loan cancellation would likely only apply to federal loans, not private loans. If you refinance your federal loans and a loan forgiveness measure is enacted, you could be missing out on this benefit.
7. Disadvantage: you are no longer eligible for adjournment or federal forbearance
With federal student loans, you can enjoy a generous deferral or forbearance if you experience financial difficulties, become seriously ill, or go back to school. Depending on the type of forbearance or deferral to which you are entitled, you can defer your payments for up to three years.
Only federal borrowers are eligible for these programs. Once you refinance, you cannot use them. And while many refinance lenders offer their own financial hardship programs, most are not as flexible as the federal options.
8. Disadvantage: Not everyone is eligible for refinancing a student loan
To qualify for a student loan refinance and get the best rates, you usually need good to excellent credit and reliable income. If you don’t meet these conditions, you likely won’t qualify for a loan unless you have a co-signer who is applying for a loan with you.
Should I refinance my federal student debt?
Refinancing federal student loans is not always a good idea. However, this may make sense in the following scenarios:
1. You have high interest loans
If you have high interest federal loans, such as parent or grad PLUS loans, refinancing may be a smart move. Depending on your credit and other debts, you could qualify for a much lower rate and save a substantial amount of money.
The average student loan balance is $ 39,341, according to Experian. If you had this amount at an interest rate of 6.28% and a 10-year term, you would pay around $ 53,000 at the end of your repayment term. But if you refinance and qualify for a 10-year loan at 4% interest, you’ll only pay $ 47,500 – a savings of over $ 5,200.
You can use a student loan refinance calculator to find out how much you can save.
2. You are not eligible for loan forgiveness
If you are eligible for programs like PSLF or Teacher Loan Forgiveness, refinancing your loans before you qualify for loan waiver is a costly mistake. But if you don’t qualify for a discount, you can refinance your loans to save money and pay off your loans faster.
3. Your job and finances are secure
Since refinancing federal loans turns them into private debt, you lose access to federal benefits such as income-based repayment plans. If you work in a volatile industry or live paycheck to paycheck and might need these perks, refinancing your loans probably isn’t a good idea.
But if you have a stable job and a large emergency fund, you can probably refinance without these worries.
4. You want to transfer the Parent PLUS loans to your child
If you have PLUS parent loans, refinancing your debt can be a wise move. If your child is financially stable and able to pay the payments, he or she can take over the loans and waive your obligation to repay the loan. Once refinanced, the loans will show up as paid in full on your credit report, making it easier for you to qualify for other forms of credit, such as a mortgage, in the future.
5. You want to repay your loans aggressively
When deciding whether or not to refinance your loans, think about how aggressively you want to tackle your debt. If you’re determined to pay them off as quickly as possible, refinancing your federal loans can help you reach your goals.
If you refinance your debt and go for a shorter loan term, you could get an even lower interest rate. You’ll save thousands more and get out of debt years sooner.
For example, let’s say you have $ 39,341 in student loans with an interest rate of 6.28% and a term of 10 years. If you refinance for a five-year term and qualify for a 3% interest rate, you would only pay $ 42,414 over the repayment term. This represents a total savings of over $ 10,500 compared to the original loan terms. Plus, you would be debt free five years earlier.
If you’ve weighed the pros and cons of federal student loan refinancing and decide to go ahead, check out our selections of the best student loan refinancing lenders.
Top Student Loan Refinance Lenders of 2021
Find the best student loan refinance lenders for your needs.