Is it smart to refinance federal student loans?
When you refinance federal debt, you lose access to government programs, such as income-driven repayment plans, student loan forgiveness, and deferment and forbearance. That said, if you're nearing the end of your repayment term and see a lower rate, refinancing your federal loans could save you money.
When you refinance federal debt, you lose access to government programs, such as income-driven repayment plans, student loan forgiveness, and deferment and forbearance. That said, if you're nearing the end of your repayment term and see a lower rate, refinancing your federal loans could save you money.
- You lose the option for student loan forgiveness. ...
- Private student loans do not offer income-driven repayment plans. ...
- Deferment periods are not as generous as with federal loans. ...
- Variable interest rates could increase. ...
- You will lose your grace period for federal student loans.
- You may not qualify for refinancing.
Drawbacks of federal student loans
Interest could capitalize when you're not making payments: For most federal loans (except Direct Subsidized Loans), interest starts accruing from the time the funds are distributed. This means you will accrue interest while in school if you don't make payments on your loans.
Student loan refinancing allows you to gather all or some of your loans into one new loan, often at a lower interest rate that may help you pay less over time or provide you with a longer repayment term that will lower your monthly payment.
You generally can't or shouldn't refinance if: You have federal loans and could see a drop in income. If there's a chance your income could decrease, don't refinance federal student loans. You'll miss out on federal student loan relief options, as well as government programs like income-driven repayment.
The act of refinancing means you are applying for a new loan, so there will be a 'hard credit inquiry. ' Any hard inquiry will have a temporary, and negligible, impact on your credit score. Typically your score will drop by five points or less, but if you submit a number of applications it might drop more.
Federal Student Loans
Interest began accruing again in September 2023 and payments restarted in October. If you're dealing with high interest rates on your federal student loans, refinancing is one strategy that could help. Borrowers with strong credit scores may be able to snag a better rate through refinancing.
Key takeaways. In order to refinance a student loan, lenders like to see a strong credit score, a stable income, a degree and a decent debt-to-income ratio. Lenders require a minimum refinancing amount, which is the amount you still have to pay on the loan. This is so the lender can make enough interest.
It's not bad to refinance student loans multiple times if it'll save you money or result in a more manageable payment. The biggest downside to refinancing often is the “hard” credit check that happens as lenders pull your credit report. Too many hard inquiries can lower your credit score.
Why are federal student loans so hard to pay off?
1. Interest. When you take out student loans, you don't just repay the exact sum you borrowed. For example, if you take out $20,000 in student loans, you're generally going to end up spending well more than $20,000 by the time your student debt is paid off due to accrued interest.
Secured loans, by comparison, are backed by something of value, such as a car or house, which can be seized if you default. But lenders can't seize a degree. So student loan interest rates are typically higher than secured loan rates because the lender's risk is higher.
Existing debt, including student loans, can also affect your ability to qualify for a mortgage because lenders also look at your credit score.
You can refinance the same loan multiple times, and if you've already gone through the process, you'll have a good idea of what lenders are looking for and how the process works. Refinancing more than once can help you secure a lower interest rate, better terms or a repayment timeline that suits your financial goals.
If your variable interest rate increases, your loan will accrue more interest and you'll probably have to make a larger payment each month.
| Company | Forbes Advisor Rating | Fixed APR |
|---|---|---|
| Federal Direct Subsidized Loans | 4.5 | 5.50% |
| Federal Direct Unsubsidized Loan | 4.5 | 5.05% |
| Custom Choice | 4.0 | 4.43% to 14.66% |
| Education Loan Finance | 4.0 | 5.04% to 12.44% |
Which is better for you? Refinancing is your best option to save money while consolidation is your best option for maintaining federal loan benefits.
You can refinance all or some of your federal student loan balance into a new private loan. You'll also need to meet the lender's other requirements, which often includes a minimum credit score and verifiable income.
It can take a few days to a few weeks for that process to be completed, so keep making payments on your current debt until you receive a notification that the loan was disbursed.
Consolidating student loans can both positively and negatively impact your credit score. It can simplify repayment, possibly lower interest rates, and improve credit scores over time with on-time payments.
How can I lower my federal student loan payments?
- Switch Repayment Plans.
- Update Your Current IDR Plan.
- Get Temporary Relief: Deferment or Forbearance.
- Review Your Loan Forgiveness Options.
| Education | Percent behind on payments |
|---|---|
| Some college or technical degree | 28% |
| Associate's degree | 19% |
| Bachelor's degree | 7% |
| Graduate degree | 6% |
Student loan debt undermines prospects for wealth building and means "waiting longer to get married and have children, making people less likely to own a home, start a business or leave their hometowns," Kamenetz said.
- Direct subsidized loans (also called subsidized Stafford loans)
- Direct unsubsidized loans (also called unsubsidized Stafford loans)
- Parent or graduate PLUS loans (also called direct PLUS loans)
| Program Type | Average Cumulative Debt at Graduation (Federal Loans Only) | Average Monthly Student Loan Payment on Standard Repayment Plan |
|---|---|---|
| Bachelor's | $27,810 | $302 |
| Master's | $59,110 | $688 |
| MBA | $56,850 | $662 |
| Doctorate | $80,590 | $938 |
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