Pros and Cons of Refinancing Federal Student Loans

By Jon O'Donnell Updated on May 3, 2019

Imagine having thousands of dollars in extra money to put toward a new car, new home or dream vacation. If you have federal student loans, refinancing could make this possible, but you should be aware of its potential downsides, too. Because refinancing is available only through private lenders, it’s important to know both the benefits and the risks of leaving a federal student loan program.

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What are the benefits of refinancing Federal Student Loans

If you meet the lender’s requirements, refinancing your federal student loans can lower your interest rate, which could save you thousands of dollars. This is especially true if you refinance with a variable interest rate loan. But with a variable rate loan, when rates go up, so will your loan payment.

By refinancing all or most of your federal student loans, you can have the convenience of only one loan payment a month instead of several. You may also shorten your loan term when you refinance, which can help you pay off your student loan debt faster.

Should you refinance your Federal Student Loans?

Refinancing may be a good choice if you have:

  • A high credit score. A good score can translate into a lower interest rate, which may greatly reduce the amount you must pay.
  • Financial stability. A good job and comfortable income mean you’re less likely to need certain federal programs designed for people who struggle to make their student loan payments. These options aren’t available through private lenders.
  • Significant savings. If you have enough saved up, you’re better prepared to manage your student loan payments if you experience a loss of income – without the help of the government programs mentioned above. Before refinancing, make sure you have the funds to handle your expenses if you face a financial challenge like losing your job.
  • No eligibility for federal loan forgiveness programs. If you’re not eligible for any of these programs, you have less reason to stay with federal student loans.

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What Federal perks go away when you refinance?

Federal student loans have unique benefits. If you choose to refinance, you’ll lose access to:

  • Flexible repayment options. The government’s extended repayment plan can help you lower your monthly payments by lengthening the term of your student loan, and there are several income-driven repayment plans that can also help you make ends meet. These don’t always save you money – and sometimes result in more interest accruing over time – but they can make paying student loans more manageable for some.
  • The Direct Consolidation Loan. This plan lets you consolidate your student loans as you would with a private lender, but you can still take advantage of federal repayment and forgiveness programs. 
  • Student loan forgiveness programs. In certain situations, people in qualifying public service professions and those with a long-term disability may be eligible to have some or all federal student loan debt forgiven.

Do the math

To see whether refinancing with a private lender is worth the effort, calculate how much you would save with a reduced interest rate. Depending on your going-in interest rate and outstanding balance, refinancing could shave a lot of money off each monthly payment – potentially amounting to thousands of dollars in savings over the term of your loan.

Weigh your options carefully

If you can’t secure a significant interest rate reduction, refinancing may not be right for you. Talk with a lender to find out how much you can expect to save by refinancing, and consider whether your income and savings justify staying with your current federal loans. As you consider this decision, make sure you know all the facts about refinancing your student loans.

Published in: Refinance

About the Author
Jon O'Donnell

Jon is a writer and marketer for Nitro who is passionate about bringing transparency to the student loan process along with providing families with the information needed to make smart financial decisions. He also just recently refinanced his student loans allowing him to pay them off 5 years faster all while saving an additional $152/month. As he continues to pay them off himself, he strives to help others do the same. Jon also has a long history of connecting people with educational opportunities to help them improve their careers and their overall personal finances. In his free time you can find him reading travel blogs and researching destinations around the world in search of his next adventure. Read more by Jon O'Donnell