Should you refinance federal student loans?

Refinancing federal student loans means a private lender pays them off and you owe the lender instead, usually at a new rate and term. The appeal is a lower rate. The catch is that the debt stops being a federal loan, and everything that came with being one goes with it.

Refinancing is not federal consolidation

The two are easy to confuse. A federal Direct Consolidation Loan combines federal loans into one federal loan. It keeps the federal protections, and for some older loans it adds them: the CFPB notes that consolidating non-Direct loans into a Direct Loan can bring "certain federal protections and benefits such as Public Service Loan Forgiveness (PSLF)". Its rate is the weighted average of the old ones, rounded up, so it does not lower the rate.

Refinancing does the opposite. The rate can fall, but the CFPB warns that "you will lose the federal loan's benefits and protections. Weigh the benefits and risks since this type of consolidation can't be reversed." Once a private lender has paid off a federal loan, there is no route back.

What you give up

The CFPB lists it plainly: "If you consolidate with a private lender, you will lose your rights under the federal student loan program, including deferment, forbearance, cancellation, and affordable repayment options".

• Income-driven repayment. Federal plans can set the payment as a share of income, so it falls if your income does. A private loan's payment is set by its terms.
• Forgiveness. "If you refinance your federal loan with a new private student loan, you will no longer be eligible to participate in these federal loan forgiveness programs." Public Service Loan Forgiveness covers only Direct Loans; the regulation defines an "Eligible Direct Loan" as "a Direct Subsidized Loan, a Direct Unsubsidized Loan, a Direct PLUS Loan, or a Direct Consolidation Loan." A private loan is none of these.
• Deferment and forbearance on federal terms. A private lender may offer its own: "you may still qualify for relief options like forbearance under a private loan", but on the lender's terms, not the government's.
• Discharge. You "may also lose the protection of loan discharge or forgiveness in the case of death or permanent disability, which you get with federal student loans. Many but not all private lenders currently offer loan discharge benefits or forgiveness in the case of death or permanent disability."

Private lenders set their own rates and terms; the rates offered "are based on your credit history". And a variable rate can move: "If you switch from a federal to a private loan with a variable rate, however, your interest rate could rise above the original fixed rate and your payment could go up."

What the lower rate is worth

On $60,000 over ten years, a federal rate of 6.5% means $681.29 a month. Refinanced at 4.5% fixed over the same ten years, it is $621.83: about $59 a month and $7,135 less interest. Those are real savings. They are also the whole of the case: the question is whether they are worth more to you than the protections.

Watch the term. A longer private term lowers the payment and can raise the total interest, even at a lower rate. The student loan refinance calculator compares both, and shows the federal income-driven payment you would give up beside them.

Who refinancing can suit

• A stable, secure income, where an income-driven payment is unlikely ever to be needed.
• No forgiveness path. You do not work in public service, or for an employer that qualifies, and do not expect to.
• A meaningfully lower fixed rate. A small rate cut rarely justifies giving up the protections; a large one, fixed for the life of the loan, may.
• Savings to fall back on, so a lost job does not mean relying on the lender's forbearance.

Who should usually avoid it

• Anyone pursuing Public Service Loan Forgiveness or another forgiveness program. Refinancing ends eligibility, however large the rate saving.
• Anyone whose income is uncertain or likely to fall, for whom an income-driven payment is the safety net.
• Anyone relying on a variable rate to make the numbers work.
• Active-duty servicemembers, who may lose interest-rate protection under the Servicemembers Civil Relief Act on pre-service loans if they refinance.

Partial refinancing is possible: some borrowers refinance one high-rate loan and keep the rest federal. And there is no deadline. You can always refinance later; you can never undo it. To see how the federal plans compare on your income, use the student loan plans calculator, and read which repayment plan to choose.

Sources: CFPB, Should I consolidate or refinance my student loans? (last reviewed 3 December 2024). 34 CFR 685.219, Public Service Loan Forgiveness. Federal income-driven figures use the same rules as the plans calculator; payment figures computed with this site's own code.