How To Refinance Federal Student Loans
Updated On January 24, 2023
Editorial Note: This content is based solely on the author's opinions and is not provided, approved, endorsed or reviewed by any financial institution or partner.
How to refinance federal student loans is a popular student loan topic. Given the growing amount of student loan debt and relatively high-interest rate from federal student loans, many borrowers want to understand how to refinance federal student loans.
For example, “Should I refinance my federal student loans?” is one of the most popular student loan questions on Google. In this guide, we will discuss how to refinance federal student loans and if you should refinance your federal student loans.
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In this guide, you will learn:
- How student loan refinancing works
- Should you refinance federal student loans: Advantages
- Should you refinance federal student loans: Disadvantages
- How can I refinance my federal student loans?
How student loan refinancing works
Student loan refinancing is the process of consolidating your existing student federal student loans, private student loans or both – into a new student loan with a lower interest rate. When you refinance student loans, you receive one student loan with one monthly payment and one student loan servicer. With a lower interest rate, you can save money, pay off student loans faster and get out of debt more quickly. You can also choose a fixed interest rate or variable interest rate as well as your student loan repayment term.
The federal government issues federal student loans. However, the federal government does not refinance federal student loans or private student loans. Therefore, if you want to refinance federal student loans, you can refinance with a private student lender. There are many high-quality private lenders that refinance student loans, and you can compare the latest student loan refinancing rates to find the best lender for you. You can also use this student loan refinancing calculator to determine how much you can save with student loan refinancing.
Should you refinance federal student loans: Advantages
There are several advantages when you refinance federal student loans:
- Get a lower interest rate
- Save money
- Pay off student loans faster
- Change loan terms
- Simplify student loan repayment
- Change lender or student loan servicer
- No origination fees
- No prepayment penalties
- Pause payments during unemployment
Get a lower interest rate
The main reason that borrowers refinance student loans is to get a lower interest rate to save money. Student loan refinancing helps you receive a lower interest rate compared to your current interest. Most borrowers choose the lender that approves them for the lowest interest rate. However, some borrowers may evaluate other factors, such as loan terms, customer service and student loan repayment flexibility.
Student loan payments can be expensive. The best way to save money on your student loans is to refinance because you receive a lower interest rate. When you have lower monthly interest payments, you can pay off your principal balance faster.
For example, let’s assume you have $100,000 of student loans at a 7% interest rate and 10-year repayment term. If you refinance student loans and receive a 3.0% interest rate and 10-year repayment term, you can lower your monthly payment by $195 and save $23,457 total.
Pay off student loans faster
Student loan refinancing can help you pay off student loans faster. First, student loan refinancing provides you with a lower interest rate. A lower interest rate means you owe less interest, which means your total student loan payment can decrease. That helps you save money each month, which you can apply toward living expenses, saving for retirement or other debt repayment. Second, student loan refinancing offers repayment flexibility. The standard student loan repayment term for federal student loans is 10 years. With student loan refinancing, however, you can choose a repayment term of five years, for example. This can help you pay off student loans faster and get out of debt more quickly.
Change Loan Terms
One big advantage of student loan refinancing is your ability to change your loan terms. For example, all federal student loans have a fixed interest rate and the standard repayment term is 10 years. With student loan refinancing, you have the flexibility to choose a new student loan repayment term. Generally, you can choose a loan term between 5 and 20 years. Shorter loan repayment terms mean your monthly payment may be higher, but you can pay off student loans faster. Longer loan repayment terms mean lower monthly payments, but it can take longer to pay off student loans. With longer student loan repayment,your student loans may be more expensive due to higher total interest.
Simplify student loan repayment
Student loan refinancing is an excellent way to simplify student loan payments. You may have multiple student loans, including federal student loans, private student loans, undergraduate student loans and graduate student loans. They each may have different lenders, student loan servicers and payment due dates. When you refinance student loans, you can combine all your student loans into a new, single student loan with one monthly payment, lender and student loan servicer.
Change lender or student loan servicer
If you don’t like your lender or student loan servicer, student loan refinancing can help you choose a better lender and student loan servicer that meets your needs.
No origination fees
There are no fees to refinance student loans. The best student loan refinancing lenders do not charge any origination fees to refinance student loans. That’s another reason why you can refinance student loans as often as you like.
No prepayment penalties
Unlike mortgages, student loans do not have any prepayment penalties. That means you can pay off student loans anytime without any penalty. This is especially helpful if you want to save interest costs.
Pause payments during unemployment
Many lenders allow you to pause student loan payments if you are ever unemployed or between jobs. Some lenders will even pause payments for up to 12 months or more.
Should you refinance federal student loans: Disadvantages
There are several reasons why you should not refinance federal student loans. These include, but are not limited to, several benefits that are unique to federal student loans:
- Income-driven student loan repayment plan
- Public Service Loan Forgiveness
- Teacher Loan Forgiveness
- Deferment and Forbearance
- Death and disability discharge
- Student loan default rehabilitation
Income-Driven Student Loan Repayment Plans
If you have federal student loans, you are eligible to enroll in an income-driven repayment plan, which allows you to make student loan payments based on your income, family size and other factors. An example is the Revised Pay As You Earn Plan (REPAYE), which can lower your monthly payment to as low as $0. When you refinance federal student loans, you will receive a private student loan and will no longer have federal student loans. Therefore, you would no longer have access to income-driven repayment plans.
Public Service Loan Forgiveness
If you plan to apply for public service loan forgiveness, you will want to keep your federal student loans outstanding. Only federal student loans are eligible for public service loan forgiveness. The good news is you can still refinance private student loans, even if you plan to receive public service loan forgiveness.
Teacher Loan Forgiveness
Like public service loan forgiveness, teacher loan forgiveness is only available for your federal student loans. Therefore, if you plan to apply for teacher loan forgiveness, you will want to keep your federal student loans outstanding. You can still refinance private student loans to lower your interest rate and save money.
Deferment and Forbearance
Like the federal government, student loan refinancing can provide you with protection if you lose your job or are unable to find work. Many lenders will pause your student loan payments if you lose your job or cannot find work. A deferment or forbearance for federal student loans helps you to stop making federal student loan payments or to reduce your federal student loan payments.
If you qualify for a deferment, you are not responsible to pay interest that accrues on certain federal student loans, including: Direct Subsidized Student Loans, Subsidized Federal Stafford Loans, Federal Perkins Loans, and the subsidized portion of Direct Consolidation Loans or FFEEL Consolidation Loans. However, during deferment, you are responsible to pay interest on Direct Unsubsidized Student Loans, Unsubsidized Federal Stafford Loans, Direct PLUS Loans and other federal student loans.
During a forbearance, you are responsible to pay interest that accrue on your federal student loans. You can either pay the interest as it accrues or you can allow the interest to be capitalized, meaning that the interest will be added to your principal student loan balance.
When you refinance student loans, check your loan terms to determine how a deferment works with your lender.
Death and Disability Discharge
Federal student loans can be discharged in the event or death or disability. When you refinance student loans, any discharge would be governed by the terms of your student loans.
Student Loan Default Rehabilitation
If you default on your federal student loans, the federal government allows you to enter student loan default rehabilitation to get back on track. Once you refinance federal student loans, you will have a private student loan. However, if you default after you refinance student loans, many lenders may work with you to help you get back in good standing.
How can I refinance my federal student loans?
The process for how to refinance federal student loans is easy and the same as when you refinance private student loans.
There are several steps to refinance federal student loans:
- Compare lenders
- Get interest rate estimates
- Choose a lender and select loan terms
- Sign documents
- Loan gets disbursed
When you compare lenders, you can look at various features, including variable and fixed interest rates, payoff terms, residency requirements (if any), minimum credit score and other terms. Most borrowers select the lender who approves them for the lowest interest rate so they can save the most money.
Get Interest Rate Estimates
Here’s a great part about student loan refinancing. Lenders allow you to check your new interest rate for free before applying. This is called a soft credit check and has no impact to your credit score. You can pre-qualify online in less than two minutes.
Choose a lender and select loan terms
Once you choose the best lender for you, it’s time to decide if you want a fixed interest rate or variable interest rate as well a shorter or longer repayment term.
While a fixed interest rate will not change over time, a variable interest rate may change during your student loan repayment. When you refinance federal student loans, you can choose a flexible loan repayment term, which typically ranges from 5-20 years.
While a shorter repayment term has a higher monthly payment, you can save interest costs and pay off student loans faster. A longer repayment term has a lower monthly payment, but overall will cost you more money in higher total interest.
This student loan refinancing calculator shows you how much money you can save with student loan refinancing.
You can apply to refinance student loans with lenders directly online, and the process takes only about 10-15 minutes. Your lender may request the following:
- Proof of citizenship or residency (government ID or social security number)
- Valid ID (drivers license or passport)
- Proof of income (pay stubs or job offer letter)
- Transcripts or proof of graduation
- Student loan statements (from your current federal and private student loans)
At this stage, your lender will do a hard credit pull to confirm your credit background. Lenders may evaluate your credit score, other debt obligations and your debt-to-income ratio. You can also add a co-signer when you apply to help you get approved and could help you get a lower interest rate.
If you’re approved, it’s time to sign the final loan documents, including disclosures. Once you sign the final loan documents, you have a three-day rescission period if you decide to cancel your student loan.
Loan gets disbursed
Congratulations! You’re all done. Your new lender will pay off your existing student loans. You should keep making monthly payments to your previous lender until you receive confirmation that your old student loan has been paid off by your new lender. Remember to sign-up for autopay so you never miss a student loan payment. Most lenders will discount your interest rate 0.25% when you set up autopay.
It’s important for you to weigh the advantages and disadvantages based on your specific financial circumstances and life goals.
If you want to apply for public service loan forgiveness, for example, then refinancing federal student loans is not a good idea. However, if you have stable income, steady employment and a strong credit profile, refinancing federal student loans can be a smart financial decision if you want to lower your interest rate and save money.
While there are certain federal benefits that you lose when you refinance federal student loans, student loan refinancing can help you save money, pay off student loans faster and get out of debt more quickly.