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Is it a good idea to refinance federal student loans? Well, refinancing can have a number of benefits, including lowering your interest rate and combining multiple loans into one for simpler repayment. But it also turns federal loans private, resulting in a loss of borrower protections. If you’re exploring refinancing, consider these five consequences before you refinance federal student loans.
- You’ll lose access to income-driven repayment
- Your new loan won’t be eligible for Public Service Loan Forgiveness
- You might not have deferment or forbearance options
- You could need a cosigner
- The rules around delinquency and default could change
- So, is it a good idea to refinance federal student loans?
1. You’ll lose access to income-driven repayment
Refinancing is the process of exchanging one or more of your old loans for a new one, hopefully with a better interest rate.
Private lenders, such as banks, credit unions, and online lenders, offer student loan refinancing. So if you refinance your federal student loans with one of these lenders, you’ll be taking out a private student loan in their place.
Pro tip: Federal loans come from Federal Student Aid. Two common types are Direct loans, which could be subsidized or unsubsidized, and PLUS loans.
Since your new, refinanced loan is private, it won’t be eligible for federal income-driven repayment plans, such as Income-Based Repayment or Revised Pay As You Earn.
Income-driven plans adjust your payments along with your income, which could be a big help if you’re struggling to afford your student loan bills.
But most private lenders don’t offer income-driven repayment, so the term you pick when you refinance will pretty much be the one you’re stuck with (unless you refinance again).
Bottom line: If you’re worried about your ability to pay back your loans now or in the future and don’t want to lose access to income-driven repayment plans, you probably shouldn’t refinance your federal student loans with a private lender.
2. Your new loan won’t be eligible for Public Service Loan Forgiveness
So, we just talked about how refinancing federal student loans turns them private. Another consequence of this is losing eligibility for Public Service Loan Forgiveness (PSLF), a program that forgives federal loans after 10 years of working in public service.
In fact, privatizing your debt means it becomes ineligible for any federal forgiveness program, such as Teacher Loan Forgiveness, Nurse Loan Forgiveness, or others.
Note that you might still have some state- or employer-sponsored options for student loan repayment assistance. But you won’t qualify for PSLF or another federal loan forgiveness program, since you’ll no longer have federal student loans.
Bottom line: If you’re working toward federal student loan forgiveness, it’s probably not a good idea to turn your federal student loans private through refinancing.
3. You might not have deferment or forbearance options
The Department of Education also offers deferment and forbearance options for borrowers who go back to school or run into financial hardship.
The federal deferment program can pause payments for years if you lose your job, go back to school, or experience another qualifying event. If you’ve got subsidized loans, they won’t accrue interest during this time.
Federal forbearance will pause payments for up to a year at a time for qualifying borrowers. During forbearance, interest will accrue on your loans, even the subsidized ones.
But private loans aren’t eligible for these federal protections. That said, some private lenders do offer temporary deferment to customers.
SoFi, for example, has an “unemployment protection” benefit that pauses payments for three months at a time for up to 12 months for qualifying borrowers. And Earnest may let you skip a payment every 12 months, as well as qualify for temporary forbearance.
So if you want to retain these protections, look for a refinancing provider that lets you pause payments temporarily if you return to school or lose your job.
Bottom line: Avoid refinancing federal loans if you want to retain access to federal deferment or forbearance protections. If you want similar protections just in case, look for a refinancing lender that offers deferment.
4. You could need a cosigner
Direct loans from the federal government are available to any full-time student in a Title IV school. But private student loans, including refinanced ones, are only available to borrowers with good credit.
If you can’t qualify on your own, you could apply with a cosigner. But doing so could mean sharing debt with someone when you weren’t before.
A cosigner becomes just as responsible for your debt as you are, and their credit could get damaged if you miss payments.
If you don’t want to risk their credit, you might choose not to refinance, at least not until you can qualify on your own.
Bottom line: If you need a cosigner to refinance but don’t want anyone on the hook for your loans, you might prefer to leave your federal student loans alone. It’s also worth looking for refinancing lenders who offer cosigner release after a year or two of on-time repayment.
5. The rules around delinquency and default could change
Federal student loans are considered delinquent the first day you miss a payment. They go into default after 270 days of missed payments. Private student loans are usually considered to be in default after 60-90 days of missed payments, but this can vary by lender.
Defaulting on federal loans comes with a host of seriously bad consequences. Your credit could get damaged, for example, and the government could garnish your wages, tax refund, and even Social Security benefits.
Private lenders, however, have no such powers. They can’t garnish your wages from your bank account or take away your Social Security benefits.
That said, they could try to bring you to court to pay up. Each state has its own statute of limitations for these attempts at debt collection.
After this time is up, private lenders can’t really do anything to collect the debt. But federal loans never go away, so defaulting could mean a lifetime of bad financial consequences.
Bottom line: Familiarize yourself with the differences between going delinquent or defaulting on federal vs. private student loans so you know what to expect, just in case.
So, is it a good idea to refinance federal student loans?
While we’ve focused on the potential downsides of refinancing federal student loans, there are a lot of benefits, too. Refinancing can,
- Lower your interest rate, resulting in hundreds or even thousands of dollars in savings.
- Provide new repayment terms, whether you choose a long term to lower monthly payments or a short one to get out of debt fast.
- Adjust your monthly payments.
- Combine several loans into one to simplify repayment.
- Give you a new loan servicer, which might be more helpful than your old one.
But refinancing federal student loans makes them private and thus ineligible for federal repayment plans, forgiveness programs, and other protections. So before refinancing federal student loans, consider whether you need any of these federal programs now or anticipate needing them in the future.
If you do, it might not be such a good idea to refinance federal student loans right now. If you don’t but still want to retain some borrower protections, look for private refinancing lenders that offer some perks of their own, such as deferment or cosigner release.
By carefully weighing the pros and cons, you can make an informed and savvy decision about whether refinancing your federal student loans is a good idea for you.
Want better rates? Here are the best banks to refinance student loans:
| Variable rates start at... | Fixed rates start at... | Repayment terms | Welcome bonus | Check your rates | |
|---|---|---|---|---|---|
 | 4.54% | 4.49% | 5 - 20 years | $200 | Visit LendKey |
 | 4.99% | 4.47% | 5 - 20 years | $200 | Visit Earnest |
 | 4.22% | 3.97% | 5, 7, 10, 15, and 20 years | $120 | Visit Laurel Road |
 | 4.53% | 4.40% | 5 - 20 years | $100 or $200, depending on the amount you refinance | Visit Credible |
 | 5.09% | 4.74% | 5, 7, 10, 15, and 20 years | $100 | Visit SoFi |
 | 4.53% | 4.83% | 5, 7, 10, 15, and 20 years | $100 | Visit ELFI |