Federal student loans make up 92% of the nation’s $1.75 trillion in student loan debt, making the U.S. Department of Education the largest student loan lender in the nation. As of June 2024, 42.8 million borrowers have federal student loan debt.
Student loan refinancing is an option for those with federal student loan debt who want to pay off debt faster to save money on student loan interest costs or those looking to extend their student loan terms and get lower monthly payments.
However, you’ll lose federal benefits if you refinance federal student loans with a private lender, so this decision involves some risk. Because of that downside, you must carefully weigh the advantages against the drawbacks before proceeding with the loan application process.
Can You Refinance Federal Student Loans?
If you have federal loans with high interest rates or unaffordable monthly payments, student loan refinancing can be appealing. However, refinancing federal loans requires some extra steps.
Although the U.S. Department of Education permits student loan consolidation with Direct Consolidation Loans, it doesn’t allow borrowers to shop for an interest rate in a consolidation; the government calculates it for you based on a weighted average of your current rates, rounded up. As a result, there is no way to refinance your federal loans to get a lower rate and keep your loans within the federal loan system.
However, there is another option: you can refinance your loans with a private lender. Refinancing federal student loans will transfer them to a loan with a new lender. You may qualify for a lower rate or different repayment terms depending on your credit and current interest rate.
When To Refinance Federal Student Loans
If you have high interest federal student loans — for example, Direct Parent PLUS and Grad PLUS Loans are currently at 9.08% as of 9/30/24 — refinancing could help you save a substantial amount of money.
Another benefit of student loan refinancing is that you can also choose a different repayment term. For those that want to save as much money as possible and pay off their debt faster, choosing a shorter loan term, such as five or seven years, may give you the lowest interest rate and smallest overall repayment cost.
But if you cannot afford your current payments, you may be able to refinance your loans and decide to extend your loan term. Depending on the lender, you can typically choose a term as long as 15 years. Although more interest will accrue with the longer term, this approach to refinancing may give you a much lower monthly payment.
When considering if it makes sense to refinance your debt, pay attention to student loan refinancing eligibility requirements. Unlike federal loans, which don’t have credit score or income requirements, student loan refinancing lenders generally look for good credit, stable income and a low debt-to-income ratio. If you don’t meet that criteria, you may not qualify for a loan or a competitive rate unless you add a co-signer to your application.
When Not To Refinance Federal Student Loans
It’s an especially good idea not to refinance federal student loans if:
- You’re concerned about a potential loss of employment
- You’d have trouble affording your bills if you were let go from your job
- You aren’t paying your student loans during the deferment period
- You qualify for existing federal loan benefits, like income-driven repayment or public service loan forgiveness (PSLF)
Pros and Cons of Refinancing Federal Student Loans
Refinancing has its perks. For example, refinancing can be an excellent way to pay off your loans faster and reduce interest charges. But it has some significant downsides if you have federal student loan debt. Before applying to refinance your loans, consider these pros and cons:
Pros of Refinancing Federal Student Loans
- You could potentially qualify for a better interest rate: Federal loan interest rates are the highest they’ve been in years. If you have high rates of federal loans, you could refinance your debt, qualify for a lower rate, and potentially save money over the life of your loan. The savings from refinancing student loans can be substantial depending on the balance, rate, and loan term of your federal debt.
- You could potentially lower your monthly payments: You can choose a different loan term when refinancing your loans. If you opt for a longer term, you could potentially qualify for a lower monthly payment and free up cash for your other financial goals.
- You could potentially pay off your debt faster: Because you may qualify for a lower rate through refinancing, more of your payments will chip away at the loan principal rather than accrued interest. With a lower rate, any extra payments you make will help you pay off your loans even faster.
- You can potentially simplify your payments: Juggling different accounts and payments can be overwhelming if you have both federal and private student loans. By refinancing your loans, you can combine all your student loans into one account.
Cons of Refinancing Federal Student Loans
- You will lose eligibility for loan forgiveness: After refinancing your loans with a private lender, your debt becomes private, and you’ll no longer qualify for programs like Public Service Loan Forgiveness or Teacher Loan Forgiveness.
- You won’t qualify for income-driven repayment (IDR) plans: For borrowers struggling to afford payments, IDR plans can be a significant benefit; they base your payments on an extended term and a percentage of discretionary income. If you have a balance at the end of the loan term, the government forgives the remainder. The government approved $39 billion of loan forgiveness for 804,000 borrowers under the IDR program. However, once you refinance your loans with a private lender, you no longer qualify for IDR plans.
- You aren’t eligible for federal forbearance or deferment: Federal loan borrowers can utilize federal deferment or forbearance programs if they become seriously ill, return to school, or are laid off. But when you refinance, you’re no longer eligible. Some private lenders, including ELFI, offer forbearance for financial hardships, but the programs tend to be shorter in duration than federal programs.
Consolidating Federal Student Loans vs. Refinancing
Student loan consolidation vs. refinancing: which is best for you? A common misconception is that consolidating and refinancing are the same thing. But they’re very different processes.
When you consolidate your federal student loans through the government’s Direct Consolidation Loan program, your loans are combined, and you can have a repayment term as long as 30 years. Consolidating your debt may give you access to additional payment options, making your loans easier to manage.
However, the interest rate is the weighted average of your existing loans rounded up to the nearest one-eighth of a percent, so you may or may not save money by refinancing.
By contrast, student loan refinancing may speed up your repayment and save you money. Rather than using the weighted average of your current loan rates, refinancing lenders typically determine your rate based on your credit score, debt-to-income ratio, and other factors.
How to Refinance Federal Student Loans
Refinancing is a straightforward process:
- Gather information: You can save time by gathering the information you’ll need for the application process ahead of time. Generally, you’ll need a copy of your driver’s license or other ID, your Social Security number, loan information (including account numbers), contact information for your employer, or a recent pay stub.
- Shop around: Rates, terms and policies vary by lender, so researching multiple companies is a good idea. Some lenders, such as ELFI, allow you to check your eligibility and view potential loan options without affecting your credit score.
- Fill out an application: Most lenders allow you to apply online, where you fill out the online form, sign it electronically, and consent to a hard credit check. Most lenders issue decisions within a few days, so look for an email notification.
- Wait for confirmation of payment: If your application is approved, you’ll receive a loan agreement to sign. After that, the lender will work with your existing loan servicers to pay off your loans. Keep making the payments due until you receive confirmation that the old loans have been paid in full and closed; otherwise, you could incur late fees, and your credit score may decrease.
- Set up new payments: After paying off old loans, you can create an account with the new lender and set up your payments. Signing up for automatic payments is a smart way to ensure your payments go through on time.
Commonly Asked Questions About Federal Student Loan Refinancing
Making a significant financial change can often feel overwhelming, which is why we’ve addressed a few student loan refinancing FAQs below:
Do I Need Good Credit to Refinance My Federal Student Loans?
The better your credit, the more likely you’ll be eligible for competitive interest rates when refinancing your student loans. There are many ways to boost your credit score, including making on-time payments and consistently paying down the balance on your credit card.
Is Now a Good Time to Refinance?
The best time to refinance your student loans depends on your personal financial situation. Student loan refinancing may be beneficial if you aren’t relying on federal benefits, like income-driven repayment or Public Service Loan Forgiveness.
If you are relying on federal loan benefits and protections, however, first consider the impact on your financial health if you were to give those up by refinancing your student loans.
Is a Fixed or Variable Rate Loan Better?
Both fixed and variable rate loans have pros and cons depending on your financial needs. If you’re looking for a consistent interest rate that won’t change over time, then a fixed rate may be your best bet. If you expect rates to drop in the near future, then a variable rate may serve you well. It’s important to consider the length of your loan and the amount of financial risk you’re able to take before making this decision.
It’s important to note that variable interest rates are only available through private lenders. All federal student loans have fixed interest rates regardless of your credit score or debt-to-income ratio.
Will There Be Fees to Refinance Federal Loans?
Many student loan refinancing lenders, including ELFI, do not charge application, origination or prepayment fees, which makes refinancing an affordable option. In fact, you’ll likely save money by refinancing your student loans, rather than the other way around!
To learn more about student loan refinancing, explore ELFI’s student loan refinancing FAQs.
What Are the Benefits of Refinancing Federal Student Loans?
If you’re a borrower with a mix of private and federal student loans, refinancing can help simplify the repayment process. Instead of keeping up with several monthly due dates, you can combine your loans into a single monthly payment.
Additionally, if you’re unhappy with your current loan servicer, refinancing gives you an opportunity to transition to a new lender. When you refinance, the new lender will pay off the original loan, and you’ll receive a new contract with updated terms.
Finally, many borrowers may enjoy savings from student loan refinancing. If your credit score has improved or your debt-to-income ratio has decreased, you may earn a lower interest rate with the new lender.
Refinancing your federal student loans can offer a number of benefits. Think carefully about the decision to determine whether it may be right for you.
To see how much you could save by refinancing with ELFI, try our Student Loan Refinance Calculator.
