Is it a Good Idea to Refinance Federal Student Loans?

Out of the approximate $1.6 trillion owed in student loan debt in the U.S., roughly 92% of all student loans are held by the Department of Education. These loans are commonly known as federal student loans or government student loans. In total, there are about 42.3 million federal student loan borrowers that owe a collective $1.54 trillion in federal student loan debt.

For those seeking to pay off federal student loan debt faster to save money on student loan interest costs, or those looking to extend their student loan terms and get lower monthly payments, student loan refinancing may be a good option. Before you refinance your federal student loans, however, it’s important to understand the benefits and risks involved. For example, by refinancing with a private lender, you may lose certain federal benefits. Here’s what you need to know about refinancing federal student loans.

Can You Refinance Federal Student Loans?

The short answer is yes. While you can’t refinance federal student loans through the government, you can refinance with a private lender. Depending on your current interest rate and credit score, you may be able to receive a better interest rate by refinancing.

Many people think student loan consolidation and refinancing are the same things. The difference, however, is that refinancing allows the opportunity to lower your interest rate or adjust your loan term, while federal loan consolidation does not.

When To Refinance Federal Student Loans

If you don’t have loans in deferment or you’re paying down high-interest federal student loans, you may choose to consider student loan refinancing. 

One of the major benefits of student loan refinancing is that you’ll have the option to change your student loan repayment term. Refinancing lenders recognize that your financial situation is likely different than it was when you originally took out your student loans, and changing your repayment term means adjusting your payment to better fit your current needs.

For example, if you originally had a $35,000 student loan with a 7% fixed interest rate and a 20-year repayment term, your monthly payment would be $271.35. Even if your interest rate doesn’t change, adjusting to a 30-year repayment term decreases your monthly payment to $232.86, creating a little more room in your budget each month.

You should also consider student loan refinancing eligibility requirements. When you refinance your student loans with a private lender, you’ll receive a rate estimate largely based on your credit score and debt-to-income ratio. If you’ve made significant strides in these areas recently, then student loan refinancing could be a good fit for you.

When Not To Refinance Federal Student Loans

As a result of the COVID-19 pandemic, the United States government has placed federal student loan payments in forbearance through the end of 2021. During the student loan deferment period, you’re not required to make loan payments. In this case, federal student loans also aren’t accruing interest. 

With that in mind, many students are choosing to wait to refinance their loans with a private lender. 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)

Consolidating Federal Student Loans vs. Refinancing

You may have debated student loan consolidation vs. refinancing, or even have assumed they were the same thing, which is a common misconception. The truth is, however, that the two are very different, and refinancing is more likely to help you save money on your student loans.

When you consolidate your federal student loans through the federal government’s Federal Loan Consolidation program, you’ll receive a new interest rate based on the weighted average of your existing rates rounded up to the nearest eighth of a percent. The benefit of federal student loan consolidation is that it makes your payment schedule easier to track, especially if you’re paying down several different student loans.

If you’re looking to save money on interest costs, however, student loan refinancing is a better choice. Instead of averaging your interest rates, you’ll receive a new rate based on your credit score, debt-to-income ratio, and other factors.

How to Refinance Federal Student Loans

You may wonder how student loan refinancing works. Fortunately, refinancing your federal student loans is often a simple and straightforward process. Before you commit to a lender, you should review offers from several different lenders, then choose the one that best fits your financial needs.

You can simplify the refinancing process further by prequalifying with your preferred lenders, which in most cases only requires a soft credit check and won’t hurt your score. When you refinance your federal student loans, you’ll enjoy benefits like only managing a single loan payment and potentially lowering your interest rate.

Commonly Asked Questions About Federal Student Loan Refinancing

Making a major 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 Federal Student Loans?

The better your credit, the more likely you’ll be eligible for competitive interest rates on your student loans when refinancing. To boost your credit score, be sure to make on-time payments and to consistently pay 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. If you aren’t relying on federal benefits, like income-driven repayment or public service loan forgiveness, then student loan refinancing may benefit you.

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.

Additionally, it’s important to remember that although interest rates are historically low, waiting until the end of administrative forbearance in January 2022 may be a good choice for borrowers with federal 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 could 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 the same 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.

Should I Refinance My Federal Student Loans?

Depending on your financial situation, student loan refinancing could earn you a better interest rate and help you save money in the long-term. To see how much you could save by refinancing with ELFI, try our Student Loan Refinance Calculator.*

Learn More: Should You Refinance Student Loans?