Should You Refinance Your Federal Loans Through a Private Lender?

By Jen Williamson Updated on January 23, 2020

If you’re like a lot of college graduates, you have multiple student loans, all through different lenders. Is it time to get them all in one place? There are pros and cons to refinancing your federal loans through a private lender, so it's important to carefully consider your specific circumstances.

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Let's start with the potential benefits of refinancing your student loans with a private lender.

Pro: One payment

The most obvious benefit to refinancing is replacing all of your old student loans with one new one. That means instead of making multiple payments per month, you'll only have to make one.

However, you don't have to refinance all of your loans if you don't want to. For example, you can just refinance your high-interest loans and leave your others parked where they are, that's fine, too. 

Pro: A better interest rate

The current lowest rate for federal Direct loans is ranges from 4.53% to 7.08%, while some private lenders will refinance your loans for a fixed interest rate of 3.14%

Of course, not everyone qualifies for rates that low. But if you have great credit, you might. You can also apply with a cosigner to improve your chances of getting an attractive interest rate. 

Refinancing is especially worth considering if you have one of the higher interest-rate federal loans, such as unsubsidized or PLUS loans. 

See also: Everything You Need to Know About Student Loan Refinancing

Pro: You could get out of debt faster

The problem with federal payment-relief options such as income-driven repayment, deferment, and forbearance, is that while you reduce your monthly payments (or pause them entirely), you also stretch out the payment period. And while student loan forgiveness sounds great, it can take decades to qualify.

This means you stay in debt longer—and pay more in interest over the long term.

When you refinance, you can shorten the timespan of your loan. This means you pay more on a monthly basis, but you pay your debt off faster and, with a lower interest rate, you pay less over time.

With refinancing, you can also opt to lengthen your payment to get your monthly payments as low as possible. It all depends on whether you want to prioritize wiping our your debt or having an increased monthly cash flow. 

Pro: You can refinance more than once

Under most circumstances, you can’t consolidate federal loans more than once. But you can refinance them again—and it’s smart to re-evaluate your options every few years. 

Don’t assume that your federal loans have better interest rates and terms than a private lender—it’s important to compare. Especially if you have great credit and higher interest-rate federal loans, it’s worth it to see if you can do better through refinancing.

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While refinancing offers lots of money-savings pros, there are a few cons to consider as well. 

Con: You lose access to income-driven repayment plans

If you fall under financial hardship and can no longer afford your payments, what happens to your student loan?

With federal loans, you can qualify for income-driven repayment plans such as Pay as You Earn, Income-Based Repayment, and Income-Contingent Repayment plans.

These all vary slightly, but the common element is that your monthly payment is determined by what you earn—so there’s a better chance you can afford it.

You don’t get these protections with private lenders.

Con: You may not get a better interest rate if you refinance

The most obvious reason to refinance with a private lender is to get a lower interest rate.  When you refinance, private lenders determine your new interest rate based on your credit score, income and debt, and other financial factors.

When you consolidate, the government determines your rate by calculating the average rates across all your original loans, and rounding up to the nearest one-eighth of a percent. Your credit score and finances don’t matter.

Consolidating with the government often won’t result in a lower interest rate. But in general, federal loans have lower interest rates than private loans. If you have lower interest-rate federal loans such as Perkins loans, it may make more sense to consolidate rather than refinance. 

In addition, refinancing may not make sense if your credit score is low. You may not qualify for a low enough interest rate to make refinancing your federal loans worthwhile. 

Con: You can no longer go into deferment or forbearance

If you really fall on hard times, the federal government will let you put your student loan on hold entirely. Under deferment (which you may qualify for if you go back to school), some loans do not accrue interest while on hold; whereas they do under forbearance.

Some private lenders offer their own version of forbearance and deferment; this is worth looking into.

Con: You lose access to student loan forgiveness

If you work for certain employers—usually in the public sector—you could qualify for Public Service Loan Forgiveness after 120 consecutive qualifying payments on your loan.

Once you refinance your federal student loan, you lose access to this option—no matter how many qualifying payments you’ve made. You will also lose access to student loan forgiveness that you may be eligible for after making 20 years of payments in an income-driven payment plan. 

Before making a move, it's a good idea to find out if you are eligible to have any portion of your debt forgiven. 

See also: The Ultimate Guide to Student Loan Forgiveness

Estimate your savings now

Check out our Student Loan Refinancing Calculator to find out how your finances could be affected by refinancing.  

Published in: Refinance

About the Author
Jen Williamson

Jen Williamson is a freelance writer living in Brooklyn. She has written for a variety of industries, including software, education, business, and personal finance. Prior to that, she worked at an adult literacy nonprofit in Philadelphia, where she coached nontraditional students in passing the GED test and applying for college. When she isn’t writing or reading—which is rare—she can usually be found planning her next travel adventure, training for a marathon, or sneaking in somewhere she’s not supposed to be. Read more by Jen Williamson