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May 2, 2022
Pros and Cons of Refinancing Federal Student Loans
If you have a stable income and a solid credit score, refinancing your student loans can save you thousands over the life of your loan. But if you’re planning to refinance federal student loans, you may want to hold off.
Refinancing your federal student loans with a private lender can bring great benefits, but it does come with some sacrifices. Before refinancing federal student loans, it’s important to consider the pros and cons.
Pros of Refinancing Federal Student Loans
Lower Interest Rate
One of the most appealing benefits of refinancing is securing a lower interest rate. A lower interest rate can save you thousands of dollars over the life of your loan.
For example, if you had a student loan with a balance of $30,000 at an 8% interest rate, you would pay $43,678 total by the end of a 10-year repayment period. If you refinanced, and secured a lower interest rate of 5%, you would pay $38,184 total by the end of the same repayment period. This results in a savings of over $5,000.
As of today, some federal loans have interest rates as high as 6.28%. If you have access to a cosigner or have excellent credit, you may be able to score a lower interest rate with a private lender.
Option to Consolidate
If you’d like to refinance more than one student loan, you will have the option to consolidate as well. Loan consolidation allows you to combine multiple student loans into one, providing you with one monthly payment rather than several.
When consolidating federal student loans, you have two options: a federal Direct Consolidation Loan or a private student loan refinance and consolidation. A federal Direct Consolidation Loan allows you to combine multiple federal student loans into one. The new loan’s interest rate becomes the average of the initial loans’ interest rates. A private student loan refinance and consolidation also allows you to combine multiple federal student loans into one. However, the interest rate on your new loan is based on a variety of factors such as your credit score and income.
Consolidating your federal student loans can make your payments more manageable, but if you opt for a private student loan refinance and consolidation, you will lose federal loan benefits.
Longer Repayment Term and Smaller Monthly Payments
If your monthly payments are becoming unmanageable, refinancing your student loan(s) to a loan with a longer repayment period will allow you to have smaller monthly payments.
For example, a $30,000 student loan at an 8% interest rate results in a $364 monthly payment on a 10-year repayment plan. If you refinanced to a loan with the same principal balance and interest rate, but a longer, 15-year repayment term, your monthly payments would be $287 instead.
Cons of Refinancing Federal Student Loans
Giving up Benefits of Federal Loans
When you refinance federal student loans to a private student loan, you will lose access to benefits unique to federal student loans, such as potential loan forgiveness, forbearance, and flexible repayment options.
Loan forgiveness is a federal initiative, and thus, when you refinance your federal loans to private student loans, you give up the potential for your loans to be forgiven. Similarly, federal loan forbearance programs will also no longer apply to your loans. While some private lenders offer forbearance options, interest typically accrues in the meantime, unlike federal loan forbearance programs.
Federal student loan borrowers also have access to a wide variety of flexible repayment options such as income-driven repayment. Income-driven repayment plans set your monthly loan payment at an amount deemed affordable based on your income and family size. When you refinance a federal student loan to a private student loan, you will lose income-driven repayment options. While some private lenders offer flexible repayment options, income-driven repayment is not an option with private lenders.
Restarting Loan Payments
Federal student loans are currently in forbearance until litigation is resolved around the loan forgiveness initiative. Payments will resume 60 days after litigation is resolved or debt is forgiven. If neither occur by June 30th, payments will resume 60 days following that.
During this period, federal student loans are not accruing interest and monthly payments are not required. If you refinance federal student loans during the forbearance period, you will have to begin making payments again.
Can You Refinance Student Loans While in Forbearance?
While you can refinance student loans during the forbearance, we recommend waiting until after the forbearance is over to do so. As soon as you refinance your federal student loans to a private student loan, interest will begin to accrue and you will have to begin making payments.
Will Biden Extend the Student Loan Forbearance?
While President Biden has extended the federal student loan forbearance several times, there is no guarantee he will extend it again. We recommend waiting until the forbearance is completely over before refinancing to minimize the risk of refinancing just before another extension.
Best Companies for Student Loan Refinancing
If you decide to refinance your federal student loans, there are a variety of lenders ready to help you through the process. The following are our top picks for refinance lenders.
Arkansas Student Loan Authority
The Arkansas Student Loan Authority (ASLA) is an Arkansas state entity that offers private student loans and student loan refinancing for Arkansas students. ASLA is a great option for Arkansas students.
Brazos is a non-profit lender that offers private student loans and student loan refinancing to borrowers who live in Texas. Brazos offers competitive rates and flexible terms to those who qualify. It’s best if you are a Texas resident with at least a bachelor’s degree and have an established income and strong credit.
(Note: Borrowers are not required to have graduated from a Texas school in order to qualify).
College Ave offers both private student loans and student loan refinancing with competitive rates, flexible repayment terms, and strong customer service. College Ave’s student loan refinance offering is best if you are seeking a more flexible repayment term that allows you to find a loan that matches your budget.
Earnest offers both private student loans and student loan refinancing. With competitive interest rates, customizable repayment plans, and forward-looking eligibility criteria, Earnest is a good fit for borrowers who don’t have a cosigner but have a strong credit score.
INvestED is an Indiana not-for-profit organization helping Indiana families access and fund education for over 40 years. INvestED is a great option for Indiana students.
ISL Education Lending is a nonprofit corporation offering private student loans and student loan refinancing. ISL Education Lending is best if you’re looking for competitive interest rates.
LendKey offers both private student loans and student loan refinancing. LendKey connects borrowers to a network of 100+ lesser-known credit unions and community banks, allowing you to work with smaller lenders with low rates and good customer service. LendKey’s student loan refinance offering is available to graduates with strong credit and stable income. It’s best if you want to work with a credit union or community bank to access loan offers you otherwise might have overlooked.
Nelnet Bank offers both private student loans and student loan refinancing. Nelnet Bank’s student loan refinance offering is best if you are seeking competitive rates, a flexible forbearance policy, and the ability to refinance both private and/or federal student loans, including parent PLUS Loans.
SoFi is one of the largest student loan refinance companies in the industry. With competitive interest rates, a diverse set of repayment options, and exclusive member benefits, SoFi is a good fit for borrowers with an associate’s degree or higher or borrowers with a high income and strong credit score.
Final Thoughts from the Nest
Refinancing your student loans can save you quite a bit over the life of your loan. But if you have federal student loans, you may want to hold off to maintain your federal loan benefits.
If you’ve weighed the pros and cons of refinancing your federal student loans and decide it is the right option for you, start the process with Sparrow.
Sparrow’s goal is to give you the tools and confidence you need to improve your finances. Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. While we make an effort to include the best deals available to the general public, we make no warranty that such information represents all available products.