#1 Student Loan Lawyer
Updated on July 20, 2022
The Education Department doesn’t refinance federal or private student loans to help borrowers get better interest rates or repayment terms. But the department allows some people with federal student loans to consolidate their existing loans into a new loan to qualify for loan forgiveness programs, student loan waivers, and lower monthly payments — or to get out of default.
The interest rate for the Direct Consolidation Loan is the weighted average of the rates on all the original loans, rounded up to the nearest one-eighth of a percentage point. The loan carries a fixed interest rate. So, if some of the original loans had a variable interest rate — which is the case with many commercially held Federal Family Education Loans — the new rate will not change for the life of the loan.
If you consolidate before the coronavirus forbearance ends, monthly payments on the loan will be frozen, no interest will accrue, and you’ll earn credit towards income-driven repayment plan forgiveness and Public Service Loan Forgiveness if you work full-time for the government or a nonprofit organization.
When it makes sense to refinance federal student loans
Refinancing federal loans with a private lender makes little sense for most borrowers. You might score a lower interest rate if you have a good credit score or a cosigner who does. A better rate will reduce your total interest, helping you pay off the loans faster.
But refinancing comes at a cost: you’ll lose federal protections like student loan forgiveness, income-based repayment options, deferments, and so on.
In my years as a student loan lawyer, I’ve seen many people regret refinancing their federal loans — especially when they learn the Biden administration has wiped out loans for other federal student loan borrowers who attended their school or temporarily expanded the PSLF Program. Read more about borrower defense to repayment and the Limited PSLF Waiver.
In my experience, student loan refinancing makes sense if you have a strong, stable financial situation and owe less than 1.5 times your salary. Those factors give you a reasonable shot at paying off the loan balance.
But if you don’t have savings, lack job security, or owe a lot more than you earn each year, keeping up with the student loan payments after refinancing can prove challenging. You may find yourself stretched thin with no margin for error.
Many private lenders don’t offer lengthy deferments or forbearances to help you when your income drops unexpectedly. And if you don’t pay on time, not only will the lender ding your credit report, but it may also choose to sue you and your cosigner to recover the money owed.
Learn More: Will Refinanced Student Loans Be Forgiven?
How to refinance federal student loans
If you decide to refinance your federal loans, use an online marketplace like Credibleto compare rates with multiple lenders simultaneously. You’ll submit a loan application to get prequalified via a soft credit check to see the interest rates and loan terms.
There are three reasons to refinance federal student loan debt with a private lender:
Save money. A lower interest rate will save you money in the long run if you plan to pay the debt back quickly rather than wait on loan forgiveness. Variable-rate loans can offer you a much lower rate than your current loans — especially if you have higher interest Parent PLUS Loans — but the rate can creep up over time. If they do, keep in mind that you can refinance a second time to find a better rate. Read more about how often you can refinance student loans.
Make a single loan payment each month. If you want to simplify your finances, refinancing your federal and private student loans will pool your loans into a single loan with one monthly payment.
Switch student loan servicers. If you’re unhappy with the servicers the U.S. Department of Education provides, refinancing will give you a new lender and servicer to work with.
Saving money is the biggest reason to consider refinancing. Getting a single monthly payment or a new servicer isn’t worth giving up the perks that come with federal loans.